HYDRAULIC CLASSICISM:  LEAKAGES AND INJECTIONS RECONSIDERED FROM THE CLASSICAL SCHOOL PERSPECTIVE                                                                                                                                          

JEL Category  B00

Schools of Economic Thought and Methodology

Alternative JEL Category  A22

General Economics and Teaching

A Proposal for Presentation at

The 66^th International Atlantic Economic Conference

Montreal, Canada

October 9 – 12, 2008

Ben L Kyer

Professor of Economics

Francis Marion University

Florence, South Carolina  29506

And

Gary E. Maggs

Professor of Economics

Saint John Fisher College

Rochester, New York 14618

HYDRAULIC CLASSICISM:  LEAKAGES AND INJECTIONS RECONSIDERED FROM THE CLASSICAL SCHOOL PERSPECTIVE

Abstract

Ben L. Kyer

And

Gary E. Maggs

I.  OBJECTIVES     The purpose of this paper is to propose an alternative approach to the standard

Keynesian analysis of leakages and injections in macroeconomics.  More specifically,

we suggest that leakages and injections may be viewed from the Classical perspective

with the focus on the bond market and bond prices rather than the product market and

the level of real gross domestic product.

II.  DATA/METHODS     This paper relies on economic reasoning and a diagrammatical analysis of the bond or capital market to achieve its objectives.  The bond market may be viewed as the mirror image of the real economy.  For example, while saving is defined in the Keynesian analysis as a leakage from the income or expenditure stream, it would be considered from the Classical perspective as in injection into the bond market.  Alternatively, although investment is interpreted as an injection into the product market by the Keynesian school, it would be depicted by the Classical school as a leakage from the bond market.  The analysis is extended to include the effects of both the government budget position and the balance of trade.

III.  RESULTS/EXPECTED RESULTS      Since Samuelson ( 1948 ), the leakages and injections analysis has become quite

common at all levels of macroeconomics.  However, at least to our knowledge, the

perspective taken or assumed in the analysis is always Keynesian in the sense that the

focus is the product market and the variable determined by the respective flows is the

level of real gross domestic product..  Indeed, the approach is so consistently Keynesian that it became known as “hydraulic Keynesianism.”  We demonstrate in this paper how leakages and injections may be alternatively interpreted and used to focus on the bond market and determine bond prices, since in the Classical school the level of real gross domestic product is a function only of input quantity and quality.  We show that when injections into the bond market exceed leakages, bond prices will rise and when leakages are greater than injections bond prices will fall.            Our results in the hydraulic sense are directly opposite to the standard Keynesiananalysis.  For example, while Keynesians interpret a Federal budget deficit as a net injection to the income stream which increases real gdp, the Classical approach would view the deficit as a net leakage from the bond market which would cause bond prices to decrease.