The true nature of saving

9 January, 2017 at 16:27 | Posted in Economics | 13 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.



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  1. So this is a passage I find very incomplete. For instance, if I decide to save I might go ahead and buy an asset (say a bond). If I do that then — by necessity — someone also sells a bond. The person selling a bond has of course decided to dissave. So my diminished propensity consume is met — dollar by dollar — by a mirrored increased in someone else’s. Why wouldn’t that be a wash?
    The only time the above argument is not true is one saving takes the form of cash hoarding. Then no transaction is needed, and the decline in my propensity to consume is not met with a mirrored rise in someone else’s, and the result is a shortfall in demand. But this was already explained by John Stuart Mill 100 years before Keynes.
    Lastly, modern macroeconomics follows the above logical steps. Thus, the question arises when agents would hoard cash instead of buying (interest bearing) assets? The answer is when interest rates are sufficiently low to render cash and bonds very close substitute — in other words in a liquidity trap.

    • “The only time the above argument is not true is one saving takes the form of cash hoarding.” True. And I take it that that is assumed in the above passage, though it should have been spelled out more clearly.

      • I don’t think it is assumed in the above passage. What is worse is that most post-Keynesians just sweep this argument under the rug. I have had multiple conversations with post-Keynesians about this and each time they get stumped and disengage (cf. Lars’ own reaction to my comment — head in the sand).

      • Pontus
        I gave you an answer to why your thinking is only modestly right, but it doesn’t apply to savings in general.
        You can keep ignoring my answer and keep claiming that post-keynesians ignore your “insight”. It is obvious that it is you who ignore due lack of comprehension whyt it is said to you.

      • Jordan,

        Your answer is so confused that I have nothing to add.

    • In a static world or cet. paribus which doesn’t exist, of course, you would be right. But that is not a world we live in.
      The real world includes continous new bond printing, either public or private bonds, and bond price growth, both of which require increasing the amount of savings.
      So, new bonds and ever higher prices of bonds need more savings. YOu can easilly get that from MV=PQ
      Velocity is 1 and M is savings. Q is total bonds.
      Total value of all bonds is constantly increasing hence the savings to cover them is by necessity increasing.

      Possibly that you do not see the problems that savings create because they are replaced by deficit spending and net new borrowing. Public debt is a historical solution to problem of savings and trying to curb it is going t0 create more problems.
      But you can also look at it this way; the size of the deficit decides the size of the savings allowed without creating unemployment.

  2. Keynes’ saving definition in his book “General Theory of …”:
    Income = value of output = consumption + investment.
    Saving = income − consumption.
    I believe that this is a big mistake in defining saving concept like that. In NIPA/FOFA/SNA2008, the saving is defined to capture the “non-consumed” income including physical capitals from consumption, rather than non-consumed financial assets (income − consumption) only in Keynes’ definition.

    saving = capital_formation + income – expense.
    capital_formation = acquired non-financial assets from your financial expense (i.e. “non-consumed” expense). Thus, there are many ways to count capital_formation in NIPA/FOFA for different purpose

    NIPA is used for measuring production/income purpose. The capital formation counts all acquired non-financial assets from investment(I) expense including 4 kinds of financial expense: equipment, construction, IP, and inventory.

    FOFA is used mainly for measuring wealth/networth purpose. The capital formation counts expense on equipment, real estate (construction+land), IP, inventory and durable consumer goods such as cars, etc.from consumption(C) expense

    No matter how you counts capital formation, we have this accounting identity for each sector: saving – capital_formation = income – expense.

    Sum of all sector (saving – capital_formation) = 0

    • It is not only you that want to interchangeably use physical capital and monetary capital. Many economists want to use it that way to confuse readers and to be able to reach desirable conclusions that are false and missleading at best.
      It is clear that Keyness used monetary capital only as the object of the study of monetary distribution and its consequences.
      Yes, you should study only monetary cycles in an economy to derive the concusions. Interchanging the values of physical capital and monetary circuits will give you such thinking as you have expressed here.
      It is about monetary distribution as power to consume and cover potential demand in economy.

      • Physical capital investments always drive economies and generate savings. It is not another way around. Savings are not used to finance investments.

        In fact, S = I(acquired physical capitals from investment expense). This accounting identity really means that our total savings are only consisted of non-consumed physical capitals(I). All financial assets – liabilities = 0 in an economy.

      • Peiya Liu
        So, you decided to keep using monetary and physical capital interchangeably.
        It seems nothing can persuade you to change your ways as you have learned them. So, your confussion will have no bounds due to your decision.
        Also, that is the reason that you can not understand what Keyness said here, because you want to mix physical and monetary capital terms.

  3. Jordan

    “Interchanging the values of physical capital and monetary circuits will give you such thinking as you have expressed here” “keep using monetary and physical capital interchangeably”
    Please don’t put your words into my mouth and I did not say those. If you think so, then you do not understand the economic data/variable semantics in NIPA/FOFA/SNA2008 accounts. You cannot read in your own meaning into defined economic variables and contradict the accounting data and identities.
    However, you can define the saving concept in whatever way you want. From a pure math perspective, the notation that Keynes use to define “saving” is just an alias of the notation of his investment. His narrative description of true nature of saving does not reflect in his saving definition.

    Three things (saving definition, narrative description, and real economic data) are not interconnected in his book. Which part we want to believe?

    • Peiya Liu
      “Please don’t put your words into my mouth and I did not say those.”

      Then what is this about;”saving = capital_formation + income – expense”
      and then comes out like you said:”No matter how you counts capital formation, we have this accounting identity for each sector: saving – capital_formation = income – expense.”???????? That is interchangeably using moneary and physical capital.

      So, lets talk about what you say here.
      ” saving – capital_formation = income – expense”

      Lets take right side first: income-expense
      Income is obviously only in monetary means unless you want to talk about barter which is not present world. In the present world we have monetary-debt-barter economy. But if you want to talk only about barter economy, that is not what real world is. not today, and last few thousand years.

      expenses could include non-finacial assets in some trades. But since income can only be in financial assets then we have to talk in monetary terms.

      now, left side:saving-capital formation
      savings could be both physical or monetary assets,
      but capital_formation includes “the saving is defined to capture the “non-consumed” income including physical capitals from consumption”

      So what you have here is that both savings and capital_formation include the same thing.

      Now, also the expense includes buying capital-formation

      So in your formula, you have used parts of capital_formation in 3 of 4 variables. WHat do you expect to get as a result?

      YOu can keep denying that you use intercheangably monetary and physical capital, but that is not truth.
      But how to convince you that you are wrong if you do not want to analyze what you are saying but use mathematics to confuse yourself and keep going no matter how wrong.

      Now we can keep talking about if you are using those terms intercheangably or proceed constructively.

      Present economic reality is that we are in money-debt-barter economy but you mainstreames want to keep studying only barter economy and that is why you intecheange physical and monetary capital.
      Have you heard of Cambrige Capital Controversy?

      • Jordan,
        I reply your message by giving an example to illustrate money relationships
        between saving, debt, networth, physical capitals, and monetary capitals in financial instruments . It illustrates the flavors of our monetary economy and Somehow it is lost and did not show up in this blog . I repeat below.

        Before you can fully understand the correct semantics of real economic data, you have to first throw out or put aside your concepts of “interchangeably”, “money-debt-barter economy”, “barter economy”, “physical and monetary capitals”, MC(Monetary Circuits), etc.
        Aggregate macro variables in economic accounts are structurally defined in terms of components and they are self-consistent with economic data. Accounting data are based on income/expense, not based on supply/demand used in many fiction economic models. Accounting identities are rigorously derived from variable definitions. More importantly, accounting identities derivation is not based on any supply/demand market conditions or behavioral assumptions unlike Keynes’ narrative description, his supply/demand equilibrium equations, and any other economic models including MC. IMHO, they are useless and create more narrative confusion than fixation. Also, they are not building upon real accounting data consistent with variable definitions.
        I use an example to illustrate the meaning of saving defined
        as “saving = capital_formation + income – expense” in NIPA/FOFA/SNA2008.
        How saving is related to networth and debt?
        Networth(t) = Reevaluation [Networth(t-1)] + Saving(t)
        Debt(t) = financial liabilities in credit market (debt securities and loan)
        Suppose household X earns wage $100K, gets a bank loan 300K to buy a house $320K and other living expense 50K in the first year.
        In first year,
        Household Saving(50K) = 320K(house) + (- 270K) (=100K-50K-320K)
        Nonfinancial Saving $320K is in forms of physical capitals such as houses, etc.
        Financial Saving -270K is in forms of financial instruments (loan and cash):
        loan = assets 0K, liabilities 300K
        cash = assets 30K, liabilities 0K
        Household Networth(50K) = $320K house + $30K in cash – $300K in loan liabilities = 350K assets – 300K liabilities
        Household Debt(300K) = 300K bank loan liabilities.
        In next year, household X still gets wage $100K, payout $20K bank loan, and other living expense $50K, but the house market value is $350K at end of next year.
        In second year,
        Household Saving(30K) = 0K + (100K-20K-50K)
        Nonfinancial Saving = 0K
        Financial Saving = 30K in cash
        Household Networth(130K) = 350K(house) + 60K(in cash) – 280K (in loan liabilities)

        350K = 350K(revaluation of last year house value) + 0K(current year nonfinancial saving)
        280K = (300K – 20K) (reevaluation of last year loan liabilities) +0K current year loan liabilities
        60K = 30K(reevaluation of last year cash value ) + 30K(current year financial saving in cash)
        Household Debt($280K) = 300K – 20K
        You see that saving is presented as “asset allocation” from a finance view in FOFA , Each asset class has different revaluation methods in either market value or replacement cost for calculating networth. You will miss the crucial point if you think interchangeable capitals with equivalent value.
        Note that sector Networth(t) = Reevaluation [Networth(t-1)] + Saving(t). Saving is a flow variable for a particular period, but networth and debt are stock variables for accumulation to the end of a particular period.
        For Cambridge Capital Controversy, they just do not understand accounting identity (1 = Labor Share + Capital Share) and how capitals and shares are defined in terms of NIPA/FOFA variables and data instances.

        For the accounting-based production function, I had a chart here.

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