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 [log in to unmask]