Savings fallacy redux (was Re: Method)

["Dr. Bruce McFarling" <ecbm@xxxxxxxxxxxxxxxxxxx>]

Gunnar Tomasson <gunnar.tomasson@xxxxxxxxxxx> wrote,
on Thu, 29 Aug 2002 10:39:30 -0400



> > By showing that savings are the result, and not the source, of growth,

>> Keynes's theory overthrew one of the justifications of economic
>> inequality.  Since lower and middle income earners have a higher

> > propensity to consume, redistribution could even mean stronger
> > growth.


> Alas, Keynes never got his basic monetary ideas right, the idea that
> "savings are the result, and not the source, of growth" being a case in
> point.


> Had he done so - that is, started from the Creditary View of Money as IOUs
> issued by Debtors/Entrepreneurs to Creditor/Suppliers of Factor Services -
> it is fair surmise that Keynes would have recognized his mistake at once.


But nobody can spend IOU's issued by Entrepeneurs to Suppliers of Factor
Services.  If that is what you are calling "creditary money", that could
not conceivably be an example of the "correct" position that anyone
ever "missed" to account for any supposed "flaws" of theirs.

Because if you can't spend it, you are just playing semantic games
calling it money.

In the Post Keynesian theory of creditary money, entrepeneurs write
out IOU's to banks, which CREDIT them with a bank deposit to the
amount of the newly created financial asset.  Entrepeneurs can then
SPEND that money paying, for example, Suppliers of Factor Services.

There is nothing in that which is in any conflict with Keynes'
description of saving.  When that payment is made, prior to
that income being used to pay for anything, it is saving, and
it remains saving until it is spent.  When it is spent, the
net saving is unchanged, by the location of the saving in the
system changes.

> For, insofar as the Output "growth" is concerned,

>  "savings" = Factor of the Economy's Work in Process.

Surely a model can be constructed in which total savings
at any point in time is equal to the dollar (value?/exended on?)
Work in Progress.  But if it is not at the time compatible with
Keynes' theory of saving, it is not compatible with our monetary
production economy, since the theory of saving is not based
on a simplified model of the economy, it is based on the
implications of the institutional rules governing the
economy.


> Curiously, the "banana economy" fable of his 'Treatise'

> reflected Keynes' grasp of this analytical point.

As many Post Keynesians have pointed out, the GT extended
some apects of the Treatise on Money reasoning, and supplants
some other aspects.


> Curiouser still, when I raised this point with Don Patinkin during a Q and A
> period following a lecture on the 'core' Keynesian GT model at the IMF in
> the early 1980s, Patinkin claimed not to recall the fable itself - "It was
> in the Treatise, you say?"


What makes this curious?  In the early 1980's, American "Keynesians"
who ignored the Treatise would have easily outnumbered those who
took it into account.