Re: General Theory Seminar --Savings and Investment

[Paul Davidson <pdavidson@xxxxxxx>]

At 10:06 PM 3/2/2000 -0600, you wrote:
> Paul
>
> Coming back to S&I, I do not know if you bought my argument that saving can
> be viewed as the accounting record of investment?
>
> Looking at it this way, it is clear that there is not an independent
> behavioural saving relationship . Investment cannot be constrained by
> insufficient saving, since saving is simply the record of investment.

from Page  96 of my book, POST KEYNESIAN MACROECONOMIC THEORY:

        In sum then, in an uncertain world, a monetary system is
associated with at least two and usually three institutions  namely,
contracts, enforcement, and clearing. The thing that becomes the money
commodity will have two essential properties, a zero (or negligible)
elasticity of production and a zero (or negligible) elasticity or
substitution between it and any other good that has a high elasticity of
production.
        Uncertainty and unwillingness to commit earned income to current
purchases of producibles (a process that the layperson terms SAVINGS) will
cause unemployment, if, and only if, the object of the savers' desire is a
resting place for their savings that is nonproducible and not readily
substitutable for producibles -- even if prices are flexible.
        If prices are flexible and producibles were good substitutes for
nonproducibles as liquidity time machines, then an increased propensity to
save by the members of a community can not, ceteris paribus, cause
unemployment. In other words, if producible durables are capable of "doing
money's duty equally well," then involuntary unemployment can not be a
significant problem for marketoriented, monetary economies. Any increase in
the demand for liquid stores of value would, as Friedman's monetary
framework suggests, rapidly spill over into an increase in the demand for
producible goods.
        It is a failure by many able but wrongheaded economists to
comprehend the importance of these three institutions and two properties
that are peculiar to money and the need for liquidity in a monetary economy
that has led to the shunting of much of modern monetary analysis onto a
wrong line. Any model of a modern, monetary, marketoriented economy that
attempts to provide insights about the real world should have the following
characteristics:
        (1) Decision making by firms and households who are fully aware
that human judgment is fallible.
        (2) The existence of contractual agreements, enforceable by the
State, which permit the sharing of some of the burdens of uncertainty
between the contracting parties.
        (3) Different degrees of organization of spot and forward markets
for all sorts of real goods and financial assets. In many cases, either
only a spot or a forward market exists for a particular item because of
difficulties of organizing a market in a world of incomplete information.
In markets that do exist, there may be significant and increasing
transactions, search, and information costs.
        (4) Money buys goods in these markets, and goods can buy money, but
except for some relatively small  but not necessarily unimportant  markets,
goods never trade directly for goods. In a monetary economy, demand
involves want plus the ability to pay. Liquidity is defined as being able
to meet all contractual payments as they come due. Financial conditions, by
affecting the quantity of money in the hands of the public, can affect the
public's ability to pay and the resulting use of real resources.
        (5) The various institutions that develop in organizing a market
can affect the price path in the market as it reacts to a disequilibrium
situation.
        (6) There is a clearing mechanism for private debts that permits
the existence of a fractional reserve banking system. There are also
nonbank financial institutions which because they lack a generally
available clearing mechanism independent of the banking system cannot
create a medium of contractual settlement. Nevertheless, these financial
intermediaries can affect financial flows and therefore market demands.
        (7) There is confidence in the monetary and financial system.
        Thus the main characteristics of real world monetary economies are
Uncertainty, Fallibility, Covenants, Institutions, Commerce, Finance, and
Trust. These are the Seven Wonders on which the Modern World is based.
Simultaneously, these are the sources of the outstanding faults of a
modern, monetary, free market economy, namely "its failure to provide for
full employment and its arbitrary and inequitable distribution of wealth
and incomes."

Paul

Paul Davidson
Holly Chair of Excellence in Political Economy
Editor, JOURNAL OF POST KEYNESIAN ECONOMICS [JPKE]
Economics Department -- 523 SMC
University of Tennessee
Knoxville, Tennessee 37996-0550
email: Pdavidson@xxxxxxx;   phone: (865)974-4221;    fax: (865) 974-4601
http://econ.bus.utk.edu/Davidson.html