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On the Origins of the Sector Balances Identity….

Ramanan has a superb post up at his site that traces the origin of the sectoral balance identity back to Nicholas Kaldor.  This analysis was made famous by Wynne Godley and many of us have latched onto it in recent years as it contributes a great deal of insight to the current economic environment.   This identity has even made its way into many of the big research firms like Goldman Sachs where Jan Hatzius is consistently implementing it in his work.  It’s a major focal point of Monetary Realism and the work we’ve been doing in the last 12 months on it.

It’s not only interesting to note that Kaldor was the first to use it, but it’s also interesting to note his framing of the discussion.  He clearly defines “total net saving” in a way that is consistent with the MR view of sectoral balances as “equal to the sum of the items private net investment at home, the balance of foreign payments and government expenditure out of loans”.   What’s even more interesting (and brilliant) is that JKH came up with the same conclusion (also confirmed by Ramanan, Steve Waldman and others) in the discussions on S=I+(S-I) entirely on his own with the focus on private investment as a focal point of private saving.  As far as I know, JKH wasn’t familiar with the Kaldor work, but maybe I should ask him that before I hit publish.  Or maybe not. Either way, it’s brilliant stuff and incredibly enlightening.  Not to mention consistent with the views of the guy who founded the whole thinking.  We also ripped off Kaldor’s views on the foreign sector, but that’s a different story….

Wonky stuff, but important for framing these discussions correctly….


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