Chapter 7

Chapter 7


This chapter focuses on the meaning of the terms “saving” and “investment” and their relation to one another, in particular to when there is an excess of saving over investment. The excess here is said to be similar to that of an un-designed increment in the stock of unsold goods. Mr. Hawtrey does not agree, regarding the daily decisions of entrepreneurs concerning their scale of output as being varied from the scale of the previous day by reference to changes in their stock of unsold goods.

“Normal Profit” of entrepreneurs also declines with an excess of savings over investment. Furthermore, a continually increasing excess of savings shows a decline in actual profits.

An entrepreneur fixes the volume of employment to maximise present and prospective profits. The volume of employment is determined by the estimates of effective demand made by the entrepreneurs, an expected increase of investment relative to saving being a criterion of an increase in effective demand.

With Mr. D. H. Robertson’s definition of “today’s income”, saving can exceed investment by the excess of yesterday’s income over today’s income. Therefore if current expectations were always determined by yesterday’s realised results, today’s effective demand would be equal to yesterday’s income.

“Forced Saving” is then highlighted here. This has no definite relation to the difference between investment and saving. “Forced Saving” results from, and is measured by, changes in the quantity of money or bank-credit. A change in the volume of output and employment will cause a change in income which in turn redistributes income between borrowers and lenders. A change in aggregate income measured in money creates a change in the amount saved. These are not “forced savings”. A highly contrived definition of “forced savings”, resulting from a meaning for “savings” in a state of full employment, may be: “Forced saving is the excess of actual saving over what would be saved if there were full employment in a position of long-period equilibrium”.

Jeremy Bentham looked at the consequences of an increase in money in circumstances of full employment and pointed out that real income cannot be increased, and, consequently, additional investment involves forced frugality “at the expense of national comfort and national justice”.

No-one can save without acquiring an asset and no-one can acquire an asset which he did not previously possess, unless either an asset of equal value is newly produced or someone else parts with an asset of that value which he previously had. Therefore, the loss of wealth must be due to his consumption exceeding his income. The aggregate saving must be equal to the amount of the current new investment.

Bank credit that allows for the addition to current investment, will increase income and at a rate which will normally exceed the rate of increased investment. This brings an increase in real income. Money corresponding to the bank credit can be held rather than holding some other form of wealth. Bank credit has tendencies which may affect the distribution of real income between groups. This is avoidable only by passing up any course of action capable of improving employment.

The affect of consumption on the incomes of others make it impossible for all individuals to save any given sums simultaneously. The community as a whole cannot save less than the amount of current investment, as this will raise incomes to a level at which the sums at which individuals choose to save add up to a figure exactly equal to the amount of investment. Incomes and prices change until the aggregate of the amounts of money which individuals choose to hold at the new level of incomes and prices thus brought about has come to equality with the amount of money created by the banking system