Author Archives: V. Ramanan

Income = Expenditure!

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The accounting identities equating aggregate expenditures to production and of both to incomes at market prices are inescapable, no matter which variety of Keynesian or classical economics you espouse. I tell students that respect for identities is the first piece of wisdom that distinguishes economists from others who expiate on economics. The second?… Identities say nothing about causation.

– James Tobin

In my previous post Income ≠ Expenditure?, I raised some accounting issues in a recent talk by Steve Keen. I found a paper European Disunion and Endogenous Money which has a background on this written with Matheus Grasselli of the Fields Institute, Toronto.

Let us look at their basic model which still has income not equal to expenditure. Now whichever way one presents it (with better defined terms using phrases “ex-ante”, “ex-post”, “planned”, “unplanned”, one cannot escape the conclusion income = expenditure).

The model is below – found on page 15.

Keen has a simple two-sector model of households and production firms and it can also be thought of as a three sector model where production firms borrow from banks to finance investments.

In the last equation, you see Keen and Grasselli’s claim that expenditure is income plus change in debt.

The trouble is with Keen’s behavioural assumption (1.4)

C = W + ΠD 

Unfortunately the rules of accounting do not allow this!

If the assumption (1.4) is relaxed, firms’ increase in debt is mirrored by households’ saving.

In a three sector model with households, firms and banks, the increase in firms’ debt is mirrored as increase in households’ deposits.

It can be generalized with firms issuing some securities purchased by households.

So equation 1.8 should read:

YE = YI 

with no need of Lebesgue Integrals to prove (1.8) is correct because it is not correct.

The Saving = Investment Identity

The Keen-Grasselli model doesn’t respect the identity

Saving = Investment

This can be easily seen. Households (in his language workers) having zero saving and zero investment. Firms have a saving of  ΠR  and investment of I.

So total saving = ΠR and total investment = I

But because these terms differ by ΔD (equation 1.5), they cannot be equal unless ΔD = 0.

So in the Keen-Grasselli model,

Saving ≠ Investment

The reason Keen and Grasselli get this inconsistency is because they assume that saving is volitional.

Basil Moore was aware of this and in his book Shaking The Invisible Hand, he wrote:

The belief that aggregate saving is the sum of volitional saving decisions by individual economic units is simply a spectacular macroeconomic illustration of the “fallacy of composition.” This fallacy has been reinforced by the unfortunate use of the colloquial verb “to save,” with its very powerful transitive volitional connotations, for an economic term which is merely an intransitive accounting definition: “income not consumed.” As economists know, it is a “fallacy of composition” that what is true for the part is necessarily also true for the whole. Total “saving” is the sum of total saving undertaken by individual “savers.” But since saving is the accounting record of investment it cannot be the sum of volitional individual saving decisions. Aggregate saving is not the sum of individual savers volitional decisions to save. It follows that in all monetary economies most “saving” is “non-volitional.”

[emphasis: mine]

Ideally (i.e., realistically) Keen’s model should sit inside a model with the government and the government would end up running surpluses. Non-volitonally 🙂 S = I would be maintained and so would YE = YI 

Some Higher Mathematics: The Dirac Delta Function

Keen and Grasselli claim that confusions around economists being not able to see things in continuous time is the source of errors by them and that the reason is that debt injections are sudden.

Now, in calculus, there is a thing called the Dirac Delta Function.

[Paul Dirac didn’t get the media attention that Einstein got but he was surely his equivalent. The Delta function is just a small contribution when compared to what he did elsewhere. He was Feynman’s hero.]

The delta function δ(x) is zero at all points except 0 where it is infinite. But the integral of δ(x) from over the range of real numbers is 1. That is difficult to digest initially when first tries to learn it.

A debt injection is a step function jump in debt. The delta function has a curious property that it is the derivative of the step function.

So income flows can be represented as sum of delta functions which different coefficients at different points in time.

So Keen’s chart (Figure 13) in his paper should have income represented as delta function spikes.

To get the flow over a period, one has to integrate and this will result in the income over the period to be the sum of the coefficients of these delta functions.

So whether in discrete formulation or continuous time formulation, YE = YI for the whole economy and the reason is not hard to guess because dD/dt cancels out with dA/dt since assets and liabilities are created equally.

For an individual sector it is true that YE = YI  + dD/dt – nobody disagrees with that but to be more accurate the right hand side should include minus dA/dt.

Also, a continuous time formulation is just taking infinitesimal intervals and then treating infinite of them together.

It makes no sense to say income before debt injection was $100 for real world transactions in a continuous time formulation. It is actually zero just before a debt injection because all income/expenditure flows are “spikey”.

Just after the debt injection it is zero again because nobody spends the instant a loan is given. The debt injection increases assets and liabilities by the amount of the loan if the borrowing is from a bank.

So after the loan is given at the next infinitesimal, change in debt is zero and income/expenditure is also zero.

Then income/expenditure flow spikes at the moment the transaction happens – like a delta function.

But that is income for someone and for an economy as a whole Income = Expenditure.

Anyway, nothing of the analysis justifies the definition of “aggregate demand” (now renamed by Keen to “effective demand”).

20 Years Of Maastricht And All That

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I recite all this to suggest, not that sovereignty should not be given up in the noble cause of European integration, but that if all these functions are renounced by individual governments they simply have to be taken on by some other authority. The incredible lacuna in the Maastricht programme is that, while it contains a blueprint for the establishment and modus operandi of an independent central bank, there is no blueprint whatever of the analogue, in Community terms, of a central government. Yet there would simply have to be a system of institutions which fulfils all those functions at a Community level which are at present exercised by the central governments of individual member countries.

The counterpart of giving up sovereignty should be that the component nations are constituted into a federation to whom their sovereignty is entrusted. And the federal system, or government, as it had better be called, would have to exercise all those functions in relation to its members and to the outside world which I have briefly outlined above.

That was published 8th October 1992 – exactly 20 years back!

Worth your time if you haven’t read it yet. Even if you have, worth reading it again!

Here’s the link to the full article Maastricht And All That by Wynne Godley.

Wynne Godley

(photo credit: King’s College, Cambridge)

Also check out John Cassidy’s post The Man Who Saw Through The Euro written for The New Yorker last year.

Income ≠ Expenditure?

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I like Steve Keen. He is terrific in debunking economics! In a recent debate with Paul Krugman, Keen put Krugman on the defensive and exposed his weaknesses. Krugman obviously didn’t want to accept defeat and tried to escape with the help of comments in the comments section of Nick Rowe’s blog (that DSGE is not neoclassical – whatever!).

There are however some issues with Keen’s own methodologies. In a recent talk (video here), he claims that income is not equal to expenditure due to debt creation. Keen also claims in the video that Schumpeter and Minsky claimed that is the case.

Keen is right about an individual sector but not an economy as a whole when it is closed.

In the following I assume a closed economy – as does Keen. At least he doesn’t make any distinction and thereby his claim is a claim for a closed economy as well. So here is Keen’s claim:

Further he attributes this difference to discontinuities due to debt injections.

In the above Keen forgets that expenditure creates income.

There is no need for a claim that income is not equal to expenditure. In fact it is convenient to have them equal.

Wynne Godley and Francis Cripps wrote a nice book in 1983 named Macroeconomics. Here is from just the second page of Chapter 1: National Accounts:

It is extremely useful to choose definitions such that total income and expenditure in any year, month, day or second are identically equal to one another; they will be – because we choose to define them so that they are – two different ways of looking at the same process. We are only going to admit into the category of flows called income things which have an exact counterpart in the category of flows called expenditure. [footnote]

(with a footnote on qualifications for the case of an open economy).

Further in pages 27-29:

Although the definitions so far imply that the income of all individuals and institutions taken together equals their total expenditure on goods and services in each and every period, this need not be true of any particular person or institution …

… It is easy to understand that any one individual who does not spend all his or her income in a period will have more money left over at the end of the period. But we have chosen a system of definitions which ensures that total income in each period when summed across the whole economy equals total expenditure in the same period. It must therefore be the case that if some people or institutions are accumulating money or other financial assets, others are incurring debts on an exactly equal scale. In the economy as a whole the total increase in financial assets must always be equal in each period to the total increase in debt (financial liabilities).

But since the possibility of borrowing is included as a source of funds for spending, our formal representation of the budget constraint for any individual or institution including the government, is

Equation 1.4 simply says that any excess of income over spending must equal the acquisition of financial assets less the acquisition of debts. As this is true for all individuals it must also be true for the economy as a whole.

But since total national income equals total national expenditure (i.e., Y ≡ E) it must follow for the economy as a whole the change in financial assets must be equal to the aggregate change in debt, i.e.,

ΔFA ≡  ΔD

Back to Keen. He has this slide in this talk:

In the above, households consume by getting wages and going into debt. Hence households have their expenditure higher than income. Similar story for firms.

However, Keen forgets that consumption is income for firms and his accounting has black holes. The whole thing can be done right by creating a Transactions Flow Matrix, so that one is sure that nothing is missed out.

The reason Keen gets into paradoxes can be seen by looking at the following slide where he changes the definition of expenditure.

The right definition of expenditure does not include purchases of financial assets. For Keen if  a household purchases financial assets, it will be counted as “expenditure”. From the above slide, it can be seen that Keen’s definition of expenditure itself is different to begin with from standard ones and obviously he gets the paradoxical claim that Income ≠ Expenditure!

If Keen wants to do an empirical study of the rise in gross assets and liabilities, there is a systematic way to do this: for example see this Bank of England paper Growing Fragilities – Balance Sheets In The Great Moderation.

I won’t pursue this further except saying a few things.

I think Keen’s intuition is that households and firms incurred liabilities at an increasing scale before the financial crisis for both expenditures and purchases of financial assets and this led to increases in asset prices and hence capital gains and hence a feedback loop leading to debt-fuelled growth. Etc etc etc. There is a way to do this but changing definitions is not the right way.

Keen’s model will look accounting consistent (highly important) and more realistic (with no need to define aggregate demand = gdp + change in debt) if he uses some sort of econometric modeling in which Private Expenditure PX is dependent on many things – for example PX-1 so that income need not be equal to expenditure for the economy as a whole (as the time periods for which they are recorded are different) and there is some sort of econometric relation with change in debt.

Else one gets hodgepodge and/or endless redefinitions.

I think his “model” mixes identities, behaviour and plausible econometric relationships.

Below are some “endnotes”

Change in Inventories

“Change in Inventories” create some issues for “Y ≡ E”.  The right way is to have Expenditure equal Final Purchases plus change in inventories. As per Godley & Cripps (p 33):

Y ≡ E = FE + ΔI

Open Economies

Funnily, it is in the case of an open economy that for an economy as a whole, Income ≠ Expenditure! The difference between expenditure and income is equal to the increase in net indebtedness to foreigners.

GDP by Expenditure

Expenditure (of a resident sectors) used here shouldn’t be confused with the expenditure in “gdp by expenditure”. In the former, we include expenditures of residents while in the latter, the export component refers to expenditure of the rest of the world sector of goods and services produced by resident sectors.

Why Paul De Grauwe Is Wrong About TARGET2

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The financial and non-financial resources at the disposal of an institutional unit or sector shown in the balance sheet provide an indicator of economic status. These resources are summarized in the balancing item, net worth. Net worth is defined as the value of all the assets owned by an institutional unit or sector less the value of all its outstanding liabilities. For the economy as a whole, the balance sheet shows the sum of non-financial assets and net claims on the rest of the world. This sum is often referred to as national wealth.

– 13.4, System of National Accounts 2008 (pdf)

Recently, Paul De Grauwe joined the long debate on TARGET2 with a paper What Germany Should Fear Most Is Its Own Fear: An Analysis Of Target2 And Current Account Imbalances. He is supposed to be the top economist in both public and academic debates about the Euro Area but unfortunately, there are glaring errors in his paper.

This paper was aimed at Hans-Werner Sinn who started ringing alarm bells on the huge TARGET2 claims of the Deutsche Bundesbank. The claim of this post (and some more in the past in this blog) is that while Prof Sinn may be wrong on many issues in the debate, he is right about a few important issues. Needless to say, his prescriptions are not defended by me. I am a fan of Nicholas Kaldor’s ideas as quoted in my post Nicholas Kaldor On The Common Market.

De Grauwe’s argument is slightly more nuanced that others such as Karl Whelan. While Whelan dismisses any argument that a loss of creditor nations’ TARGET2 claims on the periphery Euro Area nations is a loss, De Grauwe modifies this to say that the repatriation of funds by Germans (individual investors and institutions) does not increase Germany’s risks.

So we have this claim in his paper:

Thus the increase in the Target2 claims of the Bundesbank should not be interpreted as an increase of foreign claims of Germany, and thus as an increase of risk from higher foreign exposure. Using the Target claims as a measure of risk incurred by the German population is therefore erroneous. As we have seen earlier, after 2010, the Target claims of Germany (and other Northern countries) increased dramatically and much more than the current account surpluses during this period. This increase in Target2 claims cannot be interpreted as an increase in the foreign exposure (net foreign claims) of Germany, except to the extent that they were the result of current account surpluses. What changed dramatically is the nature of these claims. Prior to 2010, these claims were mainly claims held by private German agents (mainly financial institutions). Similarly the liabilities of the peripheral countries were held by private agents (financial institutions). The eurozone crisis led to a dramatic shift. As a result of the breakdown of the interbank market, a large part of these private claims and liabilities were transformed into (public) Target claims and liabilities (Buiter et al., 2011), without however changing the total net foreign claims and liabilities of these countries. Thus, the explosion of the Target claims of Germany since 2010 cannot be interpreted as an explosion of the risk of foreign exposure for Germany.

Ignoring the fact that the repatriation of funds by German residents back to Germany puts the risks on the public sector’s books and awards the (ex-) German lender, there is some element of truth to the above claim. The repatriation of funds does not increase Germany’s gross international investment position (assets and liabilities) but just changes the composition. It however ignores the fact that nonresidents also reallocate their portfolios in German assets and this increases Germany’s gross foreign assets and liabilities and in case there is a default by the periphery on the TARGET2 liabilities (in case they leave the Euro Area), Germany suffers a loss. We will see this with an example below. Before that let me highlight one misleading claim in the paper:

The value of the money base is exclusively determined by its purchasing power in terms of goods and services. This value is independent of the value of the assets held by the central bank. In fact in the fiat money system we live in, the central bank could literally destroy the assets without any effect on the value of the money base. In order to stabilize the value of the money base, the central bank should keep the right supply of money base, i.e. a supply that will maintain price stability.

That is Monetarist handwaving. Won’t say anything further!

When the central bank acquires assets, mainly government bonds, it issues new liabilities. The latter take the place of the government bonds in the portfolios of private agents. It is as if the government debt has disappeared. It has been replaced by central bank debt. The central bank could literally put the government bonds in the shredding machine. This would not affect the value of the central bank debt as the central bank has made no promise to redeem its debt (money base) into government bonds. And as long as the central bank maintains price stability, agents will willingly hold the new debt (money base) issued by the central bank.

That is incorrect. The People’s Bank of China cannot shred US Treasuries into a dustbin and claim it does not matter to the Chinese people.

Now to the main point about this post: foreigners shifting funds into assets issued by German residents.

Here is from the Bundebank’s statistical supplement for Germany’s international investment position:

Aktiva is Assets, Passiva is Liabilities and Saldo is Net.

Germany’s assets and liabilities can increase as a result of a nonresident (such as from Spain) buying German Bunds (government bonds). If an institution in Spain liquidates its position in Spanish assets and transfers the funds to purchase  Bunds, Bundebank’s TARGET2 claims will increase (in the current scenario).

Let us use these numbers to see how Germany’s IIP changes if there is a purchase of €100bn of German assets by German nonresidents (but residents in Euro Area for simplicity).

Initially,

Germany’s Assets = €6,843bn

(of which TARGET2 claims = €727bn)

Germany’s Liabilities = €5,829bn

NIIP = €1,014bn

Now assuming a nonresident purchases €100bn of German government bonds from a German resident,

Germany’s Assets = €6,943bn

(of which TARGET2 claims = €827bn)

Germany’s Liabilities = €5,929bn

NIIP = €1,014bn

So while Germany’s gross assets and liabilities have increased by €100bn, its net position is the same.

However this is not the end of the story. When nonresidents purchase €100bn worth of German securities, the TARGET2 claims of the Bundesbank (or more generally creditor nation’s TARGET2 claims) increases by €100bn. If there is breakup of the Euro Area position at this point in time, this will leave the creditor EA nations with an additional liability of €100bn (incurred just before the breakup) while at the same time losing the €100bn of assets (TARGET2) acquired (in addition to other assets) and hence an NIIP worse than the case if the transaction had not occurred.

This number can be much higher because when there are tensions building up in the financial markets, foreigners may shift funds into Germany and if a breakup really is forced upon the Euro Area, it will leave Germany with additional liabilities and a lower NIIP than before and a huge loss of wealth.

At any rate, a non-negligible part of the German international investment position can be due to foreigners already having shifted funds in German assets (as the gross assets and liabilities position indicates).

But De Grauwe claims (thanks to JKH for pointing):

It is surprising that these simple principles are not widely understood.

!

Recently, the ECB announced a plan which substantially reduces the risks of a breakup of the Euro Area. In the absence of a breakup, discussions such as these are purely academic. However, the story has new twists and turns, and one can never be sure what is going to happen. It is however counterproductive to claim there is no risk/loss (in select scenarios) when there is indeed one.

Needless to say this analysis is not a defense of the German position either. Free trade has helped them a lot and it is time they increase domestic demand and help reduce global imbalances.

OMT! Enter The Draghi

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As leaked earlier by Bloomberg, Mario Draghi in a press conference today, presented his big plan to save the world.

This will involve OMTs (Outright Monetary Transactions) – in which a Euro Area nation central government requesting aid from the EFSF/ESM will also be provided help by the ECB. Under this plan, when a nation’s government asks for financial aid (and a big if), the ECB/Eurosystem may buy government bonds in the open markets to bring the yields down.

The Eurosystem will buy bonds with maturities between one and three years and will accept credit risk on these bonds and will not ask for a seniority status in case of default. Of course, this will come with strict conditions – the government asking for aid would need to commit to a tighter fiscal policy and promise supply side reforms. There will be no upper limit to the  amount of bonds purchased by the Eurosystem.

The full details are here: Introductory statement to the press conference, 6 September 2012 – Technical features of Outright Monetary Transactions.

During the press conference (actually a bit before as well – after Bloomberg leaked a part of the plan), government bond yields had huge moves (e.g, Spanish ten year yields decreased 39bp). Now, if the yields do not reverse and deteriorate again soon, governments requiring help may just delay asking for aid. However, sooner or later bond yields may rise again – especially if foreigners holding the bonds start to get nervous.

My own view is that this plan significantly reduces the risk of an exit by a Euro Area member. Unlike previous plans (SMP, EFSF, ESM) this has no limit on the amount of funds needed. There is no need to wait for parliaments and courts to approve any transaction or aid.

Of course this is not a happy set of affairs. Forcing governments into retrenchment will lead to economic conditions deteriorating further. One however needs to realize that an independent fiscal policy for the troubled nations – while it (an expansion) increases national income and output – will have the adverse effect of deteriorating the balance of payments – resulting in the public debt and the nation’s net indebtedness to foreigners (and the latter is already high for troubled nations) rising without limit relative to output. The plan will look good in retrospect if it is supposed to be a bridge toward a political union with a central government.

Post-Keynesians And Others

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That is the title of Chapter 1 (by John E. King) of this book which has just come out.

The Routledge website is here.

I just got the book and flipped through to come across this at the beginning of Frederic Lee’s article (Chapter 6):

HETERODOX CRITIC: We want to change heterodox economics.

HETERODOX ECONOMIST: What kind of change are you talking about?

HETERODOX CRITIC: The kind that does not mess with the mainstream status quo.

Matias Vernengo had a post a while ago (when the book was finalized) and it has links to articles by Marc Lavoie and Fred Lee (quoted above).

I found this reference to an article by Fischer Black in Marc Lavoie’s article in the book. It was written in 1970:

click to view the pdf file

Join, Or Die. aka “I Want Europe”

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Join, Or Die by Benjamin Franklin (Source: Wikipedia)

It is possible – in my opinion – that the September Constitutional Court Ruling in Germany may indicate that Germany should move toward a European Integration where European nations surrender powers to the European Union. Angela Merkel has been pushing for this but her critics argue that this is a surrender of sovereignty. They should realize that by giving the power to make a draft at their central bank, European governments have already given up their sovereignty – but without any central government to whom this is entrusted. The integration is a right move in that direction.

However, there is a general lack of trust and this has to be created – else there is no solution to than a breakup with unknown consequences.

Hence Merkel is launching a campaign “I Want Europe”.

Interesting reads on the future of Europe:

The Man At The Heart Of The European Economic Storm (Irish Times article on Wolfgang Schäuble)

Excerpt:

A crucial difference lies in their political styles: while Merkel bases her euro zone strategy on an emotionless, cold-eyed analysis of Europe’s future – unite or die in a globalised world – Schäuble makes the same argument with a passionate eye on the past.

Full Interview

Excerpt:

Q:  At some point it will come to a referendum in Germany on greater European integration. Are you concerned that, by then, German critics of your crisis strategy will have poisoned enough of public opinion here to torpedo the project?

A:  We might need a referendum at some point because it’s in our constitution that, when we transfer considerable parts of our sovereignty to the EU, Germans will at that point have to give themselves a new constitution. When that day comes we will have to lead a big campaign and I am confident we have a good chance it will go well. Germans are in general very pro-European. But it’s not a question of now.

Merkel Joins Lahm, Schmidt In Campaign To Promote Europe (Bloomberg)

Merkel Launches New Pro-EU Campaign (Sky News)

Nicholas Kaldor On The Common Market

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… Some day the nations of Europe may be ready to merge their national identities and create a new European Union – the United States of Europe. If and when they do, a European Government will take over all the functions which the Federal government now provides in the U.S., or in Canada or Australia. This will involve the creation of a “full economic and monetary union”. But it is a dangerous error to believe that monetary and economic union can precede a political union or that it will act (in the words of the Werner report) “as a leaven for the evolvement of a political union which in the long run it will in any case be unable to do without”. For if the creation of a monetary union and Community control over national budgets generates pressures which lead to a breakdown of the whole system it will prevent the development of a political union, not promote it.

[italics in original]

That was written in 1971! In The Dynamic Effects Of The Common Market first published in the New Statesman, 12 March 1971 and also reprinted (as Chapter 12, pp 187-220) in Further Essays On Applied Economics – volume 6 of the Collected Economic Essays series of Nicholas Kaldor.

Further excerpts from the article:

Page 202:

The events of the last few years – necessitating a revaluation of the German mark and a devaluation of the French franc – have demonstrated that the Community is not viable with its present degree of economic integration. The system presupposes full currency convertibility and fixed exchange rates among the members, whilst leaving monetary and fiscal policy to the discretion of the individual member countries. Under this system, as events have shown, some countries will tend to acquire increasing (and unwanted surpluses) in their trade with other members, whist others face increasing deficits. This has two unwelcome effects. It transmits inflationary pressures emanating from some members to other members; and it causes the surplus countries to provide automatic finance on an increasing scale to the deficit countries.

Page 205:

… This is another way of saying that the objective of a full monetary and economic union is unattainable without a political union; and the latter pre-supposes fiscal integration, and not just fiscal harmonisation. It requires the creation of a Community Government and Parliament which takes over the responsibility for at least the major part of the expenditure now provided by national governments and finances it by taxes raised at uniform rates throughout the Community. With an integrated system of this kind, the prosperous areas automatically subside the poorer areas; and the areas whose exports are declining obtain automatic relief by paying in less, and receiving more, from the central Exchequer. The cumulative tendencies to progress and decline are thus held in check by a “built-in” fiscal stabiliser which makes the “surplus” areas provide automatic fiscal aid to the “deficit” areas.

[italics in original]

Page 206:

…What the Report fails to recognize is that the very existence of a central system of taxation and expenditure is a far more powerful instrument for dispensing “regional aid” than anything that special “financial intervention” to development areas is capable of providing.

The Community’s present plan on the other hand is like the house which “divided against itself cannot stand”. Monetary union and Community control over budgets will prevent a member country from pursuing full employment policies on its own- from taking steps to offset any sharp decline in the level of its production and employment, but without the benefit of a strong Community government which would shield its inhabitants from its worst consequences.

page 192:

Myrdal coined the phrase of “circular and cumulative causation” to explain why the pace of economic development of the various areas of the world does not tend to a state of even balance, but on the contrary, tends to crystallise in a limited number of fast-growing areas whose success has an inhibiting effect on the development of others. This tendency could not operate if changes in money wages were always such as to offset difference in the rates of productivity increase. This, however is not the case; for reasons that are not perhaps fully understood, the dispersion in the growth of money wages as between different industrial areas tends always to be considerably smaller than the dispersion in productivity movements. It is for this reason that within a common currency area, or under a system of convertible currencies with fixed exchange rates, relatively fast-growing areas tend to acquire a cumulative competitive advantage over relatively slow growing areas. “Efficiency wages” (money wages divided by productivity) will, in the natural course of events, tend to fall in the former, relatively to the latter – even when they tend to rise in both areas in absolute terms. Just because the differences in productivity increases, the comparative costs of production in fast-growing areas tend to fall in time relatively to those in slow-growing areas and thus enhance their competitive advantage over the latter.

I don’t have the copyrights to reproduce the whole article The Dynamic Effects Of The Common Market, so this is so much I can quote. You can read the rest from the book (Collected Essays 6). Also, there are five chapters on the Common Market.

EU Referendum?

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Spiegel Online is reporting that Germany is considering holding a referendum to transfer more powers to Brussels.

Click below to go to the article:

This is definitely a step in the right direction.

Meanwhile The Economist is reporting of a plan of a Euro Area breakup by Germany! Click to read the article.

Seems fictitious!