On Wednesday, July 19, Anne Mayhew wrote, among others: 
 
"I do think that in countries where there are unused resources--as  
surely there are in third-world (and first-world countries)--then  
increased consumption is an increase in demand and if there are  
willing and able entrepreneurs (as I am told to assume exist in great  
plenty) then they will respond with production and that increased  
production usually requires investment.  So, yes I would say that the  
doctrine applies equally to third and first world." 
   
But Anne's response omits a vital element.  With what do investors  
invest, if not the savings of households?  Now if you ask how does  
the typical income earner spend his/her income, the correct answer  
should be: i. pay income taxes, ii. on consumption, iii. buying income- 
earning assets (including bank deposits, bonds, stocks), and iv. hold  
some in the form of reading purchasing power (i.e. cash) or buying  
the service flow of money.  The third element in the household's  
expenditure categories is properly what is called saving, and it is  
the source from which investors acquire the funds for investment  
spending. 
 
Now if households spend more on consumption from their after-tax  
income, they MUST have less to spend on income earning assets  
(savings).  This is why it is important to encourage savings for  
more investment to take place and growth to occur.  In fact,  
development economists in general do not make the Keynesian error of  
downplaying the importance of saving for capital accumulation and  
growth. 
 
Elsewhere, I have tried to explain how Keynes could have come up with  
his argument about the paradox of thrift, still taught in many  
economics textbooks, but which fails to accord with the workings of a  
real economy.  It is because he incorrectly included the hoarding of  
cash in his conception of saving: S = Y - C.  That conception  
makes it easy to divorce saving from the purchase of financial  
assets issued by investors.  But take a look at World Bank  
publications and observe the savings rates of different economies as  
well as their growth performance.  You would find that it is those  
countries with higher rates of saving which grow faster, not the  
other way around.  Of course, other factors such as the efficiency in  
the employment of savings and the openness of an economy affect the  
growth performance. 
 
I think Rick Holt's subsequent contribution diverts attention from  
the problem with the Keynesian argument when he writes: "So what is  
all this talk about savings?  The real issue is the rate of  
population growth and the accumulation of human capital and  
knowledge."  If one did not save to purchase education and training,  
how would one acquire human capital?  If population growth leads to  
more spending on consumption, how would households find the means to  
acquire more income earning assets?  Isn't this the reason the UN has  
been promoting efforts to reduce population growth in the Third  
World, albeit unsuccessfully? 
 
So I say, back to basics as Larry Moss has suggested.  It is partly  
the failure to have the basics firmly understood, and rather to  
engage in mathematical modelling of the process of economic  
growth, especially of the types of Solow, Meade, Harrod, Domar, etc.,  
that has sustained confusion in our subject. 
 
James Ahiakpor 
Department of Economics 
California State University 
Hayward 
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