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In "The General Theory of Employment, Interest and Money", Chapter 6 The Definition of Income Saving and Investment, John Maynard Keynes says:

Income = value of output = consumption + investment.
Saving = income - consumption.
Therefore saving = investment.
[...]
The equivalence between the quantity of saving and the quantity of investment emerges from the bilateral character of the transactions between the producer on the one hand and, on the other hand, the consumer or the purchaser of capital equipment.

And in Chapter 7 The Meaning of Saving and Investment Further Considered says:

In the previous chapter saving and investment have been so defined that they are necessarily equal in amount, being, for the community as a whole, merely different aspects of the same thing
[...]
Thus the old-fashioned view that saving always involves investment, though incomplete and misleading, is formally sounder than the new-fangled view that there can be saving without investment or investment without 'genuine' saving.

In fact, all chapter 6 and 7 is about that saving is equals to investment. But later, in other chapters, when Keynes talk about lack of investments or to much liquidity-preference, it sounds like really there are some savings that not involves investment. Morover, in Chapter 23 Notes on Mercantilism, the Usury Laws, Stamped Money and Theories of Under-Consumption says:

It is impossible to study the notions to which the mercantilists were led by their actual experiences, without perceiving that there has been a chronic tendency throughout human history for the propensity to save to be stronger than the inducement to invest. The weakness of the inducement to invest has been at all times the key to the economic problem.

But if saving is equals to investment, then don't matter the supposed difference between propensity to save and inducement to invest.

In general, I find very confusing all passages of this book about investment because some time looks like investment and saving are the same (so there can't be saving without investment and can't be investment without 'genuine' saving) and others times looks like invest and saving are differents (so there can be saving without investment or investment without 'genuine' saving).

Can someone clarify this concepts according Keynes "The General Theory of Employment, Interest and Money"?

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1 Answer 1

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In Keynesian economics, the equation S=I represents a state of equilibrium in the economy where Savings (S) are equal to Investment (I). This is a simplified way to describe how an economy reaches a stable state, assuming that all savings are invested and all investments are financed by savings.

Context in Keynesian Economics

Savings (S): In Keynesian economics, savings are what is left after households consume out of their income. Savings are influenced by factors like interest rates, income levels, and consumer confidence. ($Y disposable = C + S$)

Investment (I): Investment refers to the spending on capital goods that will be used for future production. This includes things like machinery, infrastructure, and technology. Investment is influenced by factors like interest rates, business confidence, and government policy.

In a simple closed economy without government, the equation would be:

$$C+S=C+I$$

Here, C+S represents the total income, which is either consumed (C) or saved (S). On the other side, C+I represents the total spending, which is either on consumption (C) or investment (I). Then, if you subtract C from each part, you will get that $$S = I $$in a closed economy without the government.

If you add the government sector,

$$ C + S + T (Taxes) = C + I + G (GovRevenue) $$

where assuming budget balance (G = T), you will again get that S = I.

A similar logic follows with the trade, if you assume that net exports (Xn) are zero if X – M = 0 (exports = imports).

All of the above should be true in equilibrium (steady state) and when all agents (households, firms, government) make optimal decisions about consumption, investment, spending, etc.

I would interpret the last statement about “the propensity to save to be stronger than the inducement to invest” as referring to the so-called “transition dynamics”, how agents act while trying to reach equilibrium and stating that there might be suboptimal decisions and that there is room for intervention (Keynesian approach) to solve what Keynes seems to refer to as the “main economic problem”.

That said, I’m not a macro-economist, but that’s how I would reconcile these contradictions with an intuition that they should be equal in equilibrium, but might not be equal during the transition to equilibrium and this might be where economic crises and market failures might be related.

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