A recent online exchange between Steve Roth and my colleague Matthew Klein contains much food for thought. It started with a post by Roth titled “Why economists don’t know how to think about wealth”, which alleged, in simplified terms, that mainstream economists miss much of what goes on in the economy by focusing largely on flows of income, spending and saving rather than the stocks of wealth, assets and liabilities. Klein’s retort warned against “dangers in making capital gains and losses more central than they already are”. And Roth has replied to some of Klein’s comments.
Those interested would do well to read the whole exchange. Here I want to dwell on a particular point. Roth urges economists to take a wider view of saving, and uses the term “comprehensive saving” for the sum of, on the one hand, income that is, so to speak, put aside (the amount produced but not consumed in a given period of time), and on the other, the change in value of the stock of wealth. The former is what economists call just “saving” in national income account: it is just the amount of economic activity not consumed (but instead devoted to capital goods — investment — or serving users abroad — net exports). There is an analogous concept of comprehensive income, which includes not just the amount produced in a time period but the increase in the value of things already owned.
This may seem commonsensical: it is how an individual person, household or business experiences their financial situation. Adding it up for a whole economy gives a picture of something that undoubtedly has an effect on their individual economic behaviour and how it may change. But precisely because an economy behaves differently than the sum of its parts, this approach brings important pitfalls of its own.