Fine. But it starts with income.

]]>C’mon George, if that is not a flow nothing is.

BTW, I corrected myself in comment which hasn’t been posted yet. Waiting for David to put it thru.

]]>It would appear that we have come full circle. As I said from the beginning, once you make the conversion from income to money income payments your constraint is logically and mathematically correct. Why can’t you see this? It’s not that complicated. It’s simple junior high school math: distance = speed x time. You have to multiply your speed by the amount of time you travel at that speed in order to calculate the distance you will travel.

And, again, as I have said before, you can use this as a budget constraint if you want to and maximize utility subject to it, but what can you then say about the resulting demands? How do they correspond to what actually happens in terms of the willingness to buy and sell in markets? What does this constraint tell you about how your income on Wednesday measured in terms of the $/time enter into these demands and constrain your choices on Wednesday? How does income enter into these demands in any way other than as an expectation? How do these demands differ from demands implied by a constraint that includes only assets and the availability of credit with expectations treated as a parameter in the utility function?

]]>“This conversion makes it possible to add these two magnitudes…”

There is no conversion required. It is patently clear if you add $10 at beginning of period to income of $15 over period you end up with $25 at end of period. Simple. Incontrovertible. Uncontroversial.

Perhaps it has been abused, but I see no problem using it in a budget constraint.

Lavoie’s and Godley’s book is available online as a pdf if you google it. You should read it for yourself.

]]>Good point. But still, my point is that simply adding 5 bushels of apples to 10 bushels of apples/time to get 15 does not tell you anything about what that 15 is without adding the fact that “the end of time” is 1 time unit, and you can’t add these two numbers and get 15 bushels without multiplying the 10 bushels of apples/time by 1 time unit which is, of course, the only way to make sense out of this sum being equal to 15.

This conversion makes it possible to add these two magnitudes, but after you make this conversion and do the addition you don’t end up with a homogeneous magnitude; you end up with the sum of bushels of apples that exist either independent of time or at a point in time and bushels of apples that are related to the flow of time. At this point you have to ask: What is this magnitude of bushels of apples useful for?

Re: “The stock = stock + flow equation is a fundamental equation of accounting and economics.”

The stock = stock + time x flow equation (or some version of it, e.g., equation (7) in http://rweconomics.com/SFM.pdf ) is a fundamental equation of accounting, not stock = stock + flow, and I think it is useful in economics only when economists understand it. I suspect that a failure to understand this equation is responsible for most of the fallacious nonsense we see in economics today because economists in general do not have a clear understanding of what this kind of economic fruit is; what kinds of conclusion can be drawn from an analysis of this kind of economic fruit, and what kinds of conclusions cannot be drawn from an analysis of this kind of economic fruit. (See., http://rweconomics.com/RTVK.pdf )

Re; “It appears some economists think your rules don’t apply.”

This is obvious from the fact that the confusion between stocks and flows has led to so much nonsense in economics such as the nonsense I explain in http://rweconomics.com/RTVK.pdf

As for Lavoie and Godley, I presume you are talking about their Monetary Economics book. I haven’t read It so you will have to give me an example of what they actually say. I don’t know whether there book is nonsense or not, but it does sound interesting.

]]>I’m afraid I think your prior comment was a load of nonsense.

“When you add 5 bushels of apples to 10 pounds of oranges you get 15 what? ”

The analogy is inappropriate. The appropriate equation is 5 bushels of apples added to 10 bushels of apples/time to get 15 bushels of apples at the end of the time.

The stock = stock + flow equation is a fundamental equation of accounting and economics.

Lavoie and Godley wrote a book on macroeconomics based on this equation.

It appears some economists think your rules don’t apply.

]]>“Very good! Now I can see what you are getting at. I don’t have any problem with this constraint. Since it is entirely in terms of money, the flow or rate of income does not enter it, only current money balances (and other assets and liabilities) and expected future income (payments). If you maximize utility subject to this constraint current income will not enter the resulting demand functions, only expected future income. This seems to be perfectly consistent with Keynes, but I’m not quite sure what the utility function that is maximized subject to this constraint looks like or how the system works, but this is not a Walrasian budget constraint and I’m pretty sure it won’t lead to a Walras’ Law with regard to current excess demands. I think it would be simpler to include expectations in the utility function and maximize this function subject to current assets, liabilities, and expenditures, but either way I think it will work.”

The point is the only way you can make sense of this constraint is if “it is entirely in terms of money, the flow or rate of income does not enter it, only current money balances (and other assets and liabilities) and expected future income (payments);” any other interpretation is nonsense. Money balances and other assets and liabilities are all measured in units in $. The only way to make sense out of this constraint is if future income is interpreted as future income payments of money. If you want to assume future income is measured in terms of $/year this constraint is nonsense. I was giving you the benefit of the doubt here when I assumed you understood this.

Re: “You get $s. So is this not valid?” How do you get dollars? If the $10,000 in your bank account is bushels of apples and your $50,000/year is pounds of oranges you can’t add them together to get bushels/$ without a conversion factor to convert the $/year to $. The only conversion factor that will convert this sum into $60,000 is 1 year is equal to $50,000 of income.

If you multiply your $50,000 by 1 Year you get $50,000 which you can add to the $10,000 of money in your bank account to get $60,000 which is $60,000 of neither money nor income; it’s $60,000 of economic fruit.

The question now becomes how do you make sense out this result? Why does the composition of this economic fruit not matter such that it makes no difference whether it is all income or all money? Why to you want to measure this economic fruit in the first place? What are you going to use this measure of economic fruit for?

I really don’t know what is so confusing here. It seems to me that I was told in the first or second grade that you can’t add apples and oranges. I have never before been told that, somehow, the rules are different for economists.

Income and money are not the same thing. You can’t add them together unless you have a common unit of measure. That means to add them you must find a way to either convert the money to $/year or income to $. Once you do that you end up with either $/year or $ of economic fruit. Having obtained the result the question becomes how do you make sense out of this result?

These are the rules, and I can see no reason why they should not apply to economists.

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