Wednesday, February 1, 2012
It’s amazing, isn’t it, that professional economists could argue about the relationship of identity and equilibrium and fail to come to a quick agreement? I see that David Glasner and Scott Sumner are still having at each other over at Uneasy Money. And I am truly baffled by Glasner’s claim “that it is incoherent to state that the income-expenditure model of national income requires savings to equal investment whether or not equilibrium obtains...”
It’s all rather easy: an accounting identity imposes a necessary relationship between a set a variables on the basis of their definition, but it doesn’t say what the value of any particular variable will be. Behavioral arguments, which may employ the concept of equilibrium (but don’t have to), attempt to explain or predict these values. A behavioral argument may be right or wrong—people may behave the way you say they do, nor not—but an identity is an identity is an identity.
I disagree strongly with Noah Smith and Paul Krugman, however on the question of whether one can learn anything substantive from identities; clearly the answer is yes. Rather than make a theoretical argument, I will link to a chapter from my introductory macroeconomics text. It is all about identity---there is no discussion at all about equilibrium—but I think students would learn a number of useful things about national and global economic patterns from reading it. See if you agree.
And the next time you accuse someone of not fully comprehending an identity, look in the mirror.