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 [log in to unmask]