Posted by: Dirk | August 30, 2017

Keynes on Savings and Investment

Geoff Tily in his paper on Keynes (pdf) has this quote (from the Collected Writings):

S = I at all rates of investment. Y either definable as C+S or as C+I. S and I were opposite facets of the same phenomenon they did not need a rate of interest to bring them into equilibrium for they were at all times and in all conditions in equilibrium. (CW XXVII, pp 388–9)

This is very enlightening. The “General Theory” also contained the issue of savings and investment, but the quote above nails it. There is no “supply” and “demand” for capital, hence savings and investment do not need anything to move so that there can be equilibrium.

From my point of view, this is one of the strongest rejections of neoclassical macroeconomics and it stands until this day. In a monetary economy, there is no “savings good” that needs to be produced before it can be “invested”. I = S “at all times” – there cannot be a disequilibrium between saving and investment.

What is correct on the national level must hence be correct on the international level. We cannot have global excess savings, since they are always equal to investment. Mario Draghi, when he said last year … (my highlighting)

It is this phenomenon – the global excess of savings over profitable investments – that is driving interest rates down to very low levels. And so the right way to address the challenges raised by low rates is not to try and suppress the symptoms, but to address the underlying cause.

… is wrong about the inequality of savings and investment on a global level. However, he is right in seeing low interest rates as a symptom and not the cause. Lack of aggregate demand is what has led to low rates of inflation, and hence low interest rates in order to stimulate demand.


  1. Keynesians ― terminally stupid or worse?
    Comment on Dirk Ehnts on ‘Keynes on Savings and Investment’

    Eighty years ago, Keynes got macro wrong and Keynesians did not notice it until this very day.

    Dirk Ehnts quotes Keynes: “S=I at all rates of investment.” and comments enthusiastically: “This is very enlightening. The ‘General Theory’ also contained the issue of savings and investment, but the quote above nails it. There is no ‘supply’ and ‘demand’ for capital, hence savings and investment do not need anything to move so that there can be equilibrium.”

    There is not better proof of the abysmal scientific incompetence of economists in general and of Keynesians in particular than S=I.

    Here is the evidence from the General Theory: “Income = value of output = consumption + investment. Saving = income – consumption. Therefore saving = investment.” (p. 63)

    This two-liner is conceptually and logically defective because Keynes did not come to grips with profit.

    “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al.)

    Because profit is ill-defined the whole theoretical superstructure of Keynesianism is false.#1 Let this sink in: Keynes had NO idea of the fundamental concepts of economics, viz. profit and income. Keynes, though, was not alone: “… one of the most convoluted and muddled areas in economic theory: the theory of profit.” (Mirowski) Fact is, the profit theory is false since Adam Smith. Economics is scientifically worthless since 200+ years.

    What has to be done is to replace Keynes’s false macrofoundations by the correct macrofoundations. The pure consumption economy is, for a start, defined by three macro axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw) and two definitions (monetary profit Qm≡C-Yw, monetary saving Sm≡Yw-C). The graphical representation is shown on Wikimedia.#2, #3

    It always holds Qm+Sm=0 or Qm=-Sm, in other words, at the heart of the monetary economy is an identity: the business sector’s deficit (surplus) equals the household sector’s surplus (deficit). Put bluntly, loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the Profit Law. It follows directly from the definition of the business sector’s monetary profit Qm≡C-Yw and the definition of the household sector’s monetary saving Sm≡Yw-C. From this immediately follows that Keynes’s foundational identity “Income = value of output” is false.

    For the investment economy, the profit equation reads Qm≡I-Sm. Legend: Qm monetary profit, I: investment expenditures, Sm monetary saving/dissaving. The business sector’s investment expenditures and the household sector’s saving/dissaving are completely independent and NEVER equal.

    There is no such thing as an equality of investment and saving, neither ex-ante nor ex-post, and there is NO such thing as an equilibrium of I and S. Keynes was too stupid to understand this, and After-Keynesians are even worse.#4

    Egmont Kakarot-Handtke

    #1 Why Post Keynesianism Is Not Yet a Science

    #2 Wikimedia, The pure consumption economy

    #3 For the detailed description see ‘How the intelligent non-economist can refute every economist hands down’

    #4 For more details see cross-references Refutation of I=S

  2. “There is no such thing as an equality of investment and saving, neither ex-ante nor ex-post, and there is NO such thing as an equilibrium of I and S. Keynes was too stupid to understand this, and After-Keynesians are even worse.#4”

    I disagree, and I don’t understand your claim because it comes without any argument. You just claim it does not exist. Fine. Do you refer to empirical facts or to theory? In both, I can clearly see that S and I exist.

    Regarding wording, how about: “saving is the accounting record of investment”? I find it immensely useful!

    What I don’t find useful is the inclusion of profits in macroeconomic models. Financial crises and their cures can be analyzed without, using aggregates. Of course, the question what drives investment needs to be attacked using the concept of profit, but that is a different question from what determines the level of unemployment, which was Keynes’ question in the GT!

  3. The fact that actual saving is identically equal to actual investment tells us no more than that actual apples purchased is identically equal to actual apples sold.

    Rather we need to consider that what determines the amount people want to save is not the same as what determines the amount others want to invest and that these desired quantities are not identically equal. The important question is what happens when they are not equal.

    The expected real rate of interest is in some sense the price of savings and so, in principal, changes in this expected rate might be able to reconcile desired saving and desired investment. In a barter economy, goods for current delivery can be traded for promises of the same goods for future delivery. The price that is agreed in this trade establishes a real rate of interest.

    The point about a monetary economy is that this trade does not take place – current goods are not traded for future goods, they are only traded for money. The real rate of interest is not part of the bargain between buyer and seller; rather it is the money price of the goods. Whilst changes in the money price of goods could possibly lead to a suitable change in the expected real interest rate, there is no guarantee that it will and good reasons to think that it might exacerbate the disequilibrium.

    The relevance of a monetary economy has nothing to do with the requirement for a “savings good”. Whether under barter or monetary exchange, investment cannot take place before the invested good has been produced. I = S at all times under barter as well.

    Under barter, if firms wished to increase investment, they could do so by paying workers with promises of future goods. There is no need for a “savings good” to be produced which someone then decides whether to invest or consume. That’s a straw man narrative.

    Whether firms were successful in financing investment this way would depend on whether they could get workers to accept such promises rather than current goods. The relevance of monetary exchange here is that all labour is paid for with a kind of promise of future goods, i.e. money. Labour is never paid for with current goods. The issue is therefore not about how firms bargain with workers, but about whether they can borrow the required money from the bank.

    • “The issue is therefore not about how firms bargain with workers, but about whether they can borrow the required money from the bank.”
      Please read my article again since your last sentence is in absolute agreement with it.
      Then, the savings good is a straw man how? Loanable funds theory says that savings finance investment. You need savings first before you invest. This is Ricardo. You need corn if you want to grow corn in the future. Here is Ricardo: “It is only by saving from income, and retrenching in expenditure, that the national capital can be increased;” Nothing about paying labour with future goods.

      • I know we are in agreement on the conclusion, but I think we differ on the reasoning. And I think it is important, because I see this line of argument a lot, but I don’t think it is an effective rebuttal of the neo-classical position.

        Loanable funds theory, as I understand it, does not say that “you need savings first before you invest”. Savings and investment must be equal at all times whether under barter or monetary exchange.

        Take the following scenario, which I think is along the lines of what you have in mind. Firms produce corn using labour and pay workers in corn. Workers then lend some corn to firms for investment and consume the rest.

        Corn that has been produced but not paid to workers is investment by firms in inventory. It is also savings of firms (income of firms less consumption). Corn paid to workers and not consumed becomes investment and savings of workers. If workers lend some of this corn to firms, it becomes savings of workers and investment of firms. At all times, aggregate savings and investment are equal. They cannot be otherwise. You cannot have savings preceding investment.

        Of course, you have to have actually produce corn before it can be used in production, but this is just as true in a monetary economy as under barter. It has nothing to do with savings and investment.

        In the scenario I described, workers lend corn to firms. This loan is an exchange of commodities. It is an exchange of corn today for a promise of corn at some specified future time and place. If it is provided that such promises of future delivery may only be exchanged for current delivery of the same goods then, sure, you have to have produced corn before you can lend corn.

        There are two points however. First, loans of corn are neither savings nor investment. They do not change the quantity of either. All they change is who it is that is investing.

        Secondly, if you limit the exchanges that can take place, by saying that future promises cannot be traded directly for labour, then you are not really describing a barter economy – you are describing what Clower calls a non-pure money economy. Most of the time, this distinction does not matter but here we are talking about the situation where one set of agents (workers) is saving and another (firms) is investing and whether this requires prior production and transfer of a “savings good”. The point here is that it does so only because of an implicit assumption you have made limiting the allowable exchanges, not because of anything implicit in barter.

        But again, I do think we agree on the conclusion.

  4. Thanks, I see your points. The first one seems to be more important than the second, but I agree with both.

    • Yes, the second point is a bit obscure and I probably shouldn’t have mentioned it.

  5. “What I don’t find useful is the inclusion of profits in macroeconomic models. ”

    Sorry for coming late, but may I ask why?

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