Sunday, October 09, 2011


One of the hallowed concepts in Economics is the notion that Savings=Investments. This follows from the sacrosanct accounting identity Y=C+I+G, which means in English "output equals consumption plus Investment + Government Spending".

Much has been said about the "I" variable of the above, and I will spare the reader from the supposedly rigorous math involved. Suffice to say that just because something is logical in a strict sense (and much of mathematics is error-testing for logical sufficiency) does not necessarily mean it is instructive or even true.

Variables that attempt to convey the complexity of economic systems have always been well, insufficient. A variable containing millions of other variables that fluctuate individually and in concert with still other variables (while also being effected by that strange economic "gravity" of "confidence") is not very useful in forecasting.

And yet there persists this knee-jerk response when economic issues to simply say Savings equals Investment, and thus everything is copasetic.

I think this is wrong-headed. Investment happens over long time periods involving uncertain payoffs whilst saving happens immediately with known amounts. Equating a benefit from the future with an asset now compresses time in an unsettling and academic way.

Reality is far more complicated than that. The above identity not very useful anymore, if it ever was.

1 comment:

Curt Matsen, CPA said...

Thank you very much for your post! I am very interested in your points.

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