Though I suggested that we might pursue the discussion from a different 
slant and so did not respond to James Ahiakpor's point by point arguments, 
since Steve Horwitz also jumped in it seems that I should at least reply to 
the point concerning the logical necessity of saving preceding investment. 
 
I suppose we might all agree that what we have is a circular process, that 
the existence of savings requires that some productive activity have taken 
place, and that resources used in productive activity means those resources 
were not directly consumed, and thus that activity was 'financed' by 
savings. 
 
One might try to argue that savings is prior to investment because "In the 
Beginning There Were Savings."  This would get into a discussion of 
original ('primitive') accumulation.  (Of course, there are several 
scenarios I can think of in which savings would not have to be prior to the 
'First Investment'.) 
 
But short of that discussion, recognizing that we are talking about a 
circular process leaves us with the question: what is the cart and what is 
the horse?  Is savings the engine?  Or is investment the driving force with 
savings playing a more passive role?  I think we all know which is the 
neoclassical and which is the keynesian view. 
 
In terms of bank finance and credit, etc., I should probably just say that 
if it was not obvious I had in mind the literature on endogenous money and 
finance, which views private banks and the Central Bank in a fractional 
reserve banking system as having the ability, through various institutional 
mechanisms at its disposal and financial innovations induced by profit 
opportunities, to accomodate the demand for credit.(see, e.g. Wray's book 
_Money and Credit in Capitalist Economies_) 
 
So, crudely put: 
 
the demand for credit by investors leads banks to extend credit as long as 
there are profits to be made.  Investment takes place which increases 
incomes in the economy.  Some of the new higher income is spent on 
consumption, some is saved.  The savings are deposited in bank accounts, 
replenishing depleted accounts and creating new ones. 
 
the key is what is the independent variable, what is the driving force.  In 
this view it is investment and the demand for credit for investment which 
is heavily influenced by the expectations of investors. 
 
in some ways, what is behind some of this discussion is the simple point 
that if income is constant, consumption can only increase if savings goes 
down, while if income is rising, both savings and consumption can rise 
together. 
 
___________________________________ 
 
Mathew Forstater      Department of Economics 
        Gettysburg College     Gettysburg, PA  17325 
 
tel: (717) 337-6668   fax: (717) 337-6251   e-mail: [log in to unmask]