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]