University of Massachusetts Amherst
"Saving"
POLITICAL ECONOMY
RESEARCH INSTITUTE
POLITICAL ECONOMY RESEARCH INSTITUTE
Robert Pollin
2002
10th floor Thompson Hall
University of Massachusetts
Amherst, MA, 01003-7510
Telephone: (413) 545-6355
Facsimile: (413) 545-2921
Email:peri@econs.umass.edu
Website:
http://www.umass.edu/peri/
WORKINGPAPER SERIES
Number 31
1
Entry on “Saving” for
John King, Editor,
The Elgar Companion to Post Keynesian Economics
Robert Pollin
Department of Economics and
Political Economy Research Institute
University of Massachusetts-Amherst
Amherst, MA 01002, USA
January, 2002
What is the relationship between saving behaviour in capitalist economies and their
macroeconomic performance? This question is a hardy perennial in the history of economics, and
one that has carried great theoretical and practical significance through its many revivals. It is
easy to see why this is so, since any economy that aspires to long-term increases in productivity
and average living standards must devise effective means of raising the quantity and quality of its
capital stock. The role of saving is central to this process, though how exactly it exerts influence
has long been a matter of contention.
Debates on how saving behavior affects long-term growth and business cycles stretch
back to those between Ricardo and Malthus on whether Say’s law of markets that ‘supply creates
its own demand’ can be violated, thereby creating the possibility for ‘general gluts’ or
depressions. The Keynesian revolution, of course, was also focused on this issue, as Keynes
rebelled against the 1934 ‘Treasury View’ that higher saving rates were a necessary precondition
for stimulating investment and lifting the British economy out of depression. Arguing against the
intuitively appealing notion that an adequate pool of saving must exist before the funds for
investment can be drawn, Keynes and Richard Kahn developed the concept of the multiplier to
demonstrate the counterintuitive point that higher levels of saving will generate higher saving as
well. Many of the most pressing policy concerns of today remain centered on the relationship
between saving and macroeconomic performance.
What is saving? The answer is not obvious. Moreover, answering the most basic
questions about the impact of saving on macroeconomic activity—including whether saving rates
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are rising or falling—depends on how one defines and measures the term (this discussion follows
Pollin 1997b). Two standard approaches to measuring saving are as an increase in net worth and
as the residual of income after consumption. As accounting categories, these two saving
measures should be equal in value. But making this distinction raises a major question: when
one considers the category of asset-specific saving, should the value of assets be measured at
historical costs or market values? Only the historical cost measure is equivalent conceptually to
residual saving. Measured at market values, asset-specific saving will of course fluctuate along
with fluctuations in asset prices themselves.
Another major issue is distinguishing gross saving, including depreciation allowances,
and net saving, which excludes depreciation. In principle, net saving measures the funds
available to finance economic growth, while gross saving would also include funds set aside for
replacing worn out capital stock. In practice, however, depreciation allowances do not simply
finance replacement. Rather, they are primarily used to finance investment in capital stock that
represents some advance over previous vintages. As such, depreciation funds are also utilized to
promote economic growth.
What is the most appropriate definition of saving? In fact, for the purposes of economic
analysis, there are legitimate reasons to examine each concept. There are three basic purposes for
considering saving patterns by any measure. The first is to observe households’ portfolio choices,
in which case asset-specific saving is obviously the only option. The second purpose would be to
understand consumer behavior. Here we would want to measure consumption directly relative to
income, making saving a residual. However, asset-specific saving at market values would also be
important here insofar as it contributes to understanding consumer behavior. The third reason for
measuring saving is with respect to examining its role in determining credit supply, i.e. the source
of funds available to finance investment and other uses of funds. This role for saving is clearly
the primary consideration among analysts seeking to understand the relationship between saving
and macroeconomic performance. In fact, however, the connections between any given measures
3
of saving, the provisioning of credit, and overall rates of economic activity are quite loose. We
can see some indication of such loose connections through the table below on the U.S. economy.
TABLE BELONGS HERE
The first three rows of the table show annual figures on net, gross and net worth saving in
the U.S. relative to nominal GDP between 1960 – 2000. The data are grouped on a peak-to-peak
basis according to National Bureau of Economic Analysis business cycles. The last two rows of
the table show, respectively, measures of credit supply and overall activity: first the ratio of total
lending in the U.S. economy relative to gross private saving, then the average annual growth rate
of real GDP.
To begin with, the table shows substantial differences in the cycle-to-cycle behavior of
the three saving ratios. For example, between the 1970s and 1980s cycles, the net saving ratio
fell from 9.8 to 8.9 percent, the gross saving ratio rose from 18.4 to 19.1 percent, and the net
worth ratio fell from 39.5 to 32.4 percent. Meanwhile, between these same two cycles, the
lending/saving ratio rose sharply from 86.9 to 106.1 percent, while the rate of GDP growth fell
from 3.3 to 2.9 percent.
At the very least, one can conclude from these patterns that we cannot take for granted
any analytic foundation through which we assume a simple one-way Pre-Keynesian causal
connection whereby, as James Meade (1975) put it, ‘a dog called saving wagged its tail labeled
investment’ instead of the Keynesian connection in which ‘a dog called investment wagged its
tail labeled saving.’
The pre-Keynesian orthodox view held that the saving rate is the fundamental
determinant of the rate of capital accumulation, because the saving rate determines the interest
rate at which funds will be advanced to finance investment. Keynes’s challenge to this position
constituted the core of the ensuing Keynesian revolution in economic theory. Nevertheless, what
we may call the ‘causal saving’ view was nevertheless restored fairly quickly to its central role in
the mainstream macroeconomic literature.
4
Despite neglect among mainstream economists, the ‘causal investment’ perspective has
advanced substantially since the publication of Keynes’s General Theory (1936). One major
development has been precisely to establish a fuller understanding of the interrelationship
between saving, financial structures, and real activity. This has brought recognition that the logic
of the causal investment position rests on the analysis of the financial system as well as the realsector multiplier-accelerator model.
Of course, the multiplier-accelerator analysis is the basis for the ‘paradox of thrift’, that
is, low saving rates (saving as a proportion of income) can yield high levels of saving and vice
versa when real resources are not fully employed. However, considered by itself, the multiplieraccelerator analysis neglects a crucial prior consideration: that the initial increment of
autonomous investment must be financed, and the rate at which financing is available will
influence the size of this investment increment and the subsequent expansion of output, income
and saving.
Kaldor (1960) was an early critic of the multiplier-accelerator causal investment position,
and his argument was revived by Asimakopulos (1983). Their critique focuses on the interim
period between an autonomous investment increase and the attainment, through the multiplieraccelerator process, of a new level of saving-investment equilibrium. The Kaldor-Asimakopulos
position is that, as a general case during such interregnum periods, intermediaries could not be
expected to accept a reduction in liquidity without receiving an interest rate inducement to do so.
Rather, for intermediaries to supply an increased demand for credit would require either a rise in
interest rates or a prior increase in saving. As such, low rates of saving again yield high interest
rates and a dampening of investment—an argument, in other words, that returns us to the causalsaving position.
In fact, Keynes himself addressed this issue, working from his theory of liquidity
preference and interest rate determination. But this dimension of his argument is far less well-
5
known than the consumption function and multiplier analysis, at least in part because it is less
fully developed in the General Theory itself.
Holding the level of saving constant, Keynes argued that the banking system—private
institutions as well as the central bank—was capable of financing investment growth during the
interregnum period without necessarily inducing a rise in interest rates. That is, as he put it, ‘In
general, the banks hold the key position in the transition from a lower to a higher scale of
activity,’ (1973, p. 222). Keynes based his position on a central institutional fact, that private
bansk and other intermediaries, not ultimate savers, are responsible for channeling the supply of
credit to nonfinancial investors. The central bank can also substantially encourage credit growth
by increasing the supply of reserves to the private banking system, thereby raising the banks’
liquidity. But, even without central bank initiative, the private intermediaries could still increase
their lending if they were willing to accept a temporary decline in their own liquidity. The reason
the that the fall in intermediaries’ liquidity would be only temporary is that liquidity would rise
again, even before the completion of the multiplier, when the recipients of the autonomous
investment funds deposited those funds with an intermediary. Moreover, the completion of the
multiplier process would mean that an increase in saving equal to the investment increment had
been generated. Overall, then, it is through this chain of reasoning that Keynes reached what he
called ‘the most fundamental of my conclusions within this field,’ that ‘the investment market can
become congested through a shortage of cash. It can never become congested through a shortage
of saving,’ (1973, p. 222).
This more fully developed Keynesian position emphasizes clearly the central role of
financial institutions in establishing the relationship between saving and macroeconomic activity.
More recent literature has developed this idea in several directions (see the contributions in Pollin
1997a). Other researchers have broadened further this investigation as to the relationship
between saving, institutional structures and macro activity. Indeed, in the 1990s a substantial
literature developed arguing that financial systems that channeled savings within a tighter
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regulatory structure tended to outperform economies in which capital markets operated more
freely (Pollin 1995 reviews this literature). Countries categorized as having more tightly
regulated ‘bank-based’ financial systems were Germany, France, Japan and, among the less
developed Asian countries, South Korea. The U.S. and U.K. represented the less regulated
‘capital marked-based’ system. But by the mid-1990s, the debate over the relative merits of these
systems was short-circuited by two factors: first the stock market bubble in the United States,
which lent temporary credence to the idea that capital-market based systems could operate more
effectively; and second, the global ascendance of neoliberal economic policies in economies such
as Japan, France and Korea, contributing, in turn, to greater economic instability in these
economies in the late 1990s. But a restoration of this line of research on alternative financial
institutional environments will be critical for developing new policy regimes that can promote
more stable as well as more egalitarian growth prospects.
More broadly within the realm of policy, there always have been clear important
normative issues at play in the debates over saving behavior. The agenda following from a causal
saving perspective consists of seeking to raise national saving rates through measures such as
providing preferential tax treatment to capital income, eliminating government deficit spending.
or even paying off completely outstanding government debts. These will normally also generate
a less equal distribution of income. Building from a causal investment analytic framework points
to policy approaches that directly encourage higher investment while also promoting egalitarian
distributional outcomes. Such measures would include increasing aggregate demand and
employment through fiscal and monetary interventions or more equal income redistribution, or,
through various institutional reforms, giving preferential access to credit for productive private
investment relative to unproductive speculative expenditures. The policy ideas that flow from a
causal investment perspective are committed to utilizing most effectively the interconnections
observed in research between growth, stability, and distributional equity.
7
References
Asimakopulos, A. (1983) “Kalecki and Keynes on Finance, Investment and Saving,” Cambridge Journal of
Economics, 7, pp. 221-33.
Kaldor, Nicholas (1960) “Speculation and Economic Activity,” (1939) in Essays on Economic Stability and
Growth, London: Gerald Duckworth & Co. Ltd., pp. 17-58.
Keynes, John Maynard (1936) The General Theory of Employment, Interest, and Money, New York:
Harcourt Brace.
Keynes, John Maynard (1973) “The ‘Ex Ante’ Theory of the Interest Rate,” (1938) in The Collected
Writings of John Maynard Keynes, vol. 14, London: Macmillan.
Meade, James (1975) “The Keynesian Revolution,” in M. Keynes ed., Essays on John Maynard Keynes,
Cambridge, UK: Cambridge University Press.
Pollin, Robert (1995) “Financial Structure and Egalitarian Economic Policy,” New Left Review, NovemberDecember, pp. 26-61.
Pollin, Robert ed. (1997a) The Macroeconomics of Saving, Finance and Investment, Ann Arbor MI:
University of Michigan Press.
Pollin, Robert (1997b) “Financial Intermediation and the Variability of the Saving Constraint,” in R. Pollin
ed., The Macroeconomics of Saving, Finance and Investment, Ann Arbor MI: University of
Michigan Press, pp. 309-366.
8
Saving Rates, Credit Supply and GDP Growth for the U.S. Economy
(in percentages)
1960-69
1970-79
1980-90
1991-2000
Net Private
Saving/GDP
9.6
9.8
8.9
6.3
Gross Private
Saving/GDP
17.1
18.4
19.1
16.4
Net Worth Private
Saving/GDP
25.2
35.2
32.4
30.5
Total Lending/
Gross Private
Saving
60.5
86.9
106.1
106.4
Real GDP Growth
4.4
3.3
2.9
3.2
Sources: U.S. National Income and Product Accounts; U.S. Flow of Funds Accounts.
Note: For brevity, two sets of cycles—1970-73/1974-79 and 1980-81/1982-90—have been merged.