Re: Keynes And The Concept Of Saving

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

Esteban:

No - the confusion is rooted in Keynes' failure to make "technical monetary
detail" part of his analysis rather than let it "fall into the background,"
as he put it in his Preface.

At one level of abstraction - that is, when one does not probe into
associated "technical monetary detail" - there is no problem with the
concept of "savings" spelled out by Keynes 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."

However, when one does probe into associated "technical monetary detail",
one immediately encounters the point addressed by Samuelson in 'The Rate of
Interest Under Ideal Conditions'.

Namely, the analytical proposition IMPLIED by Keynes in parts of his book
that the "value" of the economy's work in progress can ONLY change through
change in its NET factor content.

Samuelson did NOT address this proposition on its merits; instead, he
professed to "believe" that it was "demonstrably true" that Keynes had
gotten himself mired in some kind of Zeno's Paradox.

Nor did Samuelson EVER offer any such 'demonstration' - instead, his student
Klein returned to the fray in 'The Keynesian Revolution' and, rather than
take aim at Keynes, chose to address the point at issue in the context of
remarks made by Pigou in his review of the General Theory which accorded
with the view implied by Keynes and challenged by Samuelson in his paper.

This is how Klein put what, presumably, is the 'demonstration' which
Samuelson had in mind:

"...Pigou did not understand how Keynes could take the stock of capital as
given for the short run and then speak of a non-zero rate of investment.
[This recasts and obfuscates the point at issue - insert]  He had in mind
the fallacious argument that if capital is regarded as given, then it can
have no rate of change other than zero.  However, those acquainted with the
simplest concepts of the differential calculus know quite well that a
variable can be given for each point of time and yet have a positive or
negative rate of change over time."

In the context of Samuelson's earlier approach to the point at issue,
Klein's 'demonstration' reduces to this:

The "value" of factor services X, Y, and Z invested in the economy's work in
progress CAN change without any concurrent change in X, Y, and Z.

There is method in their madness - for IF it were otherwise, THEN
Samuelson/Klein would have to concede Schumpeter's point that NON-zero
interest on production credit is a SOCIO-ECONOMIC rather than a purely
economic phenomenon.

A simple numerical example may help clarify the Keynes/Pigou viewpoint.

1.  Let the "value" of the economy's work in progress increase by $100 in
some period.

2.  Thus, the "income" of Suppliers of Factor Inputs will increase by $100.

3.  Also, "consumption" will fall short of "income" by $100.

4.  Hence, "Saving = income - consumption" and "Therefore saving =
investment," as noted by Keynes.

5.  That is to say, "Therefore saving = investment = net supply of factor
services."

Here is the point:

The ONLY coherent concept of "savings" is one that equates it to "net supply
of factor services".

This has important real-world implications - briefly,

(a) it stands The Washington Consensus on its head insofar as "savings" and
interest rate policy is concerned;

(b) it exposes as analytically incoherent any proposition to the effect that
shortage of "savings" can ever stand in the way of full factor employment;
and

(c) it does the same for any and all theories which attempt to rationalize
on economic rather than socio-economic grounds interest on production credit
over and above its factor supply cost.

Gunnar




----- Original Message -----
From: "Esteban Perez" <eperez@xxxxxxxxxxxx>
To: <gunnar.tomasson@xxxxxxxxxxx>
Sent: Saturday, April 26, 2003 8:41 AM
Subject: Re: Keynes And The Concept Of Saving


Gunnar,

Pigou wrote: ´A decision to have one´s teeth extracted is not in itself a
decision to have false ones. But few people in fact make the first decision
without also making the second´.

Is this what you mean when you say that Keynes was confused about savings
(that a decision not to consume is automatically a decision to save)?.

Thanks.

Esteban

<<< "Gunnar Tomasson" <gunnar.tomasson@xxxxxxxxxxx>  4/25  3:42p >>>
Dear Gang:

In light of Paul Davidson's recent suggestion that my challenge to his
interpretation of key aspects of Keynes' General Theory reflects failure on
my part to "understand" relevant "facts" of the matter, I am re-posting to
Gang8 the message below which I posted to PKT a few days ago.

The proposition that Keynes was confused on the concept of "saving" is not a
new one - if memory serves me right, Pigou made the like point in his review
of the General Theory as did Paul Samuelson in two key papers, (a) 'The Rate
of Interest Under Ideal Conditions' in 1939, and (b) his July 1947
Econometrica memorial article on Keynes.  And, of course, so has Geoffrey
both on and off Gang8.

The point is an important one for, if the Pigou-Samuelson-Gardiner-Tomasson
critique is justified, then it follows that Keynes' General Theory was
infused with conceptual confusion from the very outset - a "fact" which
Davidson has yet to "understand".

Gunnar


My PKT message:

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