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Introduction

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

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Introduction

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  1. 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]

  2. GlobalEconomy in 'Normal' State Abstract "normal" (a kind of template) • just as perfect competition is an abstract 'normal' • real-world phenomenacanonlyapproximate'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

  3. '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

  4. Figure 3

  5. 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)

  6. 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-sectoralintertemporalexchange(inter-nodalarteries) • 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

  7. Figure 5 + + – –

  8. 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

  9. Conclusion If S is wealth-maximising in this mercantilist sense • financial and economic crisis becomes chronic Solutions ? • 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

  10. End

  11. Figure 5 + + – –

  12. Figure 4

  13. Figure 1: Google NGram use in books of expressions: • "saving class" (blue) • "saving classes" (red) 1900 1930 1960 1990

  14. Figure 2 UK & France

  15. UK Balances

  16. UK Corporate Balances From"Splashing Out" The Economist 19 May 2011

  17. France Balances Japan

  18. Japan Balances

  19. Switzerland Balances

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