To my students

9 June, 2017 at 16:36 | Posted in Varia | 9 Comments

Yours truly has a reputation for being tough on grading students. It is true. I am tough. And for a reason. Economics is hard. Getting a grade in it is not something you have a right to. You have to show that you master the material. You have to earn it!



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  1. Think you mean “master” the material? It is a novel use of the word muster but ….

  2. In a way, I am a student of yours, and am very happy that you do not grade my comments. Or is there a secret grading system…? I’m sure I am failing if so. At the risk of another ‘F’, I will attempt to master the courage for another comment. I mean muster, sorry.

    Recently in your comments section I had the good fortune to be involved in a discussion of the logicality? of one paragraph from a quote that you presented from Paul Davidson. One item of contention seemed to be about whether all income is always spent on “producibles” (either consumption or investment). And I am still unclear about this, and would like to ask for help.

    One side of this discussion was that the accounting will show that all income will be in fact be spent on either consumption or investment. This side was represented by JKH, which means it is almost certainly true, and if it isn’t, it is probably me botching JKH’s comments, for which I apologize in advance.

    I understand this argument as saying that in any point in time, if there is a transaction in the economy, one side will show an expenditure on either investment or consumption items and the other side will show an income. And they will always equal, which seems reasonable to me. And at the next point in time the same will hold and so on for every point in time that we look at. So therefore it is reasonable to say that all income is spent on producibles.

    But when I look at the economy as a whole, over longer time frames, I want to question that statement that all income is always spent on producibles, because it just doesn’t seem right to me, but am lost as to exactly why. Is there a fallacy of composition in the argument, or is there just a failure of comprehension on my part? Or have I gone completely off track. In any case, I will not argue if you give this comment a failing grade, or delete it entirely. But any help would be appreciated.

  3. Jerry,

    For some reason, Lars has shut down discussion on this matter twice. Perhaps he wants to protect his students from errant comments?

    JKH wasn’t happy with what Davidson said in the comments edited from the quote, which I have reproduced below.

    “The proportion of income that households save does not affect total (aggregate) demand for producibles; it affects only the composition of demand (and production) between consumption and investment goods. Thus, saving creates jobs in the capital-goods-producing industries just as much as consumption spending creates jobs in the consumer-goods-producing industries.”

    I think these comments are correct.

    I think your problem lies in reconciling the notion that all income is spent (Y=C+I) with the notion that there is saving out of income (Y=C+S). On the face of it, it doesn’t make sense. Also, part of the problem is that we confuse what we do as individuals when we save with what saving means at the aggregate level. The difference is related to the fact that one man’s spending (or lack thereof) is another mans’ income.

    • Henry,
      I have a plethora of problems, so limiting yourself to just one is not necessary 🙂 But yes, one of them is about savings and how that relates to the economy. And more specifically, to the quote you reproduced-
      “The proportion of income that households save does not affect total (aggregate) demand for producibles; it affects only the composition of demand (and production) between consumption and investment goods. Thus, saving creates jobs in the capital-goods-producing industries just as much as consumption spending creates jobs in the consumer-goods-producing industries.”
      I don’t understand how that would be true in real life. If it is true, I don’t see how it would be reconciled with Keynes’ paradox of thrift, which I do think is true. How likely is it that when households decide to increase their savings, and therefore reduce their consumption, that other expenditure agents (such as businesses or governments) will automatically pick up that slack? Especially in the case of services, which can not be inventoried.

      But I very much hope that I am not abusing Professor Syll’s comment forum by asking about this, and I doubt that the previous threads were terminated due to our discussion of this topic. If I thought that was the case, this wouldn’t have been written.

      • Jerry,

        The Davidson quote refers to the situation at a given equilibrium level of income.

        The paradox of thrift has several versions. It firstly involves an autonomous shift in the savings schedule, i.e. consumers want to save more/less at every level of income. This gives rise to a change in the equilibrium level of income. If investment is autonomous of income, a rise in the saving function lowers income to the point S=I again. The level of saving will return to the original equilibrium level. (This is the case Keynes considered). If investment is a positive function of income, then not only will income fall but the level of saving will be below the level it was at before the shift.

      • I think Paul Davidson is remarkably clear and recommend that you click thru in the original post and read what he wrote in its entirety.
        In context, in the passage Henry quoted, Davidson is paraphrasing the doctrine of “orthodox theory”: it is orthodox theory that asserts that all income is spent on producibles and savings only affects the division between consumption and investment. Davidson is not endorsing that doctrine; he thinks orthodox theory is wrong, that that would NOT be true in real life. The difference between orthodox theory and real life is money (including its various extensions as finance and contingent contracts) as a hedge against uncertainty. Money is not a producible, but people can “save” money, with no necessary effect on rates of transactions (buying and selling, or even borrowing and lending) that drive productive activity or employment.
        If people can hoard money without spending it or investing it (but expect to benefit from hoarding), the paradox of thrift isn’t hard to comprehend. With money extended as debts with nominal terms, scenarios like debt deflation are also comprehensible.
        Orthodox theory, in Davidson’s telling at least, treats money as a convenient transparency and Davidson, in his critique, is at pains to expose how orthodox theory thinks its way into this cul de sac of the mind. Uncertainty, erased by an assumed ergodicity and gross substitution from orthodox theory, is Davidson’s key.
        Orthodox theory, on its own terms, posits a decentralized system of markets capable of realizing an optimal (or panglossian) homeostasis thru varying prices that bring all allocation and activity into harmony. If I hoard money, the system of markets will adjust prices accordingly, either inducing me to give up my hoard or simply by-pass me, by adjusting prices so as to realize full-employment of resources with the quantity of circulating funds available. Hoarding money is crazy behavior in the world of orthodox theory really — not something the individual can benefit from since one cannot eat money — but nothing The System of Markets cannot overcome.
        The double-entry conventions of the national accounts is irrelevant to any of the above: those conventions facilitate measuring rates of activity, nothing more. The economy might or might not be a system in market price moving toward general equilibrium — the national accounts do not care.
        I personally think “saving” should not be in the national accounts, precisely because saving is not the obverse of investment in the way buying is the obverse of selling or borrowing is the obverse of lending. When people “save” (common-sense meaning) they may be refraining from engaging in a transaction and with no transaction taking place, there is no economic activity for which to account and no justification for making an entry in the national accounts. It just confuses everyone to have “savings” in the national accounts and, in fact, a large part of National Accounts “savings” is not observed or measured at all, but simply inferred as a residual. This is, at the moment, an idiosyncratic view on my part, but after 70 years of students and others being hopelessly confused by this conceptual inconsistency, I persist in hoping others may see the sense.

        • Bruce,
          I am not sure that Davidson has expressed himself all that clearly in his “ergodic axiom” paragraph.
          He is saying things that he says orthodox theory says without saying whether he believes Keynesian theory says or does not say the same things. Some of the things he says that orthodox theory says in this paragraph, I would argue, are things that Keynesian theory says. Additionally, he uses a Keynesian concept, effective demand, to explain orthodox theory. In being economical with his explanation, I believe he has muddied the waters.

  4. Stay on the hardline, Lars! We have too many halfwits passed through in Economics, sadly, and they have done a lot of harm!!Janne

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