Fun Amongst Accounting Identities

An article alongside the flamboyant championship "The lastly implosion of MMT" by  Egmont Kakarot-Handtke caught my eye. As I observed at Mike Norman Economics, this was in all probability but an endeavour to troll people. That said, I mean value it provides closed to other useful representative of national accounting industrial plant (or does non work...).

The Premise

His wrong declaration may live summarised as:

In social club to come across this ane has to become dorsum to the nearly uncomplicated configuration, that is, the pure consumption economic scheme which consists alone of the menage too draw of piece of work concern sector.**
In this uncomplicated economic scheme 3 configurations are logically possible: (i) consumption expenditures are equal to wage income C=Yw, (ii) C is less than Yw, (iii) C is greater than Yw.
...
In instance (ii) monetary saving Sm is positive too the draw of piece of work concern sector makes a loss, i.e. Qm is negative.

The origin of the employment is that he has confused cash stream for profits. In a 2 sector economy, if ane sector has a fiscal surplus, the other sector has to bring a corresponding deficit, since the amount of fiscal flows has to equal zero. (In published economical data, at that spot tin hand the sack live measuring errors that create residuals.)

However, a fiscal stream is non the same matter equally profits. For an economic scheme divided betwixt a menage sector too a draw of piece of work concern sector (that is, the external too governmental sectors are assumed out of existence), at that spot are 2 top dog cash flows out of businesses that are non expenses, too which create a wedge betwixt cash stream too profits.

1. Dividend payments are flows to the menage sector (which allows for the buy of draw of piece of work concern output) that are emphatically non expenses.
2. Capital expenditures past times businesses are a outward cash stream past times businesses that practise non instantly hand rising to an expense. (Depreciation expenses volition arise inwards the future, however.)

For example, a draw of piece of work concern tin hand the sack pay a $1000 dividend to its owner, too the dividend is saved inwards the bank. The menage sector has $1000 inwards savings, too at that spot is no resultant on draw of piece of work concern sector profits.

These 2 exceptions are non minor; they sweat a lot of the activeness inwards the national accounts, too inwards the possibilities for outcomes inwards model economies. Dividends inwards detail pose a lot of potential theoretical difficulties. If nosotros bring a model inwards which all transactions inwards a menstruum settle simultaneously, too all entities are purely forward-looking, at that spot is lilliputian to halt dividends from becoming arbitrarily large -- since all output tin hand the sack live instantly purchased alongside dividends.*

Concluding Remarks

This is a rather featherbrained example, but it underlines why nosotros ever bring to decease on the cases of dividend too fixed investment flows inwards our minds when discussing the national accounts.

* Anyone alongside a background inwards command systems applied scientific discipline volition recognise this equally beingness the highly annoying instance where the "D matrix" is non-zero. About 90% of the annoyance gene of controls proofs deals alongside that case.

(c) Brian Romanchuk 2016