Saturday, April 9, 2011

Maybe it's different in Canada

At Worthwhile Canadian, Frances Woolley considers the Harper government's Task Force on Financial Literacy. "I regard the the whole financial literacy exercise with some cynicism," she says. "Moreover..."

Moreover, financial literacy campaigns frame excessive debt or insufficient savings as a financial problem - expenditures exceed income. Yet, as the the familiar circular flow diagram shows, financial flows are simply a reflection of real flows. (This flow diagram is borrowed from wikipedia).

Framed in real terms, excessive debt and insufficient savings becomes either a problem of "too much stuff" or inadequate incomes: the value of goods and services coming into the household exceeds the value of that household's labour and capital.

Financial flows are simply a reflection of real flows, Woolley says.

When you 'assume' ...

I choke on Wikipedia's flow diagram. Maybe it's just bad choice of words, I don't know. But that label wrapping counter-clockwise around the bottom there -- Factors for production -- is too close to "Factors OF production" not to be mistaken for it. And "factors of production" is not a concept to be used to mean "inputs."

The factors of production are cost categories; the concept gives us a way to look at costs. What's the difference? "Inputs" are used to produce output. "Costs" hinder.

But set the factors aside. I have a bigger problem with the flow diagram.

Wikipedia's flow diagram shows the financial flows in red. I tweaked it to show the financial flows in green. No big deal, right?

Red is credit-use. Green is cash.

My version is self-contained, complete, and sustainable. The original version is not. Oh, it shows the flows to and from the productive sector. But it fails to show the flows to and from the financial sector. And it fails to show the growth of finance.

"Financial flows are simply a reflection of real flows." Harrumph! There are costs associated with finance. So financial flows are a reflection of real flows plus finance charges. And guess what happens when economists ignore the costs of finance.

Oh that's right. We don't have to guess. We're living through it.


Anonymous said...

"Financial flows are simply a reflection of real flows." Harrumph! There are costs associated with finance.

And those costs represent a transfer of real resources to the firms in the financial services industry. Flows of money are accompanied by flows of real resources. Frances Woolley

The Arthurian said...

You caught me :)
In the post I am equating "real" with that which is often called "non-financial."

My point is that it is essential to NOT lump it all together, that it is essential to distinguish "financial" from "non-financial" costs and to keep careful eye on the balance between them.

Oh, and as the "non-financial" sector is the productive sector, I prefer the terms "productive" (for non-financial) and "non-productive" (for financial).

Thanks for the visit!