Concordian Economics, Part 5: Analysis and the Black Box of Saving

Written by Carmine Gorga, The Somist Institute

This article concludes the series covering the description of Concordian Economics.  The four preceding articles are listed, with links, at the end of this post.  Also at the end of this post is Appendix 2 (not included with Parts 1-4), a full list of references for the original paper and acknowledgements to those who have supported the work defining Concordian Economics.

Concordian Economic Analysis

Of all the writings in Concordian economics that have appeared in print so far, none contains economic analysis. Each one of them describes tools in economic theory, economic policy, and economic practice that will eventually allow us to perform a comprehensive economic analysis.

Whatever qualitative judgment might have been uttered so far on the basis of Concordian economics has been consciously withheld for a complex variety of reasons.

The most important among such reasons is the expectation to eventually use, not simply Concordian economics, but Concordian econometrics.

Only then economic discussion can be, not only relatively concise, but as precise as possible—at least as precise as Keynes demanded.

Some Concluding Comments

When in pursuit of economic research one discovers that a word in mainstream economics, “saving,” as Professor Raymond Goldsmith (1955-1956, Vol. II, pp. 68, 69n) calculated, can assume 100,000 possible meanings, one does not need any further justification for revising that theory. Yet, for good measure one can add that the tools of analysis of mainstream economics present the economist with a “black box” (cf. Petrongolo and Pissarides, 2001). Then one is not surprised by evaluations of mainstream economics as negative as those uttered by Greenspan (in Chan, 2010). Indeed, then one has full permission to open that box and see what does it contain.

Opening that box, as seen above, opens our minds to a very rich economic reality, a complexity that might well be identified as Concordian economics. The transformation of the various models of Concordian economics into one comprehensive econometric model will allow us to integrate all key elements of the economic process and eventually will allow us to gain a better understanding, evaluation, and control of any proposed set of economic policies.

Full disclosure.

In the course of fifty years of study, the writer has designed a set of economic policies that can be implemented as a ten-year program for the abatement of much unnecessary economic pain in the world. One of the functions of the proposed econometric model is to allow for a decisive evaluation of that program.

In the words of Vincent Ferrini (2002), the Concordian economic development program “has the answers to universal poverty and the anxieties of the affluent.”

Articles in this series:

• Concordian Economics, Part 1: Intoduction
• Concordian Economics, Part 2:  Geometric Representation
• Concordian Economics, Part 3:  Mathematics
• Concordian Economics, Part 4:  The Business Cycle
• Concordian Economics, Part 5:  Analysis and the Black Box of Saving (this article)

Appendix

Symbols, Meanings, and Definitions

Symbols in Concordian economics
ERs = energy-units
MUs = matter-units
VUs = value-units
H = hoarding
P = production of all real goods and services
D = distribution of ownership rights over real and monetary wealth
CG = consumer goods
KG = capital goods
GH = goods hoarded
OCG = ownership of consumer goods
OKG = ownership of capital goods
OGH = ownership of goods hoarded
EP = economic process
PED = principle of effective demand
npW = nonproductive wealth
pW = productive wealth
MY = monetary income
E = expenditure
Eh = expenditure to purchase goods to be hoarded
Ek = expenditure to purchase capital goods
Eg = expenditure to purchase consumer goods
If = expenditure on fixed capital
Iw = expenditure on working capital
Ck = expenditure on capital goods
Cg = expenditure on consumer goods
p = rate of change in total production
d = rate of change in the values of distribution of ownership rights
c = rate of change in total expenditure
r = the rate of interest
d = existing distribution of values of ownership rights
mec = marginal efficiency of capital
YL = labor income
rW = income from ownership of real and monetary wealth (capital income)
R = rent from land and natural resources
w = value of real wealth
m = value of monetary wealth.
***
Meanings in Concordian economics and mainstream economics
Y = income produced and consumed in mainstream economics
Y = income produced, distributed, and consumed in Concordian economics
C = consumption or expenditure to buy consumer goods in mainstream economics
C = consumption or any type of expenditure in Concordian economics
S = saving means literally 100,000 things in mainstream economics
S = saving means financial savings in Concordian economics
I = investment is equal to saving in mainstream economics
I = investment is all productive wealth in Concordian economics
***
Definitions in Concordian economics and mainstream economics

Appendix 2

The derivation of the distribution and consumption function in Concordian economics from Modigliani’s saving function.

Modigliani’s (1990) saving function is

(A.1)           S = YL + rW – C,

where S is saving, YL labor income, rW capital income, and C consumption.

Equation (A.1) can be transformed into a consumption function

(A.2)           C = YL + rW – S,

where r as an individual symbol is the rate of return on wealth.

The sum YL + rW is assumed to represent the effect of the distribution of income. By adding to this expression the rent (R) from land and natural resources, one obtains the complete distribution function (d), which is given in the text as equation (d dot) in Slide 15: General Analytic Model.

Since, in accordance with the Life Cycle Hypothesis of saving, consumption is a function of net wealth (see, e.g., Modigliani, 1980), it is necessary to take the rate of growth of wealth into account. Once wealth is distinguished between stocks of real wealth (W) and stocks of monetary wealth (M), one obtains

(A.3)           w = f(W),

where w is the growth of real wealth, and

(A.4)           m = f(M),

where m is the growth of monetary wealth.

Equation (A.2) can then be restated as

(A.5)           c· = f(w,d,m) – S.

Since at this stage of the discussion saving (or hoarding) is treated as a residual, equation (A.5) can be reduced to the consumption function (c·), which is given in the text as equation (c dot)  in Slide 15: General Analytic Model.

Note:  This series has been adapted from Beyond Keynes …. Toward Concordian Econometrics, International Journal of Applied Economics and Econometrics, Part III of the Special Issue on J.M. Keynes, Vol. 20, No. 1, Jan-March 2012, pp. 248-277.  The references for this work are listed at the end of that paper and have been added here (below).