Mathew Forstater writes (7/20/95): 
 
"For Keynes, the driving force is investment *demand*.  The demand for 
finance requires that investors' expectations be such that they are ready 
to act.  The mere existence of savings does not guarantee that investment 
will actually take place.  But that savings will result from investment 
(via changes in income) is reliable. 
 
The conventional view is that the existence of savings will call forth 
investment via variations in the rate of interest.  This may be the crux of 
the matter: to what degree one believes that a) when S>I interest rates 
fall and b) a fall in the rate of interest will result in new investment 
demand that will soak up the excess savings.  If one puts their faith in 
the neoclassical theory of interest rate determination and in the belief 
that investment is interest- elastic, and abstracts from other factors such 
as those Keynes emphasized, then you have your story." 
 
My response: 
 
What is missing in the above argument is a recognition (which was  
lost on Keynes) that the rate of interest is determined by the  
savings desires of income earners and investment (borrowing) demands.  
If savers want to save more at the going (average) rate of interest  
than investors or borrowers want to borrow, the rate of interest  
declines and the quantity actually borrowed INCREASES.  (I illustrate  
the point in diagrams as an appendix to my "Paradox of Thrift"  
article in SEJ, p. 31.)  Keynes's problem was to have included  
"hoarding" in his definition of saving, and then make interest rate  
determined by the supply and demand for cash (liquidity)!  He thus  
lost the coordination function of interest rates for the savings- 
investment mechanism.  (Steven Horwitz's contribution today addresses  
this point.  Also see p. 21 of my SEJ article.) 
 
In his exasperation to clarify the above for Keynes, Dennis Robertson  
finally appealed for the use of Latin, hoping that might help Keynes  
better understand.  As I quote him on p. 30 of my SEJ article,  
Robertson says: Keynes fails to recognize the that "English words in - 
ing sometimes dennote a process (requiring translation into Latin by  
an infinitive or gerund) and sometimes denote the object to which the  
process has been applied (requiring translation by a newter past  
participle passive)" (Essays in Monetary Theory, 1940, p. 15). 
 
The point is that "saving" is both a process and the object of that  
process, by common usage.  And investment is also a process.  But you  
can't invest that which has not been saved. 
 
Mathew continues: 
 
"Banks can't lend just because they have available savings.  They have  
to have someone to lend to - there must be a demand for credit (and  
lender'sexpectations of profitability are also important here, they  
have to cover the costs of finance, etc.). 
 
So, savings does not necessarily lead to investment (investment depends on 
expectations of both investors and lending institutions, which are 
influenced by many factors- expected profitability, business and political 
climate, etc., etc.).  But investment does lead to savings.  Finance only 
makes investment *possible*, but investment will always create new savings. 
 
My response: 
 
See the above clarification.  The saving and investment functions  
are separate.  Changes in saving propensities cause movements  
along the investment-demand schedule.  You also can't get out of the  
circle by refusing to address what is meant by "finance" or getting  
rid of "inside money".  Finance doesn't originate from thin air!   
 
Sure, investment demand is a function of expected profits.  But as  
the saying goes, "If wishes were horses, beggars would ride them!"   
Investors can't invest without someone supplying them with the  
purchasing power they seek.  Why don't you use the equation I  
supplied yesterday: S = Y - C - pY = Change in Financial Assets.  In  
any case you'll encounter it in my SEJ article (pp. 19-20, 23 & 25). 
The Robinson Crusoe economy model also intructs one on the primacy of  
savings for investment.  Try that too. 
 
Mathew also correctly restates Keynes's failure to recognize in the  
classical theory of interest and income determination the comparative  
statics argument Keynes himself reperesents in the diagram on p. 180  
of the General Theory.  Thus the claim is frequently made that  
increased investment leads (or may lead) to increase savings (since  
savings depend on the level of income).  And this obvious fact is  
stated as if any classical or early neoclassical economist ever  
denied it.  Just look at the relevant chapters on savings in  
Marshall's Principles, for example.  Better yet see my collection of  
the classical and early neoclassical statements to this effect in the  
article "On Keynes's Misinterpretation of 'Capital' in the Classical  
Theory of Interest," History of Political Economy, Fall 1990.   
 
The simple point is that savings depend on the level of income,  
expected real rate of interest, one's anticipation of the future,  
including the willingness to endow one's dependents (one of Marshall's  
illustrations), one's feeling of security, etc.  Alas many of us  
are still struggling to overcome what we learned from Keynes or  
our teachers as the failure of the classics to appreciate that  
savings depend on the level of income! 
 
Sorry for the self-citations.  I didn't mean to advertise my  
publications.  But what is the point hiding useful or relevant  
information simply because it's in my name? 
 
James Ahiakpor 
CSUH, Hayward