My jaw dropped when I read Roger Sandilands's claim that "the business
sector as a whole is usually a net saver." I have always understood
that the household sector is the net saver while the business and
government sectors are the net borrowers. If Roger's claim were true I
would expect the household sector to be net issuers of IOUs and
businesses the net holders of demand, savings, time deposit, money
market deposit, and money market mutual fund accounts, as well as
purchasers of stocks and bonds. But all the financial data I have seen
show otherwise. I wonder which economy Roger is referring to.
I also think Roger is using the term investment in the narrow but
misleading sense to apply only to the purchase of capital goods (what
unfortunately far too many textbooks tend to do). Otherwise, what does
he mean by "in the aggregate the supply of business savings from
depreciation accounts and retained earnings is consistently larger than
the volume of business investment"? As the classics taught, and as in
the language of the marketplace, see also Marshall(1920, 60, 647; 1923,
46), investment on the part of households is the purchase of interest-
or dividend-earning assets while, on the part of producers, it is the
employment of funds (typically borrowed) to earn profits. To achieve
the latter end, producers devote some of the funds to purchasing or
hiring capital goods, including raw materials, renting land and hiring
workers, and keeping some on hand to facilitate transactions: even the
vendor needs to keep some cash on hand to make change. Also note that
retained earnings constitute a borrowing from stockholders who otherwise
would have been paid their full dividends in return for their
"investment" in the enterprise.
It is such narrow usage of the term "investment" to apply only to the
purchase of capital goods that denies some analysts the ability readily
to recognize the truth to the classical explanation that savings promote
investment or capital accumulation, e.g., "The investment market can
become congested through the shortage of cash. It can never become
congested through the shortage of saving. This is the most fundamental
of my conclusions within this field" (Keynes 1938, 669).
Back to George, I don't think his denial that the wages fund derives
from past savings is helped by Roger's attempted defense. And for
George to argue, in effect, that the wages-fund explanation by the
classics was some wool they pulled over our eyes so we wouldn't
recognize the evil role of rental incomes in denying higher wage rates
to labor should be recognized as plainly mistaken. And dangerous, to boot.
Roger is correct in noting that "Though many workers are paid in advance
of the sale of the product, it is very rare indeed that they are paid in
advance of their work." I never argued otherwise. But without the sale
of their produce, employers have no means of paying workers other than
from borrowed savings or capital -- the wages fund.
By the way, specie or paper money in the hands of businesses amounts to
the same thing: part of borrowed "capital." Neither of them is
manufactured by the business, save for counterfeiters. It betrays
George's misunderstanding of capital in the financial sense to have
argued the point Roger restates.
James Ahiakpor
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