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