He screwed the pooch (was Income-Expenditure)

[From Rick Marken (2004.01.20.2120)]

> Bill Williams:
>> Rick Marken (2004.01.20.1130)-
>> [Bill Williams] is correct if the income he is talking about is the
>> income for the aggregate consumer (Ic) and the expenditure he is
>> talking about is the expenditure for the aggregate producer (Ep). It
>> is not true if the income he is talking about is the income for the
>> aggregate consumer (Ic) and the expenditure is the expenditure by the
>> aggregate consumer (Ec).
> Strange as it may seem, _in the aggregate, Ic is equal to Ec. Rick,
> you have yet to comprehend the logic of the agregate context. In
> the aggregate, "Income is expenditure." And, conversely, "Expenditure
> is Income."

I agree that I don't understand why, in the aggregate, consumer income
equals consumer expenditure. Why is it necessarily true that the
aggregate consumer spends all that it gets as income? I believe it
could happen. I just don't see how it could be a law or tautology, as
you imply.

I doing more than "imply." I am forthrightly asserting that, in an
simultaneous analysis the only possiblity that is consistent is the one in
which money income is equal to money expenditure. Stated another way
aggregate sales are equal to aggregate purchases.

  If GDP is consumer income (and producer expenditure) then,

it seems to me, if all consumer income were also consumer expenditure
then there would be no inventory

Here you are shifting from a monetary analysis to a "real goods" analysis.
This is called, thanks to Bruce Nevin, equivocation. Remember your
chemistry or physics and the dimensional analysis. It is simpler here.
There is only one dimension-- so far -- and that is money.

since all that was produced would have

been bought.

> Bill Williams (20 January 2004 7:00 PM CST)--
> I should have been more explicit. It would have been clearer if I had
> said "Money Income is equal to money expenditure."

No. That would still not be clear to me. What I don't understand is why
the aggregate consumer must be assumed to spend all its income.



the aggregate consumer gets as income is GDP dollars. I agree that some
consumers (the poorer ones) will spend all their portion of this
income. So for these elements of the aggregate consumer income will,
indeed, equal expenditure. But other consumers (the much richer ones)
will not spend the entire amount of their portion of this income. At
least, that income will not be used to purchase GDP goods and services
in proportion to that income. I think the fact that all the income of
the aggregate consumer is not spent on goods and services is
demonstrated by the fact that there is always an inventory of goods and
services on which consumer income has not been expended. But maybe I
have this wrong. It would be great if you could set me straight.

That is what I've been attempting to do.

> Now Rick says, that my assertion that "Income is expenditure" does
> not apply to the following situation-- as Rick says,
> >It is not true [that income equals expenditure] if the income
> [Williams]
> > is talking about is the income for the aggregate consumer (Ic) and
> the
> > expenditure is the expenditure by the aggregate consumer (Ec).

> However, as I pointed out in Boston a few years ago, in my attack on
> Rick's presentation

Well, it's nice to hear such breathtaking honesty. But it would be
nice to get help instead of attacks.

It's like the Texas Trooper asked, "Did he need killing?" All errors
need killing.

> Consider the example of the aggregate circular flow diagram in
> economics. .
> ________<____(2)_____
> > >
> C P
> > >
> -----(1)---------->---------------
> To start with say the rate of income is 100 units. In a simultaneous
> analysis the income is 100 units everywhere in the closed, circular
> flow loop.

I don't think this is quite right. In a simultaneous analysis, all
variables are changing simultaneously but they don't necessarily all
have the same value simultaneously. In a simultaneous analysis of a
closed loop system, like the one you show, the effects of one variable
on another propagate around the loop over time.

The mistake you make here is in thinking that above loop represents a
physical system. If it did , then what you say might have validity.
in an economic system we are not dealing with a physical system in time
and in space. Monetary transactions in an economy take place
instantaneously. There is for a transaction nothing that corresponds to a
velocity. Therefore, the situation is somewhat, or rather fundamentally
different, than any other system that has been dealt with through the use
of a set of simultaneous equations.

The slowing factors and

transport lag determine how rapidly this propagation takes place.

Again, if a monetary economy _was_ a physical system you might be
right. But, the system is fundamentally different than a physical time a
space system.

In the loop you show, a simultaneous analysis takes into account the fact
that P is having an effect on C _while_ C is having an effect on P. But
the values of P and C at any particular instant are not necessarily
(and almost certainly are _not_) the same.

On the contrary, because of the infinite velocity, the reciprocal of the
instananeous nature of monetary economic transactions-- you are when
you say "almost certainly are _not_ the same" quite wrong. Think about
it. At an infinite rate of probigation, there is no lag, no delay--
all values in the loop _are_ always the same.

> Suppose the consumer attempts to save by reducing expenditures
> relative to income. What will be the effect? An individual consumer
> can, of course, choose to reduce expenditures out of a, more or less,
> constant income. But, this is not true in the situation under
> consideration here. The analysis here is, as has been agreed by all
> parties, a simultaneous aggregate analysis. Consistent with this
> specification, there is in the circuit above no loop or time delay.

I having to repeat myself to answer your disbelief.

> If an expenditure is inserted into the loop at point one it will
> appear without any delay what-so -ever at two. It may be helpful to
> think of the circular flow in terms of a perfect circle in which the
> rate of income is equal to the diameter of the circle. When income
> changes in the context of a simultaneous analysis the circle either
> expands or contracts-- never-the-less where ever the expenditure is
> inserted into the flow the circle is maintained without distortion.--
> by expanding or contracting everywhere-- simultaneously.

I think I lost you.

I hope I improved my exposition this time around.

What will be the effect if the consumer attempts to

save by reducing expenditures relative to income? Won't the effect be
that the consumer will spend less and thus take in more income relative
to expenses?

Again, strange as it may seem-- the answer has to be NO.

> Suppose the producer in the figure above attempts to make a profit.
> An attempt to reduce expenses below income will have the effect, not
> of creating a difference between income and expenditure, but rather
> the effect of reducing _both_ expenditure and income. And, reducing
> them in such a way that they are always equal to each other.

But this seems wrong because producers can increase profit by reducing

_Some_ producers in a non-aggregate, non-simultaneous analysis-- sure.
However, as a matter of logic, they can not do this in a simultaneous
income-expenditure analysis.

Your "simultaneous analysis" seems to be saying something

happens that clearly does not happen.

I'm sure it seems that way to you. But, you evidently are assuming
that is not true of a simultaneous aggregate income-expenditure analysis.
I wouldn't expect you to factor into the analysis the consideration that the
period of a transaction is zero. While it is obvious if you think about it,
it isn't
the first, or even the 23rd thing you would ordinarily think about when
trying to
figure out how an economy works. Most people even most scientists think
causal relationships in terms of a period-sequence analysis. Velocities of
probigation are, almost by definition, finite. Monetary economic phenomena
are different. Once this is taken into account, then it becomes possible to
straighten out a lot of difficulties.

A control loop can be easily

designed to control for profit by adjusting expenses.

Consider a transaction: A sale is a purchase. Or, in a different
income is an expense. This is true by virtue of the nature of a
So, subtract money income from money expenses and the result is always
going to be zero. I explained this in Durango a number of years ago.
and Ed Ford were the only people who objected then.

You say "A control loop can be easily designed to control for profit by

I've shown that profits, Income minus expenses has to equal zero. So what
are saying amounts to claiming that a control loop can break a logical, or
mathematical identity. Can a control loop make 0 equal to 3?

> Rick's H. Economicus use of a controller to bring two parts of the
> wheel of circulation into equation with each other displays a
> fundamental misunderstanding of the principles involved in a
> simultaneous equation model of transactions in the aggregate. In the
> aggregate sales equal purchases. That isn't all one needs to know.

I don't see what this part of the model (the part that controls the
difference between what is spent by the aggregate producer (PQ') and
what is returned as income by the aggregate consumer (P'Q') ) has to do
with sales and purchases.

I am shocked. Don't you recognize that the PQ's are sales and purchases?

PQ' is not a measure of what is sold; it's a

measure of what is _produced_.

Here is where you are equivicating again by shifting back and forth from the
money side to the real side.

Is it all the goods and services

produced in one unit time by the aggregate producer, measured in terms
of the average dollar value paid to produce those goods and services
(P). P'Q' is a measure of purchases; it is a measure of the amount
spent to purchase whatever portion of PQ' is consumed by the aggregate
consumer. When P'Q' = PQ' then all goods and services produced in a
unit time by the aggregate producer are consumed by the aggregate

> However, violation of this obvious equation is going to result in
> mischief-- which is what I said in Boston, and also in St. Louis as
> well (if my memory is correct).

It's certainly true that, in an economic exchange, at the individual or
aggregate level, the dollar value of what is sold is exactly equal to
the dollar value of what is purchased.


But this is not quite what H. Economicus is about.

Worse luck.

The model is really just two control loops, one

controlling for P'Q' (goods and services in dollar value P') and the
other controlling for PQ'-P'Q' (balanced books).

Whatever the books say, the actual transaction are always, by definition
in balance. So, you don't need a control loop to do what can't under
any circumstance be undone.

The first loop

(Composite GNP Controller) is trying to purchase a reference amount of
goods and services, perceived as P'Q', which can be viewed as the spent
component of consumer income. The second controller (Composite Manager)
is trying to keep the difference between what is spent by the aggregate
producer to produce GNP (PQ') and what is taken in as income for the
portion of it that is consumer (P'Q') equal to zero.

Now that I go through this reanalysis I think I can see why Bill P.
might not have liked the model.

This is rather late in the game.

I guess the best way to describe it is

that it doesn't keep the variables clearly separated. For example, Q'
shows up in both producer expenses (PQ') and consumer purchases (P'Q').
Since Q' is the amount of goods and services purchased and produced,
this value should be different in the two different equations, say as
Q' and Q.

I wouldn't worry about it. In comparison to your misunderstanding the
of a transaction, your equvocation concerning the real and monetary
of the analysis, it doesn't amount to much. Once I could see that you were
consistently depending upon violating accounting identities, I lost any
interest in developing a critique of your model. I don't get any credit for
demolishing economic models constructed by psychologists no one has ever
heard of.

The amount of Q' purchased would be Q and it will only equal

the amount produced Q' when all of consumer income is spent (no
leakage). I take this into account properly in the spreadsheet because
inventory is greater than zero when there leakage. But, still, the
whole model could be built up more coherently.

As I have observed before: You really do have a way with words. I could
take lessons from you. When you say,

"the whole model could be built up more coherently."

this is like saying you aren't quite a virgin after you've had quadruplets.
Nice way to put it. But, there is more. Fabulous as this is you haven't
yet top out your range.

My only excuse is that, as I said, I was building the model to match TCP's
analysis, where Q (as opposed to Q') meant output without leakage, not
output consumed.

I genuinely can't think of anything that has given me more enjoyment in I
don't know how long. I know, I said this not so very long ago, but this is
an achievement that surpasses anything I could have imagined. And,
by-the-way, are you by chance familiar with the fate of Jermey Bentham?
But, there's more......

Table 1 shows that the behavior of my model matched TCP's analytic
results exactly, at least in terms of the behavior of Q'/Q and
inflation rate, both as a function of leakage. The prediction that
didn't work was rate of growth as a function of leakage. It's this
result that led to the discovery that the effect of leakage on growth
rate is an assumption rather than a derivation of the leakage model.

This is a much more sophisticate mode of discourse than I am accustomed to.
The way pilots talk, when a guy commits a complete fuck-up and
crashes the airplane killing everyone on board and also people wandering
about on the ground as well, they say-- "He screwed the pooch."

Bill williams


----- Original Message -----
From: "Rick Marken" <marken@MINDREADINGS.COM>
To: <CSGNET@listserv.uiuc.edu>
Sent: Tuesday, January 20, 2004 11:25 PM
Subject: Income and Expenditure