Policy Research in Macroeconomics

Savings are NEVER needed for investment

With acknowledgement to  PublicDomainPictures. 

With acknowledgement to PublicDomainPictures. 

Yesterday I spoke to a group of important economists about my book The Production of Money – but omitted to make one important point. So am making it here. 

Savings are not needed for investment. Ever. There is absolutely no need for example, for the Chancellor to rattle the tax collection box, or cut government spending – to build up savings, before the government is able to invest. No need whatsoever. 

To understand why, think of your own investments. When you (and I am assuming you are not a Saudi princess) set out to buy a new home that costs say £500,000 – you do not have that money in your bank account. You may have some savings for a deposit – a downpayment on your commitment to pay. But you do not have £450,000 in your bank. All you have is a contract. A Promise To Pay. That promise – its called money – may deliver a new roof over your head, somewhere secure to live, and perhaps a place to expand your family. 

Its the same when you travel to a white goods store to buy a washing machine. All you have is your credit card. If you’re a regular gal (or guy) there is no money for the machine in your credit card account. All you have is a card which effectively says: the bank thinks that ……..(insert name here) will uphold a Promise To Pay.  You hand over your card, the seller of the washing machine stamps and acknowledges it, and then – she hands it back to you. You have not engaged in barter. You have not handed over any money. 

Instead you have handed over your Promise to Pay. And that is what we call ‘money’. 

Its a wonderful thing. It gives you purchasing power (that is, if your bank trusts your Promise To Pay). And it gives the white goods store a sale. That helps the store make a profit, and probably helps the store or washing machine factory to employ a new member of staff. 

Of course the important thing is that you, the buyer must have income. And for most of us, that means having a job – because employment generates income. Not just for you, but also for the Chancellor (in the form of tax revenues). 

The Chancellor of course, has the biggest credit card of all. Not only is he backed by British employees – but he is virtually guaranteed income from 31 million taxpayers. And so his ‘credit card’ – gives him enormous powers of expenditure. Powers to purchase infrastructure, like flood defences against climate change, but infrastructure that is both social and capital investment. But investing the Chancellor is helping to create jobs (many in the private sector) which, hey presto – provides him with even more (tax) income from construction workers, nurses and teachers. 

That is the magic of the Magic Money Tree. 

2 Responses

  1. Its just not true that savings are not needed prior to investment. Think of Robinson Crusoe on his island. His first requirement is to meet his necessary consumption requirements. If he only ever has sufficient labour-time to be able to produce just what is required as his minimum requirement for his reproduction, he will never have sufficient labour-time available to be able to "invest" labour in increasing his means of production.

    Moreover, even if he does have surplus labour-time over this minimum required for his reproduction, h has a choice of what to do with it. He might have a lazy day, he might use his surplus labour-time to increase his revenue, i.e. to increase his use of labour-time to produce additional consumption of some sort, which again would act in now way to increase his means of production, i.e. to act as "investment".

    A fundamental requirement for hims to be able to "invest" is that he both has surplus labour-time so as to be able to produce a surplus product, and secondly that he uses that surplus product, as a form of saving so as to be able to use it as investment in "capital", in additional means of production. He might, for example, use the surplus labour-time to produce a fishing rod, so that although he cannot consume the fishing rod, it is not revenue, but "capital", it enables him to produce more fish in following days. Alternatively, he may use the surplus labour-time to produce a surplus product in the form of revenue that can be hoarded rather than consumed immediately, i.e. it can be saved. If, for example, he produces more fish than he needs to consume today, this might enable him to not fish tomorrow, which means he can use the labour-time he would have used for fishing tomorrow to produce a fishing rod, or to build animal pens.

    Either way, for investment to occur, saving is required, and that saving takes the form of the production of a surplus product, as a result of the existence of surplus labour, and the utilisation of that surplus product to increase the quantity of means of production available. In fact, it means that the surplus product itself must take the form not of means of consumption but of means of production, because without a portion of available labour-time being used to produce these means of production rather than means of consumption the required products do not exist.

    If we take someone buying a house, houses can only be bought, because society has sufficient surplus labour-time, over and above what is required for human reproduction, i.e. that labour-time is not required for hunting and gathering etc., that a section of society can be released from such activity, and instead be able to spend all of their labour-time building houses, which they can then exchange with those who have used their labour-time hunting and gathering (or in settled agriculture) who provide them with the food they require.

    A fundamental requirement, as the Physiocrats realised, and as Marx took from them, is that those engaged in agriculture, must be able to produce more than they require for their own reproduction, so that a section of society is released from the land to engage in the production of other commodities. It means the surplus is used to be able to produce the means of production for this additional range of commodities to be developed.

    Every society beyond the most basic overproduces in this way, and the overproduction is saved, and transformed into means of production, which in turn enables total production to be expanded. What is true is that capitalism does not require "savings" in the sense that the Austrians envisage it. Profit itself, is by definition "savings", because it is the money form of the surplus product that workers have created. Workers have already "saved" by producing profits, by overproducing beyond what is required for their own reproduction, and that overproduction is appropriated as profits by capital, available for investment.

    What is significant is what happens to this saving. Is it, for example, consumed unproductively as revenue by the recipients of rents, dividends, interest and taxes as Adam Smith, David Ricardo and Marx feared, or is it used productively to increase the amount of means of production available, which the introduction of socialised capital makes possible, provided the associated producers have control over that socialised capital, rather than the representatives of shareholders and other creditors.

    Its why Labour should scrap Corporation Taxes, alongside changing the laws of corporate governance to remove shareholders right to elect Boards of Directors or otherwise determine company policy, and should instead make Boards of Directors directly elected by the workers and managers within the company. The then profits produced by the workers would be all available for accumulation, with shareholders only getting a competitively determined dividend, as the interest on the money they have lent to the company. And, having scrapped Corporation Taxes, Labour should commit to taxing more heavily all unearned income such as dividends, rents and interest, as well as heavier capital gains taxes.

  2. The idea that savings are “never” required to pay for investments just ain’t true. Assuming the economy is at or near capacity (and to judge by inflation that’s where the UK economy would seem to be at the moment), the economy will not be able to cope with the extra demand stemming from the extra investment spending. Ergo some sort of deflationary measure must be imposed to counteract that inflation, e.g. a rise in tax or a rise in interest rates.

    As MMTers keep pointing out, the purpose of tax is not to fund government spending: the purpose is to combat inflation. That’s an unconventional way of looking at tax, but it’s a far from wholly invalid way of looking at it.

    In contrast to where the economy is at or near capacity, if it’s nowhere near capacity, then it’s true that the state can fire ahead and spend more (on investment or indeed current spending) without collecting extra tax.

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