Mathew Forstater writes:
(What is logically wrong with the following reply?):
But if they spend more on consumption, whoever they purchase from will have
rising incomes and so will save more. Business confidence may be enhanced
by rising sales and increased investment may take place to meet increased
demand. Some of those same households who originally decreased their
savings to increase their consumption may themselves experience rising
incomes (say as shopkeepers selling more goods to other households that
have increased their consumption) and so their savings will rise, perhaps
to a level as high or higher than before they increased their consumption
originally.
My response: This is the usual chain-spending argument that keeps us
us going in circles. The seller does not necessarily have a rising
income but perhaps realises what s/he anticipated from the intial
action of production/sale. Thus, suppose we use Keynes's banana
economy model (Treatise), and assume that 100 bundles of bananas
are harvested. If people to whom the income of 100 bundles of
bananas is paid use such income to purchase 80 for consumption, then
only 20 will be available for those who want to produce banana
pudding or banana loaf, etc. to purchase. Note that in the national
income accounting framework, the 20 would be classified as
investment. But if 90 were purchased for immediate consumption, only
10 would be left, i.e. less saved and less invested.
Mathew continues:
1. What about the role of credit, modern financial institutions, and
government policies in decreasing the need to rely on a pool of 'savings'
to finance investment?
I have already explained that in my response to Anne. Banks and
other financial institutions don't lend that which they have not
borrowed from households. Governments don't have money (funds) until
they have taken it from households, unless of course they borrow from
a central bank -- fresh beautifully decorated pieces of paper!
2. What is the percentage of total savings that comes from 'households'
relative to the amount that is due to corporate retained earnings?
Response:
Households are net savers and coporations are net borrowers in the
national capital accounts. In fact, strictly speaking, retained
earnings of corporations belong to households. Firms are owned by
households.
More question:
1. This conclusion assumes that hoarding is the only reason that savings
will not be automatically translated into investment.
Response:
"Automatically" may be a winning rhetorical device. Nothing happens
automatically in the economic scheme. The economy is a process and
takes time and the actions and forethought of people. Besides
hoarding is NOT saving. As Malthus well states: "No political
economist of the present day can by saving mean mere hoarding"
(quoted in Blaug, 1985, 166). Also ordinary people, at least in the
market place, think about savings differently from hoarding. (Another
of Keynes's slips that continues to frustrate clear understanding.)
Question:
2. What about the impact of decreased consumption on business expectations?
Are we to believe that when businesses see their sales declining they will
be encouraged to increase investment just because new savings are
available?
No, a fall in business expectations would depress investment spending
and lower the rate of interest (from excess supply of capital --
in the language of the market place -- or funds for lending).
But an increased demand from businesses without the funds to
implement their investment demands would also raise the rate of
interest but need not raise the volume of actual spending or
investment. Its all a balancing act. The majority of a person's
income is typically spent on consumption. But note that what is
saved is also spent, except by someone, for which the saver receives
interest income.
Please work with the equation: S = Y - C - pY (proportion of
income held as cash) = Change in Financial Assets. In
equilibrium, financial assets supplied (by investors) = financial
assets demanded (by savers).
Final question:
I open the report and I see countries with higher growth rates with higher
savings and countries with lower growth rates with lower savings. Which is
cause and which is effect? Growth leads to higher incomes leads to higher
savings seems plausible.
Response:
Refer back to my previous answer. Also see David Ricardo, Works 3,
p. 92. Savings make investment funds available or enable currently
produced goods to be tranformed into producer's goods. Thus
increased saving is logically prior to increased income. Keynes's
mistake was to have failed to recognized what the "classics" were
talking about when they discussed the savings (capital) theory of
interest and growth. I have explained this at length in my History of
Political Economy (Fall 1990) article: "On Keynes's Misinterpretation
of 'Capital' in the Classical Theory of Interest."
James Ahiakpor
CSUH, Hayward
(510) 885-3330
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