Re: saving and finance and an answer to Basil Moore

["Edward J. McKenna" <ejmck@xxxxxxxxxxxx>]

> Hi Paul,
   I am not disagreeing with any of the ideas you have written below, and
what you have written is perfectly clear. What I am questioning is the use
of the word "saving" (which appears in your macro text, and again in
paragraph three below) in place of other terms (like non-consuming, which
you also use in paragraph three),to describe the same thing.What I am
suggesting is that whatever individuals do with the non-consumed part of
current income, whether it be holding liquid currency or other, less
liquid,assets, they are in fact not "saving" in the sense that Post
Keynesians have in mind when they say things like "investment is the cause
of saving". On taxonomic grounds, I am suggesting that the word "saving"
should not be used to describe what is done with the non-consumed part of
current income, since this word has already been reserved for another
category. Take care-Ed






At 03:10 PM 4/17/03 -0400, Ed wrote:
>>In reference to the "discussion" presently engaging Paul and Gunnar, I
>>have the following question. Given the Post keynesian view that
>>investment causes saving, and the distinction that is maintained
>>between saving and finance,isn't it misleading to make statements like
>>"when I save...' when referring to the acts of consumers? It seems more
>>accurate to say that what is really occurring is a decision to provide
>>liquidity, or perhaps more generally, to be part of the process that
>>supplies finance. Yet even Paul, in his textbook, refers to
>>individual's decisions as consisting of two parts, first how much to
>>consume and save (though he also refers to this as a decision regarding
>>how much will not be spent on currently produced goods and services),
>>and then the  form in which saving will be held. It seems to me that it
>>would help clarify the Post keynesian view if this was re-phrased as
>>:"first a decision must be made as to how much to consume and how much
>>liquidity to give up, then a decision must be made regarding the form
>>in which the relinquished liquidity will be held.That is, the use of
>>the term saving in this context only serves to create an illusory
>>connection between Post Keynesian and Neoclassical thought.
>
>
> No !. The decision of how much of one's income to consume is the first
> decision. As long as the average propensity to consume is less than
> unity--  this first decision will leave the household with a RESIDUAL
> sum of funds  that is equal to nonconsumption.  THIS FIRST DECISION IS
> WHAT CLASSICAL  ECONOMISTS CALL THE TIME PREFERENCE DECISION because it
> involves the  household in deciding what proportion of income to spend
> (to consume) on  the products of industry THIS PERIOD i.e., what
> proportion of income the  household has a TIME PREFERENCE of consuming
> in the current period.
>
> If there is a residual then the household faces  a SECOND decision --
> in  what form of TIME MACHINE (ie., what store of value) should the
> household  store that portion of today's non consumed income. This
> second (and  independent) decision was called , by Keynes, LIQUIDITY
> PREFERENCE [  thereby providing a symmetry in nomenclature to the
> classical time  preference concept].
>
> Obviously hand-to hand currency is, by definition of legal tender, the
> most  liquid of all possible TIME MACHINES. Any other time machine
> chosen to hold  means the saving (nonconsuming) household
> has given up some liquidity and therefore receives a payment (the rate
> of  interest?) for parting with liquidity.  The  less liquid a time
> machine is  expected to be  [i.e., the more difficult it is expected to
> be convert into  legal tender instantaneously without costs] the more
> the non-consuming  (saving) household requires in the form of payment
> to choose that time  machine as a store of value.
>
> But What about BANK DEMAND DEPOSITS? Basil asks. Aren't they as liquid
> and  legal tender hand-to-hand currency for settling "all debts public
> and  private", and yet one can receive interest on one's ban deposit!
> Well not  quite -- as anyone knows who has tried to pay a cab fare in
> New York with a  bank check --  or purchase a Hot Dog from a street
> vendor.  And, believe it  or not some merchants, even in this day and
> age, will not accept one's  personal check. [I have never place an OTB
> bet in NYC -- or purchased a  lottery ticket -- but I suspect that, in
> most cases, even these simple  transactions require Cash -- and not a
> bank demand deposit.
>
> but for institutional reasons, bank demand deposits  -- which are
> liabilities (debts) of private  legal individuals that we call banks
> --  are usually acceptable to settle a contractual commitment --and
> hence bank  deposits are almost as good as currency (and for safety
> sake may even be  better) and hence bank deposits tend to have the
> lowest rate of return of  all possible liquid time machines.
>
> all of this is explained in MORE DETAIL in my book POST KEYNESIAN
> MACROECONOMIC THEORY.
>
> Finally Ed lending liquidity to a borrower may in your lingo finance
> that  borrower's purchase -- but for taxonomic clarity  in my book I
> limit the  term finance to the typical use of bank credit to "finance"
> the production  of working capital goods --  and the term "funding" to
> the use by borrowers  of obtaining liquidity for some "final" goods [in
> the NIPA accounting  terminology]  where the liquidity is to be
> returned at specific dates --  usually a significant time in the
> future.
>
> I hope this oversimplified view is understandable -- otherwise see my
> books  on the difference between finance and funding.
>
> Paul
>
>
>
>
> Paul Davidson
> Editor, Journal of Post Keynesian Economics
> Economics Department - 523 SMC
> University of Tennessee
> Knoxville, Tennessee 37996-0550
> phone # (865) 974-4221
> fax # (865) 974-1686
> home phone  (865) 692-0802
> http://econ.bus.utk.edu/davidsonextra/Davidson.html