Re: saving and finance and an answer to Basil Moore

["Gunnar Tomasson" <gunnar.tomasson@xxxxxxxxxxx>]

Ed:

In the context of Creditary Economics, there is no question "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."

Specifically, "saving" denotes the factor content of the economy's Work in
Progress - a proposition which is reflected in those parts of the General
Theory where, as noted by Paul Samuelson in his 1939 paper on 'The Rate of
Interest Under Ideal Conditions', Keynes reasoned (correctly) that the
"value" of the economy's work in progress could ONLY change through Net
Factor Investment therein.

In other parts of the General Theory - specifically in his definition in Ch.
6 of "saving = income - consumption" - Keynes adopted a different concept of
"saving".  In this respect, I construe his introductory comments in Ch. 6 -
"Amidst the welter of divergent usages of terms, it is agreeable to discover
one fixed point.  So far as I know, everyone is agreed that *saving* means
the excess of income over expenditure on consumption." - as clear-cut
evidence of conceptual confusion on his part.

For "saving" in this second sense is part of Factor Income received in
exchange for Supply of Factor Inputs ("saving" in the first sense) to the
economy's Work in Progress.  In the real world, of course, "saving" out of
Factor Income is routinely used to finance NEW Factor Investment as well as
Final Consumption.

The same is true of "bank credit" - a fact which throws a monkey-wrench into
any attempt to formulate a coherent "liquidity-preference" theory of
interest valid for the supply of liquidity to Consumers and Entrepreneurs
alike by BOTH banks and Factor Income Recipients.

Gunnar




----- Original Message -----
From: "Edward J. McKenna" <ejmck@xxxxxxxxxxxx>
To: <pdavidson@xxxxxxx>
Cc: <ejmck@xxxxxxxxxxxx>; <pkt@xxxxxxxxxxxxxxxx>
Sent: Thursday, April 17, 2003 8:18 PM
Subject: Re: saving and finance and an answer to Basil Moore


> > 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
>
>
>
>