Well it is possible for governments to mandate savings into investment products, which by their nature will invest those savings back into the economy. That has been an effect of the 401K retirement programs in the US. Problem is many people do not stay the course especially in down turns.

Robert, thank you for your information. What I am asking is related to principles. Your answer to my question seems to me that you are thinking that some part of income may not be spend and it is necessary for a government to spend instead of citizens.

But how about Keynes's logic? Did nobody notice a contradiction between Chapters 2 and 6?

I do not think it is a contradiction. 

The causal order of Keynesian relations thus presents itself as follows. First of all, it is necessary to consider the factors that determine the level of effective demand and investments, namely expectations, which can be taken as exogenous, and the level of the interest rate, which depends, given the liquidity preference, on the supply of money. Effective demand determines the level of income and hence of saving, which serves to finance the autonomous demand constituted by investments. In a certain sense, the money market precedes the market of goods in the causal order.

This order can be represented as follows. Equilibrium on the money market depends on the state of expectations, which influences the demand for money for speculative purposes, as well as the money in circulation. This set of circumstances determines the level of the interest rate. → The amount of investment that corresponds to a certain interest rate depends in turn on expectations. → Together with the amount of consumption, which depends on the community’s propensity to consume, the volume of investment determines the level of income. → The level of income determines the level of employment. Consequently investment determines saving (Y-C), not vice-versa. 

A deeper analyisis of Keynes'causal order in the General Theory may be found in  Pasinetti, L. [1974], Growth and Income Distribution - Essays in Economic Theory, Cambridge: Cambridge University Press, ch. II "The economics of effective demand".

Regarding the causal nexus from I to S, it could be useful Graziani, A. [2003], The Monetary Theory of Production, Cambridge: Cambridge Univeristy Press.

Stefano Lucarelli,

Thank you for your detailed explanation. I highly appreciate it. But, still, I am not convinced that I was wrong.

Let us suppose that investment determines level of production (of course through effective demand) and income. Let it be Y(t). For simplicity, all the profits (and rents and others) are distributed to households. From Y(t), people consume amount C(t). Then, the saving

　　S(t) = Y(t) - C(t). 　　(1)

If investment for this period is I(t) and if

　　I(t) = S(t), 　　　　　　(2)

then

　Y(t) = I(t) + C(t). 　　　(3)

Equation (2) is Keynes's famous investment-saving equality. I think you have argued well that equation (1) and (2) hold. Equation (3) is a logical consequence of the two equations (1) and (2).

What does equation (3) mean? All the income is spend either in consumption or either in investment. If firms orders as much as I(t) to buy machines and equipment, this means that all income is necessarily spent in buying something. This is what Keynes claimed to be the idea which "underlies the whole classical theory, which would collapse without it."

I think this is a vivid contradiction.

Say's Law in Keynes’s General Theory Chapter 2, Section 6

Say's law is, one can say, the most important way of thinking that Keynes wanted to refute in his General Theory. The formal definition of Say's law appears in Chapter 3 Section 1(pp.25-26 Volume III of Collected Works).

It is defined in two ways:

• The classical doctrine, on the other hand, which used to be expressed categorically in the statement that “Supply creates its own Demand” and continues to underlie all orthodox economic theory, involves a special assumption as to the relationship between these two functions. (p.25)
• Thus Say's law, that the aggregate demand price of output as a whole is equal to its aggregate supply price for all volumes of output, is equivalent to the proposition that there is no obstacle to full employment. (p.26)

But Keynes discusses Say's law prior to Chapter 3. What he criticizes as classical way of thinking in Section 6 Chapter 2 is equivalent to Say's law in its content. In fact Keynes starts section 6 with these words:

• From the time of Say and Ricardo the classical economists have taught that supply creates its own demand; meaning by this in some significant, but not clearly defined, sense that the whole of the costs of production must necessarily be spent in the aggregate, directly or indirectly, on purchasing the product. (p.18)

Here Keynes talks about "the costs of production" but more appropriate term will be "income." It is true that classical economists assumed that "the whole of the income (from production) must necessarily be spent in the aggregate, directly or indirectly, on purchasing the product." This is the third version of Say's law.

My question then can be formulated as this:

Where are the differences between Say's law (in the third version) and the Keynes's claim in Chapter 6 that income (the value of output) is always equal to consumption and investment?

I do not think that is a contradiction of keynesian theory. The equation S=I-C is exclusively a contable identity, thus, not determined causal relations between variables.

I Believe that there is a contradiction (or rather an omission) In Keynes, and I also think that it is the cause of Keynes Saving Paradox.

Peoples behavior, in the face of increased risk, is not paradoxical in real life - only according to keynes theory.

Only small changes to Keynes theory has to be made in order to make the keynes saving paradox go away.

The error lies in the definition of savings. Savings must be split into Savings and Reserves, and then the problem is fixed.

I expect to have a book out next to support my claims, but the financial/economical justification for splitting savings into Savings and Reserves has already been shown experimentally and published.

No, Keynes theory is not paradoxal. And your description is correct.

Its just that people don't behave that way during a crisis. A financial crisis i characterised by a drop in consumption, and people react by increasing savings and there by worsening the crisis, by furthere reducing consumption.

If Keynes is right - why cant we explain to people that they should stop saving and increase consumption, so we can get over the crisis sooner? Cause we cant - many a good politician have tried and failed.

So is the people wrong or is keynes wrong?

If keynes is right the people is behaving paradoxal - thus the name Keynes saving paradox - also known as the paradox of thrift.

http://www.jstor.org/discover/10.2307/1061372?uid=3737880&uid=2&uid=4&sid=21104527920321

Anyway - as I said it may no longer be a paradox, and keynes was wrong. Savings is too simple a term to cover the role of capital that is not consumed or invested.

Emiliano López,

I have been a journey abroad more than two weeks. That is one of the reasons I could not respond to your comments much earlier.

You mentioned, in the post of Nov 3, that S = I - C is an accounting identity. You surely wanted to say that S = Y - C is an accounting identity or an equation by definition. I do not contest it, but wonder if S thus defined would be all invested into real economy. By real economy, I mean production, distribution and consumption and other activities related to these. I exclude from this, all purely financial operations, like purchasing existent bonds and shares. They are sometimes called "investments," but they have no relations to investment in real economy.

There is a possibility that the money (cash or deposit) saved may not be invested in the real economy and will stay for a long time either as idle money (hoarding in a strict sense) or as active money which circulate only in financial economy.

Keynes distinguished industrial and financial circulation in his Treatise on Money, but abandoned this division of two different mode of circulation. This must be one of the reasons that he adopted aggregate national accounting identity and came to neglect two different "investment" concepts.

.

a possible way out of this dilemna was suggested by Kalecki in his "profit equation" :

http://en.wikipedia.org/wiki/Micha%C5%82_Kalecki

(coined by Kaldor as “capitalists earn what they spend, and workers spend what they earn.”, in Kaldor, Nicholas. 1956. Alternative Theories of Distribution. Review of Economic Studies 23 (2): 83–100)

.

Dear Fleming Bjerke,

I don't think that an argument based on the formula P Q = M V is valid or useful. This is in fact a definition of the velocity of money. I know this is a very famous one which went back to Fisher.

You are free to make any kind of definitions but you are questioned whether the concept is (1) plausible, (2) workable and (3) useful. If the formula PQ = MV is used only as definition of velocity, there is no harm. Once you start to reason on the base of the formula, question arises. Do you really think that the velocity stays relatively constant and you can tell something on the price level by supposing the right hand side stay constant?

Keynes was on the side of quantity theory of money when he was writing Treatise on Money. He abandoned it in General Theory and criticized vehemently any form of quantity theory of money. Keynes's version is a bit different from the classical formula. Instead of PQ = MV, Keynes adopted a bit different formula M Y = O P only to discard it later. He thought that the Quantity Theory of Money belongs to the "classical" (in fact neoclassical) tradition of economic thought.

It seems strange that you criticize Say's law reasoning on the same "classical" way of thinking.

Dear Jesper Lyn Jensen,

Congratulations to the publication of your new book. When will it be published? When it is published, please let me know. This kind of discussion is absolutely necessary in order to advance Post Keynesian economics. Mere loyal interpretations of Keynes's writings prevent the theoretical development of Keynes's ideas.

Your proposal to split "Savings" (in Keynesian and National System of Accounting) into Savings and Reserves is an interesting idea. That will avoid numerous confusions caused by the precipitous definition and concept making by Keynes.

I have read the Ahiakpor's paper you have recommended. I clearly understand the meaning of the word Savings when it was used by classical economists. I remarked Ahiakpor do not use the division as Savings and Reserves. In place of this division, it seems he use the word Hoarding. (The word Reserve appears once, whereas the word Hoarding appears 44 times in his paper.)

It will be better that you split Savings into Investment and Hoarding, because this terminology with above divisions is closer to everyday use of these terms.

If a person saves 10 thousand dollars in a year, he or she can use 7 of it into investment (direct investment as entrepreneur or purchasing newly issued securities to be used in machines and installations) and put off 3 of it in a drawer of a chest. Japanese call this act "tansu chokin," which means "savings in a chest". This is an old fashioned way of savings but it is illustrating in the sense that the money thus saved will not be used in any active "investment." Our income can be spent either for consumption or for (real) investment, but it can be reserved as idle money in a chest. In a popular language, this part of income is also called savings.

The classical word for this kind of "savings" was Hoarding. The concept Hoarding was important in D. H. Robertson's examination of investment processes. I wonder why this concept faded away after Keynes.

Keynes uses the word "reserve" 4 times in The General Theory and uses them in the sense it one refrains from spending to consume two times:

•  To build up a reserve against unforeseen contingencies. Chap. 9, Section 
• propensity to consume] determines for each individual how much of his income he will consume and how much he will reserve in some form of command over future consumption. Chap. 13, Section 2.

The term hoarding is used in the General Theory 19 times. In one place, Keynes discusses the meaning and functions of Hoarding (11 times in Chap.13, Section 5.). Here Keynes observes that "[t]he concept of Hoarding may be regarded as a first approximation to the concept of Liquidity Preference." He admits that Hoarding and Liquidity Preference are substantially the same thing. However, he reject the concept of Hoarding by the reason that "if we mean by “hoarding” an actual increase in cash-holding, it is an incomplete idea — and seriously misleading if it causes us to think of “hoarding” and “not-hoarding” as simple alternatives."

If we consider the tremendous influence Keynes's General Theory had, we may safely say that it is the Keynes's new concept Liquidity Preference that has thrown away the concept of Hoarding from economics.

Still there remain several questions. Why has the concept of Hoarding been wiped out so completely? We know that Nickolas Kaldor criticized Liquidity Preference concept as a base of interest theory or more generally as a base of monetary theory of productions. Why has not Kaldor resurrected the concept of Hoarding? ...

I will make a new question concerning this point in a day or two.

Dear Yoshinori Shiozawa

The book is completed and awaiting publication. If you know an international publisher, which could be interested I would greatly appreciate if you could introduce me.

But no matter if I find a publisher or not, the book will be out in English in the 2. half of 2015.

When discussing savings and reserves, one has to make an important distinction: Is it a behavioral trait or a financial trait.

Are we saving/making reserves because we feel like doing it, or are we doing it to increase the return of our investments?

I work from the assumption, that establishing the definition of “reserves” will increase the return on investments.

I work from the assumption, that “reserves” is an overlooked, and uncharacterized, financial tool, that can be used to modify the expected return of an investment.

If we successfully establish the definition of reserves as a real economic tool, it will have an effect on the macro economic theory of Keynes.

The question is – can we justify such a change in our economic theory apparatus?

I believe we can for a number of reasons.

• An important reason is that most companies actually operate with reserves. In these companies, the definition for the reserves is the one you quoted from Keynes: To build up a reserve against unforeseen contingencies. Chap. 9, Section. This definition implies a behavioral motivation, but so many companies uses reserves, that the behavior actually could be rooted in an actual financial function.
• We have shown in an experiment, published in 2012, that there is an unaccounted for cost of risk. This cost of risk, the “structural risk cost” have the properties of being influenced by reserves! As you know the theoretical apparatus on risk does not allow for reserves to influence the cost of risk. IN the classical sense risk cost is defined as Risk=probalility x consequence. And this definition is insensitive to reserves. The future cost of a car accident is the cost of repair and other consequences times the probability that the accident will occur. Reserves will not change the probability, and they will not change the cost of the accident. Yet we see in an experiment, that the capital capability of the risk owner can influence the return of an investment. So there is an effect and it is real. http://www.palgrave-journals.com/rm/journal/v14/n2/abs/rm20122a.html
• Most people are intuitively positive to the thought, that a risk, as exemplified by a 10% chance for a cost of 10,000 usd could represent two completely different situations for two risk owners, one who has 1,000 usd in Savings/reserves, and one who has 1,000,000 usd in savings and reserves. As economists we are comfortable that the two risk owner will show a different behavior towards the investment, but we are not comfortable in saying the actual cost of the risk can be different for the two risk owners who has accepted this risk. While we are not able as economists to separate the cost based on the two different risk owners, intuitively it is logically that the economic performance of a risk owner can influence the cost of risk.

In order to define reserves, as a financial tool, we need to change the definition of risk.

I propose it changed to Risk = probability * consequence * structure

Where the “structure” is economic consequence – reserves. In this way we will introduce a cost of running out of capital, what you could call a financing cost of risk cost.

The above explanation is also why “hoarding” is not a good term to use, because it does not imply any function. Reserves, on the other hand is used in companies, in much the same function as suggested by me.

Article Risk, resources and structures: Experimental evidence of a n...

Jesper Lyn Jensen,

I understand what you are thinking of Reserve. It must be what we usually call internal reserve or retained earnings. Yes, it has tremendous effect on the course of an economy.

In fact, one of the focuses of present day Japanese economy is huge accumulation of internal reserves, mainly among large companies. Many people including economists argue that Japanese economy may go around better than now if this huge sum is used to raise wages or be invested.

Hoarding in my definition is much wider than internal reserves. It may include internal reserves but does not necessarily include therm. Hoarding in my definition, and by consequence different from old days concept, is the money which circulates in finance economy and stay there for a period of our observation. See my post (the second answer to my question box linked below) to the question box "Are there any papers or books which examined historical change of the concept "hoarding"?".

You are examining firms' behavior from the view point of firms' risk managers. I am looking what will happen in the finance economy at large. Both sides of examination seem necessary. 

https://www.researchgate.net/post/Are_there_any_papers_or_books_which_examined_historical_change_of_the_concept_hoarding

Yoshinori Shiozaw,

By my understanding, any hording, as you define them, whether by private persons or companies, is comprised by two components, Reserves and Savings. Excessive savings which stays in the finance economy, is then hording.

Reserves is a financial tool, that assures low cost of risk, by assuring low financing cost of the sudden and large capital requirements, that can result from risk exposure, whether such risks originates from known and accepted risks, or are the result of the uncertainties that surround any agent of the society.

My point is, reserves generate a higher interest than savings – no matter if it is a private person or a firm, which has such reserves.

My point is also that firms and private persons, with insufficient reserves, has a higher cost of risk, than the same agents with sufficient reserves.

We are, I believe, examining the same problem from two different perspectives, and I greatly appreciate this dialog.

Maybe I can supply you with an important argument, that you need in order to define hording. Because the counter argument to hoarding is “why would it matter that other people have access to the horded cash? Why can the current cash owner not invest or consume that cash as well as anyone else? Why is it a problem that cash circulates in the financial system? You may say that it would be better if they were invested, but you cannot assume responsibility for the investment. And if you force people to invest, you may get bad investments, and a corrupt decision process behind investment decisions.

But, when applying the structural risk cost to those questions, the answer is obvious, and the answer is linked with a liberalistic approach to maximizing the productivity of the society.

The answer becomes, that the cash that is horded assures low risk cost for the agents controlling it only, and that the agents having insufficient reserves will be growth impaired. Thus hording starts to have economic growth impairment in economic theory.

It is important to state that my work is not restricted to firms, even if the experiment we did was in a simulation of firms conditions. And also in Firms we have Bowman’s Paradox, to support that indeed the Risk and Return literature may be flawed as it stands today. But the changes I propose to our understanding of risk are a fundamental change in the definition of risk, and as such are equally relevant for any agent of the society including the citizen.

Governments could invent savings via tax code, but the problem (paradox) is the reduction in jobs related to reduced spending. A more likely possibility is too increase wages enough to create more disposable income which then could be saved.

Jesper Lyng Jensen,

Yes, it is necessary to persuade  those people who believe any money income is invested in a way or other in real investment. Your idea and argument is highly indicative and I have to thank you for these answers.  

Buying  a new stock or security issued by an enterprise in order to buy new machinery or construct new factories. The money spend in this purpose is the money which circulate in the real economy.   On the other hand, buying  existing stocks or securities are mere change of owners and the money stays in the financial economy.

You have mentioned a possible point of explanation why people do not invest in real economy instead of buying securities and other financial  property like derivatives and others. Risk counts heavily on the prospective returns on investments. In a "normal" state of business, the expected returns in the finance economy are higher that those in the real economy. 

This "normal" state may happen in two reasons. One is related to the effect of incremental investment. If a company's investment plan is restricted by prospective volume of real demands, the return of investment which exceeds  the necessary  amount of  investment will be very low. 

Another possibility is a sort of bubble in the finance economy. If the stock price keeps to rising at a rate higher than the expected return in real investment, people have the reason to invest in the finance economy while the bubble continues. 

This is a kind of situation that MInsky  examined under the title of financial instability hypothesis. If the economy is in this second state, the question of systemic risk  arises. This must be what you are attacking . 

Robert Spinelli,

what you are proposing is now discussed in Japan. Thank you.

Yoshinori Shiozawa i understand from your post that an underlying goal for you is to favor long term investments over short term investments.

However, this i a complexe goal, and one that by reasoning of my work, cannoot be achieved with single actions. It requires complexe reforms, that focuses on making improvements on a large number of parameters.

While higher minimum wages, as suggested by you Robert Spinelli, is likely to have a positive effect, lower taxes is likely to have a negative effect, if is asumed that the lack of taxes results in lack of security for the cityzens, is it is seen in UK these days. Lower taxes is also the goal of Mr. Abe in Japan.

Economic stimulus, as practiced in EU and many other places is also ligkely to have no effect on improving general conditions for long term investments.

In total, there seems to be no fcoused effort on creating optimal conditions for long term investments anywhere, which is paradoxial, as long term investments should be a, if not the, key growth parameter of any state.

Jesper Lyn Jensen,

I am not thinking anything like  "favor long term investments over short term investments."  My interest is purely theoretical.  I mean by this expression a pursuit  of an explanation and  understanding what will happen in relation to money enclosed in the financial economy.

If a certain proportion of  income flows in into the financial economy and thus be changed to hoarding  in the wider sense (i.e. Hoarding in my definition), then the saving (Y - C) is necessarily into two parts: investment I in the real economy and the hoarding H in the financial economy.

If there is no other transactions, we can write

Y- C = S = I + H.

Most of the analysis after Keynes's General Theory, people believed  there is no possibility that hoarding plays non-negligible effect on the economy and real economy in particular.

If the economy was in equilibrium in the previous period, and if a part of the income is hoarded, the effective demand I + C = Y - H will be decreased in the current period. Thus hoarding plays a depressive effect on the real economy. We can ask what will happen when thus hoarded money stays in financial economy for a certain duration. 

Keynes's formula  I = S holds only when the economy is in equilibrium and  Y, C, and I remain constant. This is but a very exceptional situation.    

Yoshinori Shiozawa,

I am aware that your goal is economic theory - as is mine.

But I am implying, that the problem, that needs to be fixed is one that is more fundamental, than what can be achieved by the solution that you propose.

Keynes, as you know was an expert in risk, and wrote "A treatise on probability" in 1921, several years before his main work.

And yet, his macroeconomic work is largely devoid of any effect of risk.

The introduction of hording as proposed by you, which I completely favour, also does not introduce any sensitivity towards risk in the society.

Defining Reserves (R) as proposed by me, does on the other hand introduce a sensitivity towards risk.

Consequently I would propose

Y - C = S = I + R + H

Y - C - R - I = S - R - I = H

Where R is Reserves

I think you need reserves in order to define Hording, because if you don’t introduce reserves your Hording will be comprised of a sertain fraction of the horded capital, that plays an important economic role in protecting the agent against unexpected costs, and risk and uncertainty in the society will once again play no role in your formula.

I would need a couple of hours to convince you that the distinction of reserves is absolutely justified, and I do not believe it is possible to advance to that situation is this blog. But I, the book should bring you the full argument.

If my argument is concerned of an economy where money is composed only of commodity money like gold and if it is not producible within the country, my argument is absolutely correct. But it is not correct for an economy run by a modern banking system.

For example, if a firm has an investment plan and could not collect enough money to cover the total investment plan, banks will lend it necessary money. Of course, there is always various conditions that the firm must fulfill but banks will normally lend necessary amount of money if the investment plan is based on a firm estimation. When a bank gives credit to a firm, the total quantity of money increases. This is credit creation function of banks.

In these cases, where banks lend necessary money for investment, what I call Robertson-OKada identity holds:

I - S = ΔL - ΔH. (1)

Here I changed the symbol of hoarding from H to ΔH as the hoarding here concerns the increment of the total hoarding. ΔL is the newly created credit by bank.

The formula (1) is what D.H. Robertson was thinking in his discussion of loanable funds theory. If we transpose ΔH and S of formula (1), we have

I + ΔH = S + ΔL. (2)

The left hand side is the demand for funds and the right hand side is offer of funds. An essential difference between Robertson and me lies on the significance, or interpretation of the equation.

Robertson argued that the both sides become equal by the adjustment function of the interest rate. There is no reason that it is only the interest rate which regulates both sides of equation (2). Formula (1) can be interpreted as accounting identity when investment money is raised from saving and loans.

Even in the case of stationary state (where Y, I, and C remain constant), equation (1) teaches us an important fact. If investment is supplied by loans, the same amount of money must be hoarded anew in the financial economy. The “energy” or “temperature” of the financial economy increases at the backside of a stationary real economy and may prepare financial instability. This image is much better, I contend, than totally subjective liquidity preference theory.

Yoshinori Shiozawa, I apologize if my comments we seen as a criticism of your work. That was unintended.

I'm just concerned that the current theory that you refer to, and develop, does not take into account the element of risk.

I.e. your example " if a firm has an investment plan and could not collect enough money to cover the total investment plan, banks will lend it necessary money" is a simplification, that is not the governing thought in real life. We have just been through an international credit crisis, where this state was very far from the norm.

And even if this state can be said to apply to a large extend in a non-crisis environment, It still is far from the situation, when unexpected cost materializes. There is work by Froot and the litterature of distress cost, to support this.

And indeed most agents of society uses capital, whether you call it Reserves, Savings if ultra liquid investments in bonds and shares, as a means to decrease dependency on financial institutions. 

Ask your selves this question: What is the total cost in a situation where you face a large and unexpected capital requirement, and you do not have reserve capital, and you cannot access capital in a bank or any other institution? What is the cost of this situation, and how do we factor it into our description of the national economy.

What is the fundamental cost of any agent in society, of running out of capital?

If you assume, that it has a cost to run out of capital, Reserves will be preferable to capital that is placed in the financial institutions.

I'm contending, that Risk should have a role in the macroeconomic theory, and I argue that defining Reserves, will introduce a function of risk, and it will greatly improve our understanding of the economic "engine" that drives our society.

It is a stand alone argument, that can co-exist with your work, and in no way contradicts it.

Jesper Lyn Jensen,

thank you for your explanation. I also believe that the best way is to wait for your book. At that moment, we can do our argument better. In the meantime, we may discuss on the "big" idea concerning the research program in finance and monetary economics.

I admit the importance of incorporate Risk. This topic must be attacked from various sides of the problem.

You mentioned Keynes's Treatise on Probability. That is the unique book I read through from cover to cover (I had to write a review article on it). If we situate Keynes's probability theory in a wider history of probability theory, it can be characterized as subjective theory. I know logico-empiricism philosopher Carnap highly estimated Keynes's Treatise.

This is a necessary part of the probability theory at large. Psychology plays an important role in the development of economic processes. In this phase, mathematical formulation does not help very much our understanding. So the discussion like Keynes is necessary. On the other hand, these psychological or subjective studies have a strong tendency to be confined in explorations of disparate and unorganized knowledge. Some of behavioral economics have this tendency.

Economy is a gigantic network of interactions which include whole population of the world. We should have some "coarse graining" and statistical dynamical view point. Your Reserve seems to be one of such trials. Reserves can be aggregated. Their total sum can be an indicator of the global state of an economy.

My focus on Hoarding is based on similar idea. I used words like "energy" and "temperature". These terms are used in a very figurative meaning. The purpose of this terminology is to inspire our imagination to examine a difficult but necessary aspect of finance economy. It may be paraphrased as a degree of financial instability. Minsky discussed this problem extensively . I think he has pointed a good and important mechanism of the financial economy, but we should frankly say he did not succeeded in making his idea into a theory.

I am not accusing him by the fact that he cannot formulate his idea into a mathematical system of equations. If he had tried to do that, he must have failed. We should introduce a new way of thinking or new tool of analysis. We may also say new paradigm, if you like. The experience of physics at the turn of centuries from 19th to 20th may be helpful. In the latter half of 19th century, physicists came to formulate laws like Boyle-Charles law between pressure, temperature and volume. At the turn of centuries, they came to analyze this macroscopic relation by statistical movement of molecules. This stimulated the coming of modern probability theory à la Kolmogorov.

If I am permitted to say this, we are still at the stage in search of "Boyle-Charles." Perhaps we should search "molecule dynamics" at the same time.

I'm risk researcher - not an economist as such. I approach the world from a risk perspective, and through my understanding of risk, consider if micro- or macro economy appears logical.

I have come to believe that our fundamental understanding of risk is flawed, to an extend that Risk cannot in fact be described as risk = probability * consequence, but rather has to be described as risk = probability * consequence * structure

In many instances, the structure contribution is =0, but for an definable number of situations it has a value. And these definable situations can be predicted.

This change is not behavioral, but is as tangible and scientific as the identification of a new subatomic particle.

If this proposed change is adopted, it will have great effect on our understanding of financial instruments such as insurances and capital (it defines "the reserves") and real option evaluations, and it will change our understanding of macroeconomic "engine room" in ways that will on one hand surprise you - but on the other hand not appear strange.

While such proposed change can at first appear radical, it is interesting that for most parts, it appears to fit like a hand in a glove. Where the gloves are the paradoxes we see today, and the unexpected events during crises that we see in economy - such as why a crises makes the rich richer, and the poor poorer. And much more. Such economic events now becomes more predictable.

It is my opinion, that such change is only going to be possible, if the system of economic theory appears to make more sense after the change than before the change.

So my book, gives an justification  for the proposed change, and gives an overview of how such a change will effect our theoretical economic apparatus.

I agree with you, that "A Treatise on Probability", as well as "Risk, Uncertainty and Profit" by Frank Knight are formidable pieces of work, but as you say they are very heavy on behavior and philosophy. None the less they led to some very tangible definitions such as that of Uncertainty and Risk. Indeed I still favor the Knight'esian definitions of Risk and Uncertainty, over the newer and more specialized definitions, because the newer definitions are often even more behavioral/subjectively oriented, and thus offers little advantage for me as a risk researcher.

I will join you in daring to say, that we are at a stage of economic theory, where development is possible, hope that theoretical contributions can happen.

I hope we can continue the great discussion by all in this thread later in 2015 - I will be sure to ask the question here in researchgate, on whether it makes sense to change the definition of risk and what the major obstacles for such a change would be.

The value of Russian ruble is falling rapidly. Yesterday it stayed above the low of the day before yesterday, but no one is sure that Russian government can stop further drop of its currency.

Other oil rich countries currencies like Brasil real, Mexico peso and Indonesia rupiah are also falling. Articles suggest a resemblance to affairs in 1987 and 1988. In 1987 Asian Financial crisis erupted. In 1988 Russia defaulted and LTCM (Long Term Capital Management) went bankrupted.

It is possible that similar turbulence will be repeated again.

At this uneasy situation, all economists and non-economists want to know what will happen next. Just after the 2008 financial crash, the Queen of the U.K asked economists why nobody could tell this would happen.

Queen's inquiry is natural and based on healthy common sense, but I think it is not difficult to foretell what will happen in the near future. I do not deny the efforts of those economists who want to do it, but it is necessary that there are some in principle difficulties in foretelling economics crash and other abrupt phenomena.

I wrote this with a purpose to explain myself what I have written in the previous posts on "energy" or "temperature" of an economy.

Now many people talk about the global warming question. The temperature indicates the level of energy in the atmosphere, sea and land. It is reported that a rise of the world temperature by one degree Celsius will cause many kinds of disasters. Storms like Typhoons, Hurricanes and Cyclones occur more frequently. Droughts and long rain, abnormally hot summer and abnormally cold summer, abnormally cold winter and abnormally warm winter, and so on. In other words, when energy level is increased, the atmospheric phenomena become more violent.

We cannot tell when and where an individual phenomenon will occur but meteorologists can tell with reason the changes of tendencies. I wonder if this is also what economists can do and must do with respect to financial instability.

Difficulty of Thinking Macroeconomically, Exhibit C: Tyler Cowen and the Corporate Cash Hoard

http://econospeak.blogspot.jp/2013/02/the-difficulty-of-thinking.html

This is a comment on Krugman's blogposts and Tyler Cowen's response. Their argument is related to what I wanted to discuss in this question page.

Profits and Business Investment

http://krugman.blogs.nytimes.com/2013/02/09/profits-and-business-investment/?_r=0

Corporate Hoarding and the Slow Recovery

http://krugman.blogs.nytimes.com/2013/02/08/corporate-hoarding-and-the-slow-recovery/?

Are corporate profits a sinkhole for purchasing power?

http://marginalrevolution.com/marginalrevolution/2013/02/are-corporate-profits-a-sinkhole-for-purchasing-power.html?

Yoshi,

Do you believe the loanable funds theory is correct or is the endogenous funds theory a more accurate description of what now happens with financial institutions?  I  also truly believe Keynes knew the General Theory had monetary flaws and he intended to correct them in a further book, which he never finished.

Wayne

Dear Wayne,

I am not Keynes fundamentalist, although I really acknowledge that Keynes gave us several important message. The concept of "effective demand" is one of them. Nor am I Robertson fundamentalist. I am interested in his reasoning on the circulation of money, especially in a possible identity i named Robertson-Okada equality. My focus and Robertson's inquiry might be different. 

Jesper Lyng Jensen, 

I reflected on your proposal to treat reserve (R) as an independent entity from hoard (H). You may be right. Money hoarded for reserve purpose plays a very different role than other part of H. I wonder how R behaves and varies. Does it stay stable at least at the ordinary time of business? It may increase abruptly at the time of crisis. If my supposition is correct, we may grasp H - R by observing the change of H at the ordinary time of business. 

How do you think of my idea?

Yoshi, Have you read much by Irving Fisher, Knut Wicksell and Hyman Minsky? Of the three, Minsky has opened my eyes to some  unfinished business that Keynes left unanswered in respect of monetary theory, but of course Fisher and Knutsell made major contributions as I am sure you are well aware.

I believe central banks and trading banks today operate differently  than when Keynes was alive, so we must develop some new tools to analyse what actually happens here.  I believe that  Robertson  was not a friend of Joan Robinson who worked with Keynes, but I have not read any of his published works, so I can't make any personal comments on his work.

Wayne, 

I have no big knowledge on I. Fisher or on K. Wicksell.  I have read Hyman Minsky three years ago with my graduate students, but of course I cannot say that I understand him in depth. Minsky has a good insight but I have some difficulty in using his theory in the analysis of my concern, i.e. how does money effect real economy when money may be "hoarded" in a wide sense of the word.

Robertson was in 1920's a good discussant of Keynes's works but later they became drifted apart. Robertson was critical on Keynes's compromise in accepting equilibrium framework. They are  analyzing functions of money by step-by^step method in 1920's. 

See  Kohn (1986) Monetary Analysis, the Equilibrium Method and Keynes's General Theory. Journal of Political Economy 94(6): 1191-1224. 

I said that I am not a Keynes fundamentalist.  I think we have to revise the General Theory in a very fundamental way.  There are many reasons on this. 

Thank You Yoshi I will read that article.

Hi,

You may have a look to this paper because investment is at stake:

Diversification and cash dynamics*

Tor-Erik Bakkea, Tiantian Gub,*

Journal of Financial Economics 2017 forthcoming

Best regards.

Dear Patrick Navatte,

Thank you for the information.

I could find Tor-Erik Bakke and Tiantian Gu's Diversification and Cash Dynamics in SSRN.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2718359

It is an interesting paper that examined how diversification influence cash reserves. However, this research is rather irrelevant to my question. Let me explain.

If we assume that firms keep their internal reserve as bank deposit and banks use the sum to invest in real economy, the level of the retention ratio (if it is high or low) does not change the macroscopic situation. If banks find borrowers or the chance invest themselves, the saving represented by the cash reserves retained by firms is effectually invested as a whole.

• Hi Yoshinori, I recommend you read Steven Kates (1997) "On the True Meaning of Say's Law", which I've provided below. To Kates, Say's Law is unassailable.
• I think the problem you've addressed is partially explained by the difference between identities and equilibriums, which is largely a timing issue. For instance it's true that income is either consumed or not consumed (saved), and it's true that consumption and investment goods make up our production of goods; however, the timing of the two conditions needn't be exactly the same. Long run, yes. Short run, maybe not. After all, if the short run is defined to be short enough, there is no chance of "equilibrium". 

Dear Peter V. Bias,

thank you for your post. for the moment, I have no time to reflect and write on the problems you have posed. Let me give a very hurry answer.

What Say wanted to say may be different to the proposition that Keynes formulated. Say may have wanted to say that if the economy expands proportionally, there is no limit of demand and supply find its demand. Ordinary growth theory (with which I disagree) shows it is possible.

I am more interested in what you term "short." However, if "short run" is repeated many times, it is long run. As the economy is an evolving process and at each moment it is the short run logic which works, I believe "short  run" is important. We should admit that an economy is no time in equilibrium. "Equilibrium" is a bad concept to consider real economic processes. 

Dear Yoshinori,

in Keynes, saving is purely an accounting, ex post residual variable. Saving is a flow concept deriving from the difference between actual income and consumption. In a closed economy, by definition, the ex post identity between investment and saving always holds while, in an open economy, investment could be different from domestic saving by a deficit/surplus of current account.

This ex post identity does not imply an ex ante equilibrium, which is the essence of Say’s law. If, in a closed economy, the ex ante investment decisions are greater/smaller than ex ante saving decisions (or, in Keynesian words, the liquidity preference), in the monetary market there is an excess demand/supply determining, ceteris paribus, an increase/decrease in the interest rate and a corresponding decrease/increase in investment plans. This happens because investments depend on the Keynesian “marginal efficiency of capital” compared with the interest rate. There is money excess demand/supply even is firms decrease/increase their bank deposits, because in this case the level of money supply decreases/increases because of the monetary multiplier.

The final result, in normal conditions of money demand/supply elasticity’s, will be an increase/decrease in investment smaller than ex ante investment plans, an increase/decrease in the interest rate and, given the propensity to consume, an increase/decrease in the level of income just enough to increase/decrease the savings at the new level of investments. In case of “liquidity trap” investments growth/reduce until the ex ante planned level. This line of reasoning implies that prices are not completely flexible, which is the Keynesian definition of short run (and Keynes reminds us that “in the long run we are all dead”).

The substantial difference between Keynes and the neoclassical is in the determination of the interest rate. In Keynes interest rate is a monetary variable determined in the monetary market, while in neoclassical theory (and in Say's law) interest rate is a real variable determined in the real fund market.

In a ‘Keynes world’ the correct statement of your question would be: in a closed economy, can ex ante planned investments be financed without changes in the current level of interest rate?

Dear Andrea,

Thank you for your entering to this discussion. As I have explained to the answer to  Peter V. Bias, I have no time to reflect and write on this question. I will be back to this when I will have finished my second chapter to our new book Microfoundations to Evolutionary Economics.

What I can say for the moment quickly is this: (1) Keynes found an very important principle in economics (the principle of effective demand). (2) I do not think that his system is logically coherent. (3) The ex post accounting identity should not be used to explain ex ante arguments.  (4) Keynes and other economists on the Wicksell connection put undue importance to the interest rate.

I am afraid that Andrea is also committing (4) error.  

...

Thank you, Obed Amponsah , for reminding me the existence of this question. I have promised to consider the point that Andrea Ricci had posed but two years have passed since then.

It is true that I was preoccupied by writing Chapter 2 of our book with Morioka and Taniguchi: Microfoundations of Evolutionary Economics. It was already published in July last year. I have set up a page for it:

Book Microfoundations of Evolutionary Economics

I added many comments there. Many of them are brief summery of the book or chapters, information of book reviews, and some discussions about methodological back grounds of our book. Some others is a kind of afterthoughts and reflections that I came to acknowledge after the publication.

Fortunately, the page received more than one thousand readers. This is, I believe, a rather rare case for a book written by not so famous authors.

This is not the main point of Andrea's answer but I want to add some words on the common usage of the term "Say's Law". This word started to be used in the early 20th century and became popular by Keynes's book General Theory of Employment, Interest and Money (1936). See for the origin of the term "Say's law", my question page in ResearchGate:

https://www.researchgate.net/post/Who_has_coined_the_term_Says_law_Is_it_the_same_idea_that_J_B_Say_expressed_in_his_famous_chapter_on_Debouches

I believe this is a great book, but Keynes added some of bad tradition to economics: (1) "classical economics" that includes neoclassical economics, (2) the term of "Say's law," and (3) the concept of "aggregate supply function."

(1) made obscure the fundamental difference between classical political economy (at least some parts in it) and the neoclassical economics. This practically excluded for a long time a possibility to construct or re-build economics of effective demand on the basis of classical tradition of economics.

(2) Keynes established a scarecrow by this term. Say and Ricardo were thinking very different aspect of economic phenomenon which is normally named now economic growth. Keynes replaced the focus of arguments from long period analysis to short period one. There is nothing wrong in this displacement of the focus of interest, but Keynes should not accuse a common false argument by the name of Say's Law. Theorists after Keynes did not work on clarifying the logic why effective demand dominates the modern industrial economy.

(3) Aggregate supply function is the inverse of employment function after Keynes himself (Chapter 20 of the General Theory). In the case of employment function, the casual relations are obvious. Aggregate supply function reverses this causality. Such kind of reversing causal relations can be permitted only in the framework of equilibrium.

I believe it is now time to reconsider Keynes's framework itself. Although Keynes had a very realistic vision of the economy, his analytical arguments are full of flaws. We cannot beat neoclassical economics by this flawed system.

What I want to say to Andrea Ricci is two: (1) Ex post arguments totally draw on equilibrium arguments and cannot be used in clarifying real processes of the economy. I am not asking whether saving is always identical to investment. I am not talking on that level of arguments. (2) Contrasting Keynes and neoclassical economics may be useful to persuade new comers to economics but does not help much in advancing economics. We should clarify the logic of Keynes and rebuild a more coherent system of theories. I posed my question in this page in order to build on a higher understanding of workings of the economy.

In Keynes in the relation (1/s)I investment is taken as an independent variable so that I = I*

Thus if S = sY = I* a rise in s to s° > s will not increase S but will entail a fall in Y to Y^ < Y as to maintain the relation S = s°Y^ = I*

This process highlights the fact that in Keynes and Kalecki it is investment that leads saving.

Dear Joseph Halevi

Thank you for answering my question. As I am now working on a paper: Dynamic Capabilities of Nations and as it is far behind the schedule, I have missed reading your post.

My question may seem simply refuted if you think in equilibrium framework. However, if you once begin to ask the causal relations, equilibrium framework is quite unsatisfactory.

You noted the case where the saving ratio (propensity to save from income) rises. You argued that the output level Y would fall so as to maintain the relation S = s°Y^ = I*. However, the increase of s may make it possible that the economy will grow more rapidly than before. Think for example, if k is capital/output ratio, we have on a steady growth path this relation:

g = s / k.

When s is greater, g is greater.

How do you explain this change of growth rate? It is not always true that greater s reduces the output. But, let me stop nitpicking.

My question can be paraphrased as follows:

Suppose someone saves an amount S in money terms. In the old times, he or she may hold the money (in gold or silver coins) in his or her closet. This is the classical hoarding. In the modern times, we all deposit our saving in banks. Is it sure that banks always find the sufficient quantity of borrowing to be used (i.e. invested) by firms? Banks may invest in a financial market but this does not mean that the deposited money is invested in e.g. capacity building. I am asking whether it is safe to assume always S = I (not in equilibrium but in causal analysis). Certain amount of saving may be hoarded inside of the market economy.

What is strange with Keynes is that he talks about hoarding in many occasions and even stated that

• The concept of hoarding may be regarded as a first approximation to the concept of liquidity-preference. (General Theory Ch.13, V)

Even though, he does not admit that some money is hoarded in some agents' closet or somewhere in the financial economy and would not invested in the real economy.

Keynes's problem was that he did not have the patience or humility to read the literature he was criticizing. He studied mathematics as an undergraduate, not economics. He could have found from Alfred Marshall's "Money, Credit and Commerce" (1923) the explanation that people are inclined to "invest the greater part of their savings in Government, or other familiar stock exchange securities, or to commit them to the charge of a bank" (p. 46). Here Marshall was merely repeating Adam Smith's definition of saving as the acquisition of interest- and/or dividend-earning financial assets in the "Wealth of Nations" (1776). The classical economists continued with that definition, which is also included in Marshall's "Principles." Keynes's new definition of investment as only the purchase of capital goods (1936, p. 62) played a major role in the confusion he reflects regarding the relationship between saving and investment, besides his failure to link savings with interest rate determination. Manipulating Keynes's equations in an attempt to resolve his confusion is just a waste of time. Any wonder the question as to what he meant persists? I've dealt with Keynes's confusions over definitions in macroeconomics in Chapter One of "Macroeconomics without the Errors of Keynes" (Routledge 2019).