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Lecture 4

Lecture 4 ECON 460.docx

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Department
Economics (Arts)
Course
ECON 460
Professor
William Watson
Semester
Fall

Description
Lecture 4 ECON 460 Tuesday, September 18, 2012 Chapter 7: The Meaning of Saving and Investment Further Considered I Past writers, including Keynes, have not had S = I.
Everyone agrees: Saving is the excess of income over what is spent on consumption. The problem then is: What are investment and income? II What do regular people mean when they talk about an “investment”? What’s Keynes’ definition? (What’s your definition?) Why is he OK with the common definition?  Regular people: buying stocks and bonds- buying title to existing asset; Keynes’s talks about newly produced goods and services not being consumed; he is ok with common definition because it all nets out- overall buying and selling cancel out Hawtrey: Is he concerned mainly with inventory cycles? How do such cycles involve excess saving or investment? Why does Keynes think this isn’t a complete story?  Yes he is concerned with inventories; Is Keynes fair to the Austrians?  Austrian intellectually; doesn’t say much about them and dismisses them saying their story doesn’t say much III
 His argument in the Treatise: income of entrepreneurs their normal, not actual profit.
S > I means they don’t get normal profit and contraction takes place. But: “I did not in that book distinguish clearly between expected and realized results.”  Expected returns to investment; nothing happens to overall amount that is being produced; demand just changes from one side to another  If most investors are disappointed then there is consequences for economy  Importance of net disappointment of expectations Robertson: Income = yesterday’s consumption plus investment. Saving = yesterday’s investment plus yesterday’s consumption minus today’s consumption. What does Keynes think of that? From that perspective what can go wrong?  Keynes argues that his construction wasn’t bad; it makes sense because income is generated by producing stuff and looking at it intertemporarily  In terms of saving equation- difficulty is that you may not replicate consumption; 2 equations can be different because of different definitions of saving; struggling with this notions because things may get wrong because change of behavior IV
 “Forced saving”? Hayek & Robbins. Money creation : Higher employment and output : Higher saving. But is this “forced” saving? Need a definition of normal saving. Might try: “Forced saving is the excess of actual saving over what would be saved if there were full employment in a position of long-period equilibrium.”  Instead of forced saving you are more likely to end up with forced deficiency Why, according to Keynes, is a “forced deficiency” of saving more likely? Bentham: with “all hands being employed” additional investment requires reduction in consumption. Is this a problem at less than full employment? Why does any extension of employment involve “some sacrifice of real income to those who were already employed”? (How does always being on the demand curve for labour come into play here?)  Downward sloping demand curve for labor V 
Why is it an “optical illusion” that saving can differ from investment? (“No-one can save without acquiring an asset, whether it be cash or a debt or capital-goods...”) Acquisition can only come from new investment or from someone else dis-saving by selling an asset. How do changes in output affect the distribution of income? (How is the demand curve for labour involved here?) So the “old-fashioned idea” that S = I is sound. “The error lies in proceeding to the plausible inference that, when an individual saves, he will increase aggregate investment by an equal amount.” Have to take into account his saving’s effect on other people’s saving and wealth.  What is true for individual might not be true for everyone together “Every ... attempt to save more by reducing consumption will so affect incomes that the attempt necessarily defeats itself.” Explain. Follows from the fact that “there cannot be a buyer without a seller or a seller without a buyer.” Explain. Individual can ignore follow-on effects of changes in his own demand but “it makes nonsense to neglect it when we come to aggregate demand.” Micro: “...we assume that changes in the individual’s own demand do not affect his income.” Chapter 8: The Propensity to Consume: I. The Objective Factors I Having carefully defined units in Ch 4, what units does Keynes use in his discussion of consumption?  In terms of wage units in ch4  Ch 8- output II Explain the influence of the following “objective factors”: 1. A change in the wage unit. – bad 2. A change
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