Lecture 4 ECON 460
Tuesday, September 18, 2012
Chapter 7: The Meaning of Saving and Investment Further Considered
Past writers, including Keynes, have not had S = I. Everyone agrees: Saving is the
excess of income over what is spent on consumption. The problem then is: What are
investment and income?
What do regular people mean when they talk about an “investment”? What’s
Keynes’ definition? (What’s your definition?) Why is he OK with the common
Regular people: buying stocks and bonds- buying title to existing asset;
Keynes’s talks about newly produced goods and services not being
consumed; he is ok with common definition because it all nets out- overall
buying and selling cancel out
Hawtrey: Is he concerned mainly with inventory cycles? How do such cycles involve
excess saving or investment? Why does Keynes think this isn’t a complete story?
Yes he is concerned with inventories;
Is Keynes fair to the Austrians?
Austrian intellectually; doesn’t say much about them and dismisses them
saying their story doesn’t say much
His argument in the Treatise: income of entrepreneurs their normal, not actual
profit. S > I means they don’t get normal profit and contraction takes place. But: “I
did not in that book distinguish clearly between expected and realized results.”
Expected returns to investment; nothing happens to overall amount that is
being produced; demand just changes from one side to another
If most investors are disappointed then there is consequences for economy
Importance of net disappointment of expectations
Robertson: Income = yesterday’s consumption plus investment. Saving = yesterday’s
investment plus yesterday’s consumption minus today’s consumption. What does Keynes think of that? From that perspective what can go wrong?
Keynes argues that his construction wasn’t bad; it makes sense because
income is generated by producing stuff and looking at it intertemporarily
In terms of saving equation- difficulty is that you may not replicate
consumption; 2 equations can be different because of different definitions of
saving; struggling with this notions because things may get wrong because
change of behavior
“Forced saving”? Hayek & Robbins. Money creation : Higher employment and output
: Higher saving. But is this “forced” saving? Need a definition of normal saving. Might
try: “Forced saving is the excess of actual saving over what would be saved if there
were full employment in a position of long-period equilibrium.”
Instead of forced saving you are more likely to end up with forced deficiency
Why, according to Keynes, is a “forced deficiency” of saving more likely?
Bentham: with “all hands being employed” additional investment requires reduction
Is this a problem at less than full employment?
Why does any extension of employment involve “some sacrifice of real income to
those who were already employed”? (How does always being on the demand curve
for labour come into play here?)
Downward sloping demand curve for labor
Why is it an “optical illusion” that saving can differ from investment? (“No-one can
save without acquiring an asset, whether it be cash or a debt or capital-goods...”)
Acquisition can only come from new investment or from someone else dis-saving by
selling an asset.
How do changes in output affect the distribution of income? (How is the demand
curve for labour involved here?)
So the “old-fashioned idea” that S = I is sound. “The error lies in proceeding to the
plausible inference that, when an individual saves, he will increase aggregate
investment by an equal amount.” Have to take into account his saving’s effect on
other people’s saving and wealth.
What is true for individual might not be true for everyone together “Every ... attempt to save more by reducing consumption will so affect incomes that
the attempt necessarily defeats itself.” Explain. Follows from the fact that “there
cannot be a buyer without a seller or a seller without a buyer.” Explain.
Individual can ignore follow-on effects of changes in his own demand but “it makes
nonsense to neglect it when we come to aggregate demand.”
Micro: “...we assume that changes in the individual’s own demand do not affect his
Chapter 8: The Propensity to Consume: I. The Objective Factors
Having carefully defined units in Ch 4, what units does Keynes use in his discussion
In terms of wage units in ch4
Ch 8- output
Explain the influence of the following “objective factors”:
1. A change in the wage unit. – bad
2. A change