Chapter 7
Saving and Investment have previously been defined as merely different aspects of the same thing.
Saving is the excess of income over consumption spending. Investment, generally, means the purchase of a capital asset, of any kind, using the income of an individual or a corporation. Investment includes the increment of capital equipment, whether it consists of fixed capital, working capital or liquid capital. In terms of liquid capital, Keynes prefers to emphasise the total change of effective demand rather than part of the change. Moreover, in the case of fixed capital, the change of unused capacity is in accordance with the change of unsold stocks in its effect on producing decisions. It is concluded by the Austrian School of Economics, that capital formation and capital consumption are not identical. The former occurs when there is a lengthening of the period of production, whereas the latter occurs where there is no net decrease in capital equipment.
Keynes recognised the divergence between saving and investment as the excess of normal profit over consumption, meaning that the Entrepreneur’s output is an earning less than normal profit from his ownership of the capital equipment. Employment, as a kind of working capital, is of fixed volume as the Entrepreneur tries to maximise profits. This volume then depends on aggregate demand.
Keynes believes that an expectation of increases in the excess of investment over saving, as a way of handling profit changes, will encourage the Entrepreneur to introduce increases in the volume of output and employment. Therefore, an expected change of investment relative to saving is defined as being a criterion for an effective demand. In addition, it is said by Mr. Roberston that saving can exceed investment. When the income is falling, the excess of saving is exactly equal to the decline of income. Current expectations depend on yesterday’s realised results; whereas today’s effective demand would be equal to yesterday’s income. Such a hypothesis is vital for causal analysis between effective demand and income.
It is evident that a change in the volume of output and employment will cause a change in income. Meanwhile, changes in the quantity of money may result in a change in the volume and distribution of income, through their effect on the interest rate, perhaps leading to saving. Any increase in employment is said to involve some sacrifice of real income, however attempts to quantify are not likely to be successful.
Saving and investment can differ from one another. The banking system allows the savings of one individual to become available as investment for another. Bank-credit then allows investment to take place where “no genuine saving” corresponds. The public will exercise “a free choice” where they divide their increase of income between saving and consumption, so it is impossible the rate investment can increase faster than the rate of saving.
Although the old-fashioned view that saving always involves investment is sounder, its inference that individual saving will increase his/her aggregate investment by an equal amount is plausible and unrecognized. The reason is that increased aggregate wealth caused by individual saving might fail to allow for the possibility that an act of individual saving may react on someone else’s savings and hence on someone else’s wealth. The reconciliation between saving and investment is a two-sided affair, which the amount of money people choose to hold is not independent of their incomes or of the prices of the things, the purchase of which is the natural alternative to holding money; individual balances add up to be exactly equal to the amount of cash which the banking system has created. That is the fundamental of monetary theory.
Saving is the excess of income over consumption spending. Investment, generally, means the purchase of a capital asset, of any kind, using the income of an individual or a corporation. Investment includes the increment of capital equipment, whether it consists of fixed capital, working capital or liquid capital. In terms of liquid capital, Keynes prefers to emphasise the total change of effective demand rather than part of the change. Moreover, in the case of fixed capital, the change of unused capacity is in accordance with the change of unsold stocks in its effect on producing decisions. It is concluded by the Austrian School of Economics, that capital formation and capital consumption are not identical. The former occurs when there is a lengthening of the period of production, whereas the latter occurs where there is no net decrease in capital equipment.
Keynes recognised the divergence between saving and investment as the excess of normal profit over consumption, meaning that the Entrepreneur’s output is an earning less than normal profit from his ownership of the capital equipment. Employment, as a kind of working capital, is of fixed volume as the Entrepreneur tries to maximise profits. This volume then depends on aggregate demand.
Keynes believes that an expectation of increases in the excess of investment over saving, as a way of handling profit changes, will encourage the Entrepreneur to introduce increases in the volume of output and employment. Therefore, an expected change of investment relative to saving is defined as being a criterion for an effective demand. In addition, it is said by Mr. Roberston that saving can exceed investment. When the income is falling, the excess of saving is exactly equal to the decline of income. Current expectations depend on yesterday’s realised results; whereas today’s effective demand would be equal to yesterday’s income. Such a hypothesis is vital for causal analysis between effective demand and income.
It is evident that a change in the volume of output and employment will cause a change in income. Meanwhile, changes in the quantity of money may result in a change in the volume and distribution of income, through their effect on the interest rate, perhaps leading to saving. Any increase in employment is said to involve some sacrifice of real income, however attempts to quantify are not likely to be successful.
Saving and investment can differ from one another. The banking system allows the savings of one individual to become available as investment for another. Bank-credit then allows investment to take place where “no genuine saving” corresponds. The public will exercise “a free choice” where they divide their increase of income between saving and consumption, so it is impossible the rate investment can increase faster than the rate of saving.
Although the old-fashioned view that saving always involves investment is sounder, its inference that individual saving will increase his/her aggregate investment by an equal amount is plausible and unrecognized. The reason is that increased aggregate wealth caused by individual saving might fail to allow for the possibility that an act of individual saving may react on someone else’s savings and hence on someone else’s wealth. The reconciliation between saving and investment is a two-sided affair, which the amount of money people choose to hold is not independent of their incomes or of the prices of the things, the purchase of which is the natural alternative to holding money; individual balances add up to be exactly equal to the amount of cash which the banking system has created. That is the fundamental of monetary theory.
1 comment:
Excellent Summary. Here are a few comments.
Group 2 Comments
Chapter 7
Why does Keynes emphasize total change rather than partial change in ED?
"Keynes believes that an expectation of increases in the excess of investment over saving, as a way of handling profit changes, will encourage the Entrepreneur to introduce increases in the volume of output and employment"
Does he say how this is supposed to happen?
Emphasis on the banking system in this chapter and its role coordinating the monies of the past into the future (savings->investment). This could have been fleshed out a little more. But otherwise excellent.
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