Saving doesn’t finance investment

28 October, 2012 at 17:18 | Posted in Economics | 3 Comments

An act of individual saving means — so to speak — a decision not to have dinner to-day. But it does not necessitate a decision to have dinner or to buy a pair of boots a week hence or a year hence or to consume any specified thing at any specified date. Thus it depresses the business of preparing to-day’s dinner without stimulating the business of making ready for some future act of consumption. It is not a substitution of future consumption-demand for present consumption-demand, — it is a net diminution of such demand …

If saving consisted not merely in abstaining from present consumption but in placing simultaneously a specific order for future consumption, the effect might indeed be different. For in that case the expectation of some future yield from investment would be improved, and the resources released from preparing for present consumption could be turned over to preparing for the future consumption … In any case, however, an individual decision to save does not, in actual fact, involve the placing of any specific forward order for consumption, but merely the cancellation of a present order. Thus, since the expectation of consumption is the only raison d’être of employment, there should be nothing paradoxical in the conclusion that a diminished propensity to consume has ceteris paribus a depressing effect on employment.

The trouble arises, therefore, because the act of saving implies, not a substitution for present consumption of some specific additional consumption which requires for its preparation just as much immediate economic activity as would have been required by present consumption equal in value to the sum saved, but a desire for “wealth” as such, that is for a potentiality of consuming an unspecified article at an unspecified time. The absurd, though almost universal, idea that an act of individual saving is just as good for effective demand as an act of individual consumption, has been fostered by the fallacy, much more specious than the conclusion derived from it, that an increased desire to hold wealth, being much the same thing as an increased desire to hold investments, must, by increasing the demand for investments, provide a stimulus to their production; so that current investment is promoted by individual saving to the same extent as present consumption is diminished.

J M Keynes General Theory



  1. Correct me if I’m wrong, but I get a different interpretation of this quote. What I read from Keynes here is not that saving doesn’t finance investment, but that it doesn’t finance investment ‘in the current period’.

  2. If saving lowers demand generally, isn’t it possible that it might lower the cost of inputs in production? By lowering the cost of inputs, it could make more production plans feasible, and it could make the cost of output lower.

  3. There is no nexus [Keynes said] between decisions to abstain from present consumption, and decisions to provide for future consumption.
    — JMK, TGT (from memory, thus no quotation marks)

    I guess people just don’t read this stuff.

    Keynes also wrote of a 150-year period of “the greatest age of the inducement to invest” (probably 1776-1914 give or take).

    I think that Say’s law probably did hold good during the 150-year period, and that there seemed to be the nexus between saving and investment.

    I think that the longing of some for a return to “the free banking era” and such, is a longing for a return to the greatest age of which Keynes wrote. But they miss the whole gist of what must be done to achieve their objective.

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