Chapter 7. The Meaning of Saving & Investment Further Considered

I
Saving and Investment are defined as equal in amount. Investment, defined includes the increase of capital equipment, whether it consists of fixed capital, working capital or liquid capital.

II
Hawtrey suggests that an excess of saving over investment would be the same as an increase in liquid capital. Keynes prefers to emphasise the total change of effective demand and not just the changes in liquid capital i.e. unsold stocks in the previous period as Mr. Hawtrey does. Hawtrey’s method in the case of fixed capital ignores that changes in unused capacity corresponds to changes in unsold stocks, which effects decision to produce. Keynes makes reference to the vagueness of capital consumption and capital formation used by the Austrian School of Economists and says they are not identical to his definition of investment and disinvestment (disinvestment - sale of an investment as being negative investment).

III
Keynes acknowledges that his new argument is much better than his argument in Treatise on Money where he didn’t distinguish clearly between expected and realised results. Keynes new argument is that the expectation of an increased excess of investment over saving, given a volume of employment and output will lead entrepreneurs to increase the volume of employment and output. Any changes in the expected levels of investment over saving will motivate firms to raise the volume of employment and production. Therefore the volume of employment is determined by expected demand or an expected increase of investment over saving.

Robertson proposes an alternative attempt at defining saving and investment. From his definition an excess of saving is exactly equal to the decline of income in Keynes sense.

IV
The definition of “forced saving” is a measure of changes in the quantity of money or bank-credit and consequently it is found that “forced saving” has no distinct relationship to the difference between investment and saving. However it is difficult to distinguish between “forced saving” and any other changes in saving unless the amount saved in certain given conditions is given as a standard. “Forced saving” needs a specified standard rate of saving, for example - full employment.

V
Keynes emphasises that investment and saving are a two-sided transaction. People exercise their ‘free choice’ as to the proportion in which they divide their increase of income between saving and spending. The aggregate saving of an individual and of others taken together must be equal to the amount of current new investment.

Keynes elucidates three effects of credit:
1. increasing output.
2. marginal returns on that output increasing.
3. rising wages.
These may affect the distribution of real income between different groups.
Keynes concludes that the old-fashioned view that saving always involves investment is formally sounder that the view, that there can be saving without investment or investment without saving.

The mistake people make is thinking that when an individual saves, he will increase aggregate investment by an equal amount. It is true that when an individual saves he increases his own wealth but the conclusion that he also increases aggregate wealth fails to allow for the possibility that an act of individual saving may react on someone else’s saving and hence on someone’s else’s wealth.

Therefore incomes and prices change until the aggregate amount of money that individuals choose to hold at the new level of incomes and prices is equal to the amount of money created by the banking system.

This is the fundamental proposition of monetary theory. There cannot be a buyer without a seller or a seller without a buyer.