Responding to Michael Perelman's query, Robert Leeson wrote:
> Q: As C took a hit after 2007, did I pick up the slack?
>
> A: Under current arrangements financial intermediaries have the discretion to take S and not transform it into capital expenditure.  This discretion must be abolished.
>
> RL
This is the unfortunate conclusion to which adherence to the language of 
Keynes's economics leads.  One first has to be clear that Keynes meant 
different things by "saving" and "investment" than most people 
(particularly in the marketplace) understand these concepts to mean.  
Thus, Jérôme de Boyer responded to Roger Sandiland's explanation of the 
failure of savings to be transformed into investment because of banks' 
excess reserves by declaring that "the equation I=S concerns the goods 
market, not the financial market or banking."  But were one to keep in 
mind that saving is the purchasing of interest or dividend assets, 
including bank deposits, one would have recognized the dead end to which 
the Keynesian formulation that Jérôme restated leads.

Also, investment is the employment of savings or loanable funds in 
production, and thus entails much more than just the purchasing of 
capital goods, the definition Keynes (_GT_) uses, and most in economics 
continue to use.  But the Keynesian definition of investment leads to 
the analytical impediment to recognizing that savings do not necessarily 
have to be spent on capital goods for them to continue in the 
expenditure stream.  I think it is such poverty of Keynes's economics 
that led to Robert's unfortunate declaration that the discretion of 
banks to vary how much of the public's savings (deposits) they hold in 
reserves and thus do not lend or get turned into "capital expenditure" 
be abolished.

Finally, an alternative to Keynes's thinking about income creation, 
consumption, saving, and investment would have led to a different 
question than Michael asked or a different response from Robert.  That 
alternative is that consumption, as Adam Smith long explained in the 
_Wealth of Nations_, “is the sole end and purpose of all production … 
The maxim is so perfectly self-evident, that it would be absurd to 
attempt to prove it.”  That is why consumption is a more stable 
component of expenditures out of income.  Isn't that is what Milton 
Friedman's permanent income hypothesis was supposed to have taught us?  
Thus, if consumption took a hit, as Michael asserted, income creation 
must first have taken a hit.  Even if some people curtail their rate of 
consumption because of fears about losing their jobs, they would be 
inclined to save more (purchase interest-earning assets) rather than 
merely hoard cash.  As a matter of fact, the acquisition of bank 
deposits has increased since the fall of 2008 and interest rates have 
fallen (partly in response to the Federal Reserves' credit creation).  
Adherence to Keynes's economics or his language makes it difficult to 
make sense of the evidence, but the economics Keynes disputed, namely, 
the economics of the classics enables one more clearly to interpret the 
economic record.  Consumption spending does not lead income creation, 
the causality is in the opposite direction.  How can we all consume that 
which no one has produced?

My reaction to Robert's original query about S = I was to ask him to 
read Dennis Robertson's 1940 book, _Essays in Monetary Theory_.  In it, 
Robertson explains how Keynes's terminology led to his own analytical 
difficulties.  Not having seen any other references to Robert's request, 
I'm inclined to suggest that reference now.   I have incorporated 
Robertson's insights into my "Keynes on the Classics: A Revolution 
mainly in Definitions" in _Keynes and the Classics Reconsidered_ (1998), 
a volume to which Robert himself contributed.

James Ahiakpor

-- 
James C.W. Ahiakpor, Ph.D.
Professor
Department of Economics
California State University, East Bay
Hayward, CA 94542

(510) 885-3137 Work
(510) 885-4796 Fax (Not Private)