SUMMARY I. Why SI4, 297.-Difficulties of seeing this: the confusionbetween stocks and flows, 299; the paradox of individual freedom and social necessity, 300; the habit of labeling expenditureas "out of" particular income receipts, 302; the failure to recognize the mathematical or analytical nature of the proposition, 304; a misunderstandingof arguments about equilibrium, 305. - II. Miss Curtis' condition that "all income is spent," 305; her failure to see the place of "wishes" in economic analysis, 307.- III. An attempt to salvage one of Miss Curtis' results, 308.

In a recent articleI in this Journal, Miss Myra Curtis attacks the formulationput forwardby Mr. Keynes in his book,2and repeatedby me in an article,3 accordingto which saving and investment, for a whole economy, are always equal. This equality has appeared paradoxicalto many economists,and many difficultieshave hinderedits general acceptance. In the first part of this article I shall endeavor to clear up some of these difficulties. In the second part I shall considertwo of Miss Curtis'criticismsat greaterlength; section I shall discussthe possibilityof and in the concluding salvaging one point which does not rest entirely upon misof understanding Mr. Keynes' argument. Mr. Keynes and I and most people wouldsay that a man saves somethingin a given period,if he spendson consumption (consumes)in that period less than his income in the measureof the amountof his period. The only unambiguous saving is obtained by subtracting his (expenditure conon) sumption in. the period from his income in the period.
y (Income) - c (Consumption) = s (Saving) by definition. If

he consumesmore than his income, he is doing the opposite
1. "Is Money Saving Equal to Investment?" Quarterly Journal of Economics, August, 1937. 2. The General Theory of Employment Interest and Money. 3. "Mr. Keynes"GeneralTheory of Employment,"' I. L. 0. Review, October, 1936.



of saving, dissaving,and we similarlymeasurethe amountof his his dissavingby subtracting incomefromhis consumption. c-y= -s is the same equation (with the signs changed)in

s can be called dissaving.

Investment is the expenditureof money on things other than consumption. There is no reason why, for any individual, there should be any particularrelationshipbetween his investment (i) and the items y, c, and s mentionedabove. But when we considera whole (closed)economy,we see that there emergesa relationshipbetween these items that does not appearto exist for the individual. The equationy- c = s, since it is true for every individual in the economy,is also true for any two Y2-c2=82 or any other numberof individualsin the economy. If we take all the individualstogether and add up their incomes and consumptionsand savings (using capital letters to represent these sums for the whole economy),we get Y- C= S. In this respect, then, the whole economy is like any individual. But for the whole economy there is another relationship. The sum of the incomesof all the individualsin the economy, Y. is equal to the sum of the expendituresof all kinds by the individualsof the economy,since these expendituresare nothing but the payments, the receipt of which constitutes all the incomes. The sum of all the paymentsmust be equal to the sum of all the receiptsin the same period,since these are the same thing, only lookedat fromdifferentangles. The sum of expendituresof all kinds, which is equal to Y, must plus I, on consistof C, the sum of expenditures consumption, the sum of expenditureson things other than consumption, sincethese two makeup all possibleexpenditures. This gives We know that Y-C us the equation Y=C+I or Y-C=I. is also equal to S, and since quantitiesthat are equal to the same quantity are equal to one another, we get the result


= (81+82)



that S = 1. The sum of the savings of all individualsis equal to the sum of their investmentsin the same period. The resistance that this piece of very simple arithmetic arousesin many people can usually be traced back to one or more of the followingfive causes: (1) A failure to recognize that all the items considered are payments (or differences between payments) over a existingat somepointof time (such and period, neveramounts as the beginning or the end or some intermediate point within the period to which our propositionrelates). They are all of the nature of flows which can be measuredeither
as so much in a given period (as in the simplest case examined above) or as so much per unit of time (if we suppose the flows

to continueat an unchangedrate over severalunits of time). They can never be measured as so much existing at any moment of time. That can only be done of stocks,not of flows, and our propositiondeals only with flows. of This failure to keep clear of irrelevant considerations stocks (of money) may take the form of (a) An insistenceon the discussionof the velocity of circulation of money. The velocity of circulationis nothing but the ratio betweensome total of money paymentsin a period and (which,beinga flow,may be relevantto our proposition) some stockof money existing at some point of time (which, since it is a stock, is on a differentplane and can have no relevanceto our proposition). (b) An insistence on the discussion of "hoarding"(and "dishoarding"). Sometimes "hoarding"means a reduction in the velocity of circulation,the irrelevanceof which has been shown. Sometimesit means simply holding stocks of one'sstock of money. money. Sometimesit meansincreasing And most frequentlyit mysteriouslymeansall three of these simultaneously,as well as a lengtheningof the period an individual holds particularcoins or notes. The concept of stocksinherentin all of these usages rendersirrelevantany validity that the particular meaning of "hoarding"may retain. Lack of clarityas to whetherstocks or flowsare being dis-



cussed has played a great part in feeding useless discussions in economics in the past. The Wages Fund is a conspicuous example of an ambiguous word used to cover such a confusion, and in modern theory of capital the same confusion is a great stumbling block. The proposition that I=S is a proposition about flows and has nothing to do with stocks. (2) A failure to understand the paradox that, while each individual separately is free to save either more or less than he invests, all the individuals together are not so free, since the sum of the investments I is always equal to the sum of their savings S. How does this compulsion work? If it does not affect any individual, how can it affect the whole economy, which is simply the sum of the individuals? To understand paradoxes of this nature is the special province of the economist, and many other similar paradoxes have by their familiarity ceased to terrify and become part of the stock in trade of all economists. Any country is free to import more goods than it exports or vice versa, but world imports always equal world exports (plus freight charges, etc.). Any individual can take his money out of the bank tomorrow morning, but all individuals together cannot. And we have the converse paradox. One bank or one country cannot expand its credit indefinitely; all the banks, or all the countries, keeping in step, can do so. To insist that what is true of each individual must be true of all individuals together is the simple fallacy of composition. But how does the compulsion work, if it does not affect individuals? This question leaves many students uneasy. The answer is that the individual is by no means as free to decide how much he is going to save as has been suggested. There are very few individuals who would not like to have larger incomes than they actually have and to save more out of these larger incomes. Each individual is constrained to save the amount that he does by the size of his income; and the size of his income is determined by other people's expenditures on the goods that he produces. Each individual considers his own income as given and independent of his own expenditure (since in a large community the repercussions



on his own income of any variations in an individual's expenditure are in general likely to be small enough to be legitimately neglected); and, not being interested in the effect of his expenditure in creating income for somebody else, he sees no connection between income and expenditure. This does not mean that the connection does not exist for the individual. It merely means that he is not interested in it, insofar as his own expenditure affects other people's incomes (tho he may have a lively interest in the effect of other people's expenditure on his own income). The economist has a wider outlook, must concern himself equally with the incomes of all the individuals, and so must recognize that for the whole community the excess of total incomes over that part of incomes that is created by expenditure or consumption must have been created by investment (or expenditure on other

things), so that I =S.
The failure to face up to the paradox of social necessity with apparent individual freedom sometimes takes the form of trying to extract from the total of an individual's actual saving (i.e., the excess of his income in a period over his consumption in the period) some part of it that really is "free" or "voluntary" or "ex ante" and declaring that the rest of his saving is "forced" or "involuntary" or "really saved by somebody else" (i.e., the investor who produced something that cannot be consumed) so that it should not be counted. All such attempts necessarily fall to the ground for the lack of any situation, to serve as a basis for comparison, in which the individual can with any plausibility be said to be unconstrained in his saving or even less constrained than in the period discussed. It is much more satisfactory to recognize that in a determinate universe all saving, like everything else, is "forced" and that free will is nothing but a pleasant illusion. Related to this difficulty is the unconscious assumptiontaken from the point of view of the individual and illegitimately transferred to society - that while expenditure is varied, income remains the same. From this it would follow that an increase in saving always means a reduction in con-



sumption4(and never an increase in income, consumption remainingconstant). The assumptionof constant income is then dropped and the fall in consumptionis allowed to diminish income, so that any increase in saving appears necessarilyto involve a diminutionof income.5 From this type of argumentany numberof surprising results naturally follow, such as that altho there is an increaseof saving (to which the fall in expenditureis due) there is no change in saving (since incomehas fallen as much as consumption).6 (3) A tendencyto regardexpenditure, as a flow during not a periodcoincidentwith the flow of income duringthe same period,but as somethingcoming"outof" the incomereceived in the period. "Saving"is on this view the incomereceivedin a periodminus the expendituremade "out of" that income. One possible meaning of this is simply that only that is expenditure to be countedwhich takes place aftersome or all of the income is received. If the ambiguitiesin this are
overcome as they can be by some arbitrary ruling as

to when we are-to begin countingthe expenditure,we will, of course, find that "SS" definedis greater than I by all so the expenditure that took place too early in the periodto be to considered be "out of" the income receivedin the period, so that we did not count it. If this procedurewere carried to its logical conclusion,this expenditure,not beng "out of income,"would have to be consideredas dissavingand substractedfrom "S" and so reduceit to exactly the same value as I. It is, however,. usually carriedto its logical conclunot sion, and is consideredto be a demonstration the falsity of of our propositionthat I =S.
4. E.g., "An increase in S must be accompanied by a reduction in expenditure on consumption goods."-Miss Curtis, Quarterly Journal of Economics, August, 1937, p. 617. 5. E.g., "An increase in S depressesincome."- Ibid., p. 617. 6. Miss Curtis seems to hold that the converse of the proposition quoted in footnote 4 above is also true, and to suppose that I hold the same view. Thus she says that when I speak of a diminution of consumption I must mean an increase of S ("or why the reduction in total consumption and in income?"- Ibid., p. 617). This enables her, when she realizes that the contradictionbetween the two propositionsquoted



Anothermeaningof the insistenceon countingC, I and S only insofaras they come "out of" the income receivedduring the period is that we must count only the expenditure (or laying up) of the particularnotes or coins received as incomeduringthe period. Thus if somethingis bought with money received before the period began, it is not expenditure "out of" income. On this line of analysis, Peter, who took his wagesbag to the grocer,has spent all his incomeand saved nothing, while Paul, who put his wages bag into his safe and took last week'sbag to the grocer,has saved all his income. At this stage of the argumentit is again not necessary for I to equal S. Of course,if this method of counting were carriedto its logical conclusionand the expenditureof coins other than those receivedas incomein the periodwere regardedas dissaving, we would find ourselvesback at our arithmeticalresult that I=S; but to do that would be to destroy the whole purposeof this new method of counting. Correlativewith the objection to countingspendingthat is not "out of income" is an objectionto countingas saving the unspent income with which a man is caught at the end of a period,even tho he may not have the slightestintention of saving it.7 This looks like a seriousdivergencefrom the ordinaryman's idea of what is meant by saving, and has inspired Mr. Robertsonto another of his delightful quotations from "Alice."8 This would be justified if by saving were meant particularcoins or notes receivedas income and not spent. But we are not interestedin particularnotes or coins, and what is included in the saving of an individual, apart from the saving that he has used to buy assets other than money, is the excessof the money he holds at the end of a period over the money he had at the beginning. If a man started a periodwith ?20 and finds himself at the end of the periodwith ?25, it does not conflictwith commonsense
leads to the absurditiesnoted in the text of my article, to attribute the same confusion to me. 7. I am grateful to Dr. H. W. Singer for drawing my attention to this form of my third type of difficulty - an important form which I had overlooked. 8. Economic Journal, September, 1937.



to say that he has saved ?5 in that period, even if it is his intention to spend the whole ?25 (or more) in succeeding periods. Of course if we take highly artificial periods - say, of ten minutes each - our definitions acquire an artificial flavor too. We would then have to say that in the tenminute period in which a man receives his weekly wage he saves (nearly) all of it, and that in all the other ten-minute periods in which he makes any expenditures he dissaves. But if we take reasonable periods, this artificiality disappears. There is, of course, a sound idea underlying the notion of considering only such expenditure as comes after or "out of" income. It is that an individual's expenditure is determined more by income in the past, which is known and has been received, than by income in the present, which is uncertain. This may be true to a certain extent, altho the effect of expected income on a man's expenditure must not be left out altogether. It is important for the real economic problems of forecasting expenditure and income, and has its place in economic theory, much more important than our piece of simple arithmetic; but it cannot be used to show that two and two are five. (4) The failure to realize that the proposition S=I is only an analytical proposition, and not about the real world at all. What is taken to be a statement about the real world excogitated from an armchair is naturally looked upon with suspicion. Our proposition is not based upon observation of the real world. It therefore cannot tell us anything we did not know; neither can it turn out to be mistaken. It follows from and is implicit in our definitions of income, consumption, savings and investment, and the postulate that in any period moneys paid out are equal to moneys received. It is a proposition of the same order as the proposition that the area of the square of the hypotenuse of a right-angled triangle is equal to the sum of the areas of the squares on the other two sides. It has been called a truism, often in tones of contempt, telling us nothing but that something is equal to itself. In a sense this accusation is justified. All the propositions of mathematics are similarly truisms, since they tell us nothing



and postulates. To that is not impliedin the basic definitions one who sees these implicationsin the postulatesthemselves of the enunciationof the propositions mathematicsare nothing but an arrayof truismsand a waste of time, and I underfor stand that there are born mathematicians whom propositions like Pythagoras' and the multiplication table are unnecessaryencumbrances. The usefulnessof propositions of this mathematicalnature is an inverse function of their obviousness. The abundant discussionthat has grown up aroundthe proposition,made famous by Mr. Keynes, that S=I is abundantproofthat its truth is not instantaneously obviousto all men; andif withoutadducingany new information it leads them to see some implicationspreviouslyoverlooked,it carriesout the purposefor which it was designed. (5) A belief that the short period equilibriumwhich is discussedin the analysis that makes use of our proposition is a necessary conditionfor the realizationof the equality. This would indeed be suspicious, since the proof of the equality-e.g., as given in the first pages of this article does not mention equilibrium. This seems to go with a belief that it is the ultimate goal of Mr. Keynes and his followersto show that I = S and then to retirefrom the field of economics. The equality of I to S has nothing whatever is to do with any kind of equilibrium. Equilibrium discussed as a conditionfor some kind of stability of Y and C (and consequentlyalso of I and S). The equationof I to S is always true and serves as a check, since any resultthat makesthem unequalmust involve a mistakeeitherin logic or in counting. II A first readingof Miss Curtis'articlegives the impression of a daring attack on the propositionthat I= S. A closer examinationshows, however,that Miss Curtis puts forward all of the objections and difficultiesdiscussed in the first first section of this paper (as well as some minor confusions more peculiarto herself) and in orderto be able to dismiss the proposition a truism she has ultimatelyto admit it as as true. This she does on page;616 wherefor the first time she



definessaving in the way Keynes does (S" in her notation), having spent more than half of the article in trying to show that the equation does not hold for other definitionsof S (saving "out of income" as discussedin I (3) above, not carriedto its logical conclusion;and a hybrid between this and a stock of money as discussedin I (1) above- "total amount withheldfrom consumptionin the period,"p. 615). There are, however,two points in her article that I should like to discussfurther. Miss Curtis'main slip is to be foundin her statementthat "a hidden conditionis attached to the equations- namely that all income (and nothing from other sources)is spent in the period" (p. 607). "The conditionis, however, not one that can be expectedto be uniformlyfulfilled. For if it were, spending would be constant and incomes would never change." (p. 610) This looks at first like a denial that total income must be equal to total expenditure(i.e., C+I). Miss Curtis shows, however,that she does not make as simplea mistake as this. She says, indeed, "Tho all expenditurebecomesincome, all income need not become expenditure"(p. 608), and in her arithmeticalexampleswhich are designedto show the falsity of our proposition,she wisely avoids any internal contradictionsby makingincome (Y) equalthroughoutto spending (C+I) in the same period. She does not deny that incomes and total spendings in any period must be equal to each other.; What she denies is that incomes must be equal to spending"out of" the incomesreceived. This condition,she says, "cannotbe expectedto be uniformlyfulfilled"(p. 610);
"receipts of income . .. may be passed on during the period

either wholly, or in part, or not at all, to form the income of others." (p. 608) In this Miss Curtisdoes not go far enough. It is impossible for all incomereceipts "to be passedon" during any period, for the act of passingincome on by one personis the act of receivingincomeby the other person,and wheneverthe gong goes to mark the end of our period, there must always be somebodyleft with unspent income. In a game of musical



chairs,the players cannot beat the band, howeverfast they run. The condition describedby Miss Curtis as one that "cannot be expected to be uniformlyfulfilled"is one that can neverbe fulfilled. Fortunatelythere is no need for the fulfillmentof this impossiblecondition. The meaningbehind Miss Curtis' conclusionthat if this (as we have seen impossible) conditionwere fulfilled, "spendingwould be constant and income would never change" will be examinedin the next section. The other point is concerned with a criticism both of Mr. Keynes and of myselffor speakingof "attempts"to save and "wishing"to save amounts differentfrom the amount of investments. Miss Curtisis, of course,absolutelyright in suggesting(p. 619)that "attempting" "wishing" spend and to have in themselvesno effect on anything, except insofar as they are translated into actual spending. She is not on such firm ground when she applies the same argumentto saving or, in her language,"withholding income." Saving, of or the "withholdingof income," is not an action that has effect and that can be contrastedwith the mere"attempting" or "wishing"to save in the same way as actually spending money can be contrasted with merely wishing to spend. Income receiversare free to spend on consumption much as or as little as they wish (within certainlimits, of course),but they are not, taken altogether, able to save any desired amount as simply as they are able to spend any desired amount. This is becausetheir saving depends,not only upon their spending,but also upon income, sinceit is the difference between these. With the rate of investmentgiven (it being undertakenby other people, or at any rate determinedby other forces), income receivers are not able to save either more or less than is being invested. They may wish to save more and may try to implementthis wish by actually spending less. This, however,has the effectof diminishing incomes by exactly the same amount, so that while there has been an actualdiminutionin expenditure(anda corresponding actual diminutionof Incomes),the increasein saving has nevertheless remaineda wish. In the same way a wish to save less may result in increasedspendingand increasedincomes,but



not in any diminution in saving - that decrease always remains in the realm of wishes. An equilibrium is reached, but not by translating the wish for a larger (or smaller) amount of saving into an actuality and so satisfying the wish and thereby dispelling the driving force that is incompatible with equilibrium. Equilibrium is reached by a fall (rise) in incomes and consumption as far as is necessary to make the income receivers give up their wish. If they are obstinate, they merely make a greater fall (rise) in incomes necessary before they change their mind. When they acquiesce, we have equilibrium. Reality has not been adjusted to fit the wish; the wish has been adjusted to fit reality. Equilibrium here merely means that there is no longer any tendency for Y and C to move down (or up) together. To suppose, as Miss Curtis does (p. 620), that this equilibrium is necessary to make I=S is to misunderstand the whole point. That equality has nothing to do with equilibrium, and is undisturbed however violent may have been the movement towards equilibrium, if indeed it is ever reached. For the parallel movement of Y and C does not in the least affect the gap between them which is S and equal to I. The examination of all this movement towards equilibrium is not carried out in the least for the purpose of demonstrating our little bit of arithmetic (tho it may be observed there as anywhere else), but to consider the effect on the economy of wishes on the part of individual income receivers to vary the amount they are saving - not by telepathy but through the changes in actual spending that result from those wishes. III to be one point that Miss Curtis is perhaps There seems trying to make which does not rest entirely upon misunderstanding. When she says that Mr. Keynes' definition of saving (the excess of income over expenditure on consumption goods) "has nothing to do with saving in the ordinary sense of withholding money income from consumption expenditure" (p. 616), she may mean that people's expenditure is a more stable function of income received at some time or in



some period in the past than of income received in the same period. Individuals consider, say, last week's income when they make their decisions as to how much they are going to spend, and consider themselves to have saved the difference between last week's income and this week's spending. Some such interpretation gives sense to Miss Curtis' impossible condition "If ... all income of the period (and no more than income) is spent and recreates itself as income in the period" (p. 610), and gives validity to her otherwise baseless conclusion "spending would be constant and incomes would never change." For if spending (here total expenditure, C2+I2) in period Two is equal to income (Y1) in period One, income in period Two (Y2=C2+I2) is equal to income in period One (Y1) and income is unchanged. Such a salvaging of Miss Curtis' argument, however, involves the adoption of a technique of analysis in terms of successive periods, of the kind developed by Mr. Robertson and the Swedish writers. Of this there is no trace in Miss Curtis' article, which throughout considers simply "the period." Again the difference between these writers and Mr. Keynes and his followers is on quite another level. I am rather skeptical concerning the usefulness of analysis in terms of successive periods or "days," because it seems to me to complicate and confuse matters rather than to clarify them. But that is merely a hunch on my part as to which is the more promising (or perhaps more pleasant!) road for research. I may easily be mistaken in this and am ready to welcome any results that those who like this technique may produce. There is no question here of right or wrong or of logical errors committed. Miss Curtis claims, however, not a difference of technique adopted but the correction of an error. It is therefore probably best to give up our attempt at salvage and to say that Miss Curtis' denials that S=I are simply the result of confusion of thought. Her various definitions of saving, if carried through to their logical conclusions, all come to the same as Mr. Keynes' definition, and the equation applies just as much to these as to Mr. Keynes'.

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