Transcript Document

Circular Flow:
Drawing Further Inspiration from William Harvey
paper by
Keith Rankin
Dept. of Accounting and Finance
Unitec Institute of Technology
for the 2012 Conference of the
New Zealand Association of Economists
Palmerston North
27-29 June 2012
Introduction
Economics is about both flows and prices
– Flow models convey balance and unbalance through time
– Price models convey unbalance converging into balance
in time
Circular flow models are under-done in both
education and analysis
– Initial inspiration goes back to William Harvey (and
others) who demonstrated the circular flow of blood from
the body's centre to its sectors (nodes), and its return
• Harvey analogy dates to Thomas Hobbes (1650s)
– "Hydraulic Keynesianism" has become a
pejorative term (Laidler)
[ref. AWH Phillips]
Global Economy in 'Normal' State
Abstract "normal" (a kind of template)
– just as perfect competition is an abstract 'normal'
• real-world phenomena can only approximate 'normal'
Three Sectors
– Saving Class (S); analogous to the head
• capitalist and other 'middle-class' households
• includes business 'companies' and financial system
– Low Income Class (L); analogous to left-hand, labour
– Governments (G); analogous to right-hand
Production Centre (P)
– analogous to heart, lungs, stomach
'Normal' State (continued)
Sectors run balanced budgets
– saving is confined to S, balanced by investing within S
Factors of production are owned by S, L, G;
reside in P
– materials (oxygen, food, water) combine with all available
factor inputs to produce goods and services ('nutrients')
– nutrients are conveyed via the monetary arteries to the
consuming sectors; information conveyed with return flow
• money [currency] is the circulating medium
• nutrients represent output (outflow) and income
• 'economic cake' divided into three sectoral portions
– the division of income is based on market and government rules
Figure 3
Circular Flow in 'Normal' state
L and C consume their incomes (nutrients)
– G demands collective consumer and investment goods
– L demands wage goods
– S demands wage and non-wage consumer goods;
plus, through their companies, investment goods
• investment equals saving through interest rate
• income-maximising sector
Textbook 2-sector circular flow
– contained within S (Figure 4)
– most saving goes to other households (Life-Cycle)
– remaining income (nutrients) is Capital
• capital is invested: company purchases (equity / debt)
Imbalance; departure from 'normal' state
if S cannot fully allocate its capital, internally
– private sector surpluses may be endemic (Figure 2)
• especially but not only when paying down debt
– unemployment results from unallocated capital
S may allocate its capital externally
– inter-sectoral intertemporal exchange (inter-nodal arteries)
• S markets unallocated nutrients (capital) to L, as debt
• L contracts to send nutrients to S in the future
• enables L to maintain/grow purchases of wage goods
– wage goods are central to industrial capitalism
– if S-L intertemporal 'return journey' falters [eg sub-prime]
• S sends unallocated capital to G; accommodating G-deficits
Figure 5
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Inter-sectoral Mercantilism ?
Mercantilism: pursuit of indefinite surpluses
– consider S=Switzerland; G=Greece; L=Lithuania
– S builds up credits indefinitely; L, G enjoy 'free' nutrients
When nutrients flow from S, as debt
– S accumulates claims on L and/or G
• financial wealth including non-circulating money
– such claims are widely understood as wealth
– postulate that S is a wealth-maximising sector
(in this sense of 'wealth') as well as income-maximising
– S is uninterested in consuming return nutrients from L,G
– S actors need to ensure their "investments" not defaulted
Conclusion
If S is wealth-maximising in this mercantilist sense
– financial and economic crisis becomes chronic
Solutions ?
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negative real interest rates; (need not require inflation?)
system of government bankruptcy; debt forgiveness
philanthropy (more than charity)
changing the income distribution rules
• public equity approach
• public equity benefits payable to L and S equally
– use average L incomes as measure of systemic success
• a successful economy raises living standards;
not unsustainable accumulation of financial credits
End
Figure 5
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Figure 4
Figure 1: Google NGram
use in books of expressions:
– "saving class" (blue)
– "saving classes" (red)
1900
1930
1960
1990
Figure 2
UK & France
UK Balances
UK Corporate Balances
From
"Splashing Out"
The Economist
19 May 2011
France Balances
Japan
Japan Balances
Switzerland Balances