Saving Versus Saving Net Of Investment

The commenter JKH has an outstanding post here at Cullen Roche’s blog criticizing the Neochartalists’ mixing up of saving and saving net of investment.

JKH quoting Randy Wray:

Then, this is telling:

“To briefly summarize, at NEP we prefer to use the Godley sectoral balance approach, where he defined private sector saving as “net accumulation of financial assets” (NAFA), using the flow of funds data. Typically economists use the GDP equals national income equation where saving is defined as a residual: the net income received but not consumed (I’ll use it below in discussing the MMR approach). In theory these would lead to approximately the same result; in practice they do not because the NIPA accounts include imputed values. Godley preferred the flow of funds data but even they had to be carefully adjusted to ensure that every spending flow is actually financed and actually “goes somewhere” (ensuring “stock-flow consistency”). That is all quite wonky. My bigger point is that we can come up with alternative definitions of saving that would include unrealized capital gains as real and financial assets appreciate in value.”

This seals the case regarding MMT’s confused interpretation of the term “saving”. I don’t know if that correctly reflects what Godley does or not, but if private sector saving is defined that way it has nothing to do with the private sector saving S that’s cast in MMT’s own 3 sector financial balances model. S cannot identically equal (S – I) unless I is identically zero, which is ridiculous.

For example, in a closed economy with a balanced budget, if the (alleged) Godley definition of private sector saving is combined with the explicit definition of private sector saving S in the 3 sector SFB equation, then saving must be identically zero, whatever the level of investment. In cannot be otherwise for the Godley and MMT SFB specifications of S to be consistent. And in the real world economy, any such consistency would force global S = 0. And this is the point of it all – such inconsistency in the use of the term “saving” is fundamentally misleading.

Remarkably, Wray just demonstrated the same conflation of saving and net saving in MMT language and logic that is at the heart of the issue in question, which I find flabbergasting in the circumstances. Furthermore, he suggests this is consistent with the NIPA definition of saving. The definition of saving (allegedly) attributed to Godley above is not the same as NIPA defined saving at all. And the issue of imputed values or capital gains has nothing to do with the primary question. That is a secondary consideration having to do with the reconciliation of stocks and flows, not the outright confusion of flow definitions. It is a trees rather than a forest issue.

Of course this is an erroneous application of Godley’s sectoral financial balances approach as JKH himself suspects.

Wynne Godley never

… defined private sector saving as “net accumulation of financial assets” (NAFA), using the flow of funds data

and always specified that it is Net Saving which is NAFA and always specified Net Saving is Saving Net of Investment.

Excellent post by JKH exactly pinpointing to mixing terminologies and taking great pains to explain saving as an income residual.

JKH on me

Special mention also goes to Ramanan, who is a persistent seeker of accuracy when it comes to the subject more generally.

Thank you 🙂

Leave a Reply

Comments are welcome, but not published—see comments policy. Required fields are marked *