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posted on 30 August 2017

Savings And Investment: Defined By Keynes

from Dirk Ehnts, Econoblog101

Keynes was very clear on the relationship he saw between savings and investment: On a national scale they are the same by identity.


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Geoff Tily in his paper on Keynes (pdf) has this quote (from the Collected Writings):

S = I at all rates of investment. Y either definable as C+S or as C+I. S and I were opposite facets of the same phenomenon they did not need a rate of interest to bring them into equilibrium for they were at all times and in all conditions in equilibrium. (CW XXVII, pp 388 - 9)

This is very enlightening. The “General Theory" also contained the issue of savings and investment, but the quote above nails it. There is no “supply" and “demand" for capital, hence savings and investment do not need anything to move so that there can be equilibrium.

From my point of view, this is one of the strongest rejections of neoclassical macroeconomics and it stands until this day. In a monetary economy, there is no “savings good" that needs to be produced before it can be “invested". I = S “at all times" - there cannot be a disequilibrium between savings and investment.

What is correct on the national level must hence be correct on the international level. We cannot have global excess savings, since they are always equal to investment. Mario Draghi, when he said last year … (my highlighting)

It is this phenomenon - the global excess of savings over profitable investments - that is driving interest rates down to very low levels. And so the right way to address the challenges raised by low rates is not to try and suppress the symptoms, but to address the underlying cause.

… is wrong about the inequality of savings and investment on a global level. However, he is right in seeing low interest rates as a symptom and not the cause. Lack of aggregate demand is what has led to low rates of inflation, and hence low interest rates in order to stimulate demand.

This article was adapted from a post on Econoblog101 30 August 2017.

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