Keynes Summary of Chapter 7 - The Meaning of Saving and Investment

The purpose of The General Theory is to address the question as to what determines the employment of the available resources in the monetary-entrepreneur economy. It is the firm, as the entrepreneurs’ entity, which employs resources that is the key to addressing this issue. Keynes highlights profit as the motivating factor in this economy. He had to see demand from the sellers and buyers point of view and to go from the individual seller and the individual buyer to the economy as a whole. This involved Keynes establishing the exact relationship between an income (and hence savings and investment) and an output in any period.

The theory of the supply of output as a whole expressed in terms of the employment of the resources required to produce the output as a whole makes up the supply side of Keynes theory of employment. Based on the idea that firms undertake production to sell output at a profit to consumers and investors.

In order to formulate the demand for output as a whole Keynes separated the demand for goods and services into those purchased for consumption and those purchased for investment purposes.

Keynes placed expectations at the center of his analysis both of production and of investment. Time usually passes between the seller forming expectations and the buyer deciding to buy the output. For this reason the two aspects of demand may be different.

Income as a stream over time cannot be continuously used for immediate consumption purposes unless people are to live on a day to day basis. Part of current income is therefore set aside for immediate consumption and part for future production and consumption. To form his theory of the demand for output in terms of employment he measures consumption and income in terms of wage-units. Expenditure for consumption purposes comes directly out of income while expenditure for investment comes from past and present savings. The entrepreneur must incur certain costs in order to acquire capital for investment. It is necessary to pay a price for the commodity if it is being purchased from another entrepreneur or incur the costs of directly employed factors and of other inputs if the entrepreneur produces the capital himself. Taking this into consideration the entrepreneur must have access to the necessary financial means to pay for these outlays and must insure the expected yield is higher than outlay.

Income proper is equal to the value of output but when you take costs such as user costs into consideration it is based on net income that the entrepreneur decides what to spend on consumption. A persons ability to consume depends on his income and a decision to not consume now is seen as a decision to save. Saving allows the individual to have provisions in the future, the amount of this provision depends on the individuals time preferences.

Keynes only takes expenditure on newly produced output for investment purposes into account and proposes that the “exchange of old investments” and “creation and discharge of debts” cancels out when looking at the investment for the economy as a whole. Keynes proposes that investment has to be induced while he says that consumption is a “habitual propensity” limited by income. The inducement for investment is the expectations of a profitable return on the output rather than a desire to have output available for future consumption.

The point of effective demand for the firm is the point at which a particular level of production and employment offer the maximum attainable profit levels. Keynes and Robertson both take an increase of savings over investment to mean that income is falling even though they phrase it differently while an increase of investment over savings is said to induce entrepreneurs to increase both employment and output.

Obviously with a change in output and employment there will be a change in wage-units i.e. money wage of a labour unit and therefore distribution of this asset amongst borrowers and lenders. “Forced saving” needs to be compared against a standard rate of saving and Bentham when dealing with this concept was looking at an increase in the quantity of money and a full employment scenario.

Keynes believes the principle that saving always involves investment or there cannot be investment without saving to be a sounder view than there can be investment without saving. To show this he states no one can save unless they first own an asset or no one can acquire an asset unless someone parts with their asset or produces an asset of that value.

Saving and spending are two sided affairs. What one individual spends becomes another persons’ income and therefore allows that individual to save a part of his income. If one person consumes less to save more this affects the savings levels of another so the economy as a whole does not benefit from such actions. In regards to the monetary economy money is seen to affect motives and decisions. Keynes notes that the amount of money people hold is dependant on their incomes and prices of securities primarily which is seen as the natural alternative to money. Income, prices and the amount of money the bank creates are all interlinked and this is the main proposition of the monetary theory. Basic economic theory highlights the fact that there cannot be a buyer without a seller or vice versa. The individual looks at his demand as a one sided transactions where as in the case of formulating economic theory this is not the case for the aggregate.