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The savings paradox

from Lars Syll

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

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Categories: Keynes
  1. December 9, 2012 at 8:47 pm | #1

    The problem with thinkers like Keynes, and others of his day, is their limited perspective on what we call “the economy” which is far more complex than any of these gentlemen seem capable of imagining.

    • Bruce E. Woych
      December 10, 2012 at 12:40 am | #2

      “…what we call “the economy” which is far more complex than any of these gentlemen seem capable of imagining.”
      Imaginations aside, the working definition of today’s economy is class business rationing and legitimation; or for the “imaginative…justification (the justifyers, in turn, bought lunch for the deniers…). Prior to the systemic analysis of Keynes …you had what? Outside of the ideologues of his class oriented bank and monopoly yes men of his day…what “thinkers” are you referring to? Few men have corrected the world…Keynes certainly was one of them! To call his comprehension a “limited perspective” is myopically lost in a text book of lexicon that gives one a false sense of control over reality. The language of Economics is the quintessential FOG and it spends a great deal of time defending itself by attacking the fundamental insights that Keynes attempted to turn into models for the rest of us to manage. Instead we get resistence and a failure to follow through. THAT…is the problem with “thinkers” of today and the elite sophisticates of our day!

      • December 10, 2012 at 2:03 am | #3

        Behold! A defender of the faith.
        Keynes certainly became very fashionable in his day and the glow obviously lingers. Consume, consume, consume! That is the mantra. What happens when we have stuffed ourselves?

  2. Pavlos
    December 9, 2012 at 8:49 pm | #4


    This topic is muddled in the thinking of many economists to the point of despair. A different statement of the basic fallacy is that inter-temporal transfer of value largely does not exist. It is a financial make-believe. In other words if people really had less dinner in order to build more ships then, fair enough, current saving would equal current consumption and undisputedly yield increased output in the future. However in practice this very rarely happens. Current saving is typically a non-consumption and the funds so saved simply accumulate in the financial system as competing claims against the future, mostly driving up the price of real assets.

    I wish that the Austrians and other “hard money” people would pick up this simple distinction between funds, which are just claims on assets, and real capital goods like machines. Reducing consumption (if it has to be reduced any, which is debatable) to construct real capital goods is a great idea. Saving funds is societally pointless. It’s a purely distributional arms race that certainly doesn’t increase future output and most likely decreases it through present deflationary effects and future consumption uncertainty.

    Saying that “we have no funds for retirement” is bunk as a policy statement. Individuals and classes of people indeed end up lacking funds, meaning that their relative claim to future consumption is weak relative to the claims of other, rich people. That’s entirely a distributional outcome. You don’t eat the funds. You consume the food, medical care, and such that the future economy produces so the only thing we need to “have enough of” for a good future is productivity.

    BTW this looks like a fine edition of the book. Do you have that copy?

    • Bruce E. Woych
      December 10, 2012 at 12:28 am | #5

      “A different statement of the basic fallacy is that inter-temporal transfer of value largely does not exist.”

      Ah…isn’t that “money” you are denying exists?

      Oh foolish me!

  3. Douglas Woodard, St. Catharines, Ontario, Canada
    December 10, 2012 at 5:21 am | #6

    An individual or a corporate entity can save money. Its ability to save for future consumption depends on a social process. A complete economy cannot save money, it can only save goods or invest in the capacity to produce future goods and services. It can produce a tool, plant a tree, or someone can learn something useful.

    For an individual decision to save to not result in a decrease of production, to not cause the economy to wind down, either the individual must invest, or the the money must be loaned to (or otherwise acquired by) someone else who invests in some means of future production, involving present activity. Alternatively one can forgo consumption now in favour of someone else who agrees to forgo consumption in the future in favour of oneself.

    We employ each other. Not spending means not employing someone else. The total produced decreases.

    I think that what Keynes talking about is possible pathologies of adjusting the mix between consumption and investment. Adjustments may be more or less automatic under certain conditions; other other conditions they may not be (boom/depression). When does one have to metaphorically take a screwdriver or a wrench to the system? Keynes is reminding us of what the social process, the economic system does, and that sometimes it needs attention.

  4. Pavlos
    December 10, 2012 at 8:03 am | #7

    I am saying that money as a store of value is a fallacy outside of short-term marginal situations where the economy and prices remain constant.

    Value = Useful or productive things such as food, machines, or services. Note that almost all of those are perishable within a lifetime. Only things like buildings and institutions last. I would not include land in this category unless it’s actually created, e.g. by earthworks. Otherwise land title is better modelled as a claim to a fixed resource.

    Money = A token that’s accepted as a shared claim on value. It’s shared in the sense that whenever there’s a market the buyers put up their varying amount of claims (money) and get value in proportion to the money each one spends. In the very short term markets yield stable prices and money looks like an absolute store of value, but in the long run every market is an auction. It only matters how much money you have relative to everyone else.

    Fallacies result when people try to apply the short term, everyday familiar concept of money as a store of value to the long run economy. Thus you hear:

    - “We must use gold or other real money so that it preserves its value”. Idiotic concept. This just says you want a fixed money supply, which turns out technically to be unproductive. The idiocy is confounding retained money with retained value.

    - “We don’t have enough money to support an ageing population”. Whether we can support them depends on the total productivity of those who work and the total demands of those who don’t. Employing youth, using care resources more efficiently, and keeping seniors active for longer all improve the balance of value and therefore matter. Building education and infrastructure in the present also helps the future balance. Money is irrelevant to overall sustainability. Sure enough money can frustrate the process if it’s concentrated and doesn’t flow, so that simultaneously youth are unemployed and seniors are poor and without care. But this is a distributional mess, not a “lack of money” problem.

    - “If only people like the Greeks or Spanish would save instead of consuming they would be prosperous today”. That would be most true if they limited present consumption in order to build capital goods: machinery, firms, innovation, brands, education, institutions, and so on. Lack of real investment is very much a problem for Greece compared to Germany. But the problem is in the real economy not in the money. If the Greeks and Spanish put their money in the bank or on land speculation, as many did, that does no good. It’s an inflated claim on a collapsing economy.

    - “Only absolute poverty matters; relative inequality is a liberal whinge”. Garbage, and a direct result of the money/value fallacy. In the context of stable prices it’s true, so this applies to places like the supermarket. There it only matters that poor families are able to buy food day to day. But in the long run money works as a shared claim. Whoever is poor gets shut out of living space, social space, education, advanced care, or anything else that is outbid by the superior claims of rich people. For long run outcomes, only relative wealth matters. Rich people know this full well.

  5. December 10, 2012 at 1:04 pm | #8

    Lars, could you please give me some idea of where in Keynes’ General Theory your quotations comes from. I can’t find them my 1949 reprint.

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