Jim, As regards the concept of aggregate demand. How is it defined? Theoretically it isn't just the value of goods and services demanded (which would include a more nebulous concept of "potential demand"), it is the value of the quantity of goods and services demanded at a given price level. The "given price level" is set by the market prices actually paid, in which case aggregate demand can be equated to the total monetarily effective demand, which is, operationally, the value of a total transaction volume in an interval of time (as measured according to a standard valuation procedure).
Conventionally that quantity is defined as C+I+G+(X-M) which turns out to be equal to Kuznets's Gross National Product, nowadays GNI. In fact, GNI is nowadays most often presented as an expenditure measure where any trace of the income distribution is effaced (if, as the World Banks does, world GDP is valued at ppp and world GNI is valued by the Atlas method - a difference of about a trillion dollars - then at the same time international transfers of factor income (mainly profits) can no longer be separately identified). If you have a given quantity of goods and services at a given price, you can conceptualize that the value of this output must be equal to the expenditure on it (equal to investment expenditure + consumption expenditure), and the expenditure on it must be equal to the income generated by producing it. This is also what Kuznets and Keynes do, and that gives you the familiar three measures of gross product. But the first question really is whether, in reality, aggregate demand is in truth equal to gross product so defined. This turns out not to be the case, and it turns out that each of the components of the C+I+G+(X-M) formula is vaguely defined. In particular, intermediate expenditure, property income, capital gains, transfers, land rents, certain types of interest, expenditure on second hand assets, and the effect of credit creation are ignored. >From this it already follows that there is no "mechanistic" relationship between investment, saving and consumption of the type suggested in Keynes' General Theory. In a naive theory, income - spending = net savings. In a more sophisticated (post-Keynesian) theory, expenditure = income + net change in debt. If debt grows only slowly as a fraction of gross product, the impact on aggregate demand is very small; but as the level of debt in an economy grows, economic activity becomes more and more sensitive to the dynamics of debt repayment. But the next analytical problem is: how do we actually define the "net change in debt"? Again, there are some measurement conventions, but in reality the definition of total credit volume is rather arbitrary, and we simply don't really know what it is. If that is the case, how then can we "manage" aggregate demand anyway? It becomes a rather pragmatic issue, where credit is injected or withdrawn, and then we see what it does - we observe and adjust to what effect that has. What the Keynesian concept of aggregate demand does not do, is to distinguish adequately between the spending, saving and investment purposes of different social classes, which really are quite different. For the purpose of the theory of economic growth, it is in fact fairly meaningless to equate "investment" with "capital formation", and it is meaningless to talk about "investment" in general without distinguishing between different kinds of investment (productive and non-productive expenditures) It has to be acknowledged that different kinds of investment, saving and consumption have quite different effects for economic growth. Of course, you can introduce more distinctions into Keynes's theory, but they were not in there, originally. More substantively, it can be shown that in a debt-ridden rentier economy, classic pump-priming techniques have less and less effect for economic growth, you get less and less "bang for the buck". It boils down to debt expanding a bit here, and shrinking a bit there, without much effect on productive accumulation. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
