Okay Fine, Let’s Call Investment “Saving.” Or…Not
I really like Hellestal’s comment and linguistic take on this whole business:
I’m comfortable changing my language in order to communicate. I have very little patience for people who aren’t similarly capable of changing their definitions.
This discussion is really about the words we use to describe different accounting constructs. Nick totally gets that as well.
So I’m ready to say, “fine, let’s call investment saving.” That’s perfectly in keeping with the very sensible understanding found in Kuznets, father of the national accounts. He characterized real capital — the actual stuff we can use to create more stuff in the future — as “the real savings of the nation.” (Capital in the American Economy, p. 391.)
So when you spend money to produce something that has long-lived (and especially productive) value, you’re “saving.”
But still, I gotta wonder: why don’t we just call it…investment?
Because this S=I business confuses the heck out of everyone. Some of the smartest econobloggers on the web have spilled hundreds of thousands of words over the last several years trying to sort out this confusion. I’ve read most of them, and I’m still confused. And I’m quite sure that all non-economists who’ve looked at this (and many or even most economists) are as well.
And that’s not a surprise. Here are a few reasons why:
1. When you invest in real assets, you’re spending. That’s why it’s called investment spending. So spending = saving. Really?
2. When you pay someone to build you a drill press, you’re saving. When you don’t eat some of this year’s corn crop, you’re saving. When you pay off some of your money debt, you’re saving. When you don’t spend some of the money in your checking account, you’re saving. Each of these is true within a given (usually implicit) balance-sheet/income-statement accounting construct. But are they anything like the same thing?
3. As I showed in my last post, f you look at the “real” domestic private sector — households and nonfinancial businesses (most people’s implicit default context) — the amount of saving (income minus expenditures) has absolutely no relationship to the amount of investment spending. Saving is always insufficient to “fund” investment. And the changes in the two measures don’t move together, either in magnitude or direction. (Aside from the long, multi-decadal growth in both as the economy grows.)
4. When you “save” by investing, you decrease the amount of money on the left-hand (asset) side of your balance sheet, while increasing the amount of real assets on that tally. Your total assets are unchanged. Have you saved?
5. When you pay someone to write a piece of software, you get a long-lived real asset. You’ve saved. But the money you gave them is income for them, so it contributes to their (money) savings as well. Do you double-count those savings, or did “the economy” get that software for free?
6. Investment means “gross investment” — all the money spent on long-lived goods, including replacement of long-lived assets that have been consumed in the period (through use, decay, and obsolescence, and — for inventory of consumer goods — actual consumption). But in KuznetsWorld, shouldn’t we be talking about net investment — the additions to our stock of long-lived assets? Gross consumption minus consumption of fixed assets (and inventory changes)? Shouldn’t we call net investment “saving”?
I know: there’s (at least apparent) confusion in some of these, but that’s rather my point. And there are answers to all of these in the context of S=I. (All of them, I think, based on the flawed [neo]classical accounting constructs embodied in the NIPAs. That’s my next post.) I’ve read them all, every which way from Sunday. But do they help anybody understand how the economy works, or…quite the contrary? If they do, why do all those econobloggers feel the need to worry at this, constantly?
I’m not sure this really solves the problem, but I’d like to suggest that saving should mean what everybody in a monetary economy means when they use the word: money saving. Monetary income minus money expenditures. In dollars, or whatever. (And while we’re about it, when you take out a loan or spend out of your savings, let’s call those “borrowing” and “spending,” not “dissaving.”)
Meanwhile investment (in economics discussions) should mean what economists mean when they use the word: “spending to create fixed assets and inventory.” (Because the national accounts only count spending on structures, equipment, software, and inventory as investment.)
And actually, that’s what it already means.
Why do we need to call it saving?
Cross-posted at Asymptosis.
The macroeconomy is counterbalancing asset debt system with counterbalancing owner counterparties. There is a natural cycling of the system based primarily on accumulated debt and ongoing demand which is based on further debt expansion within the citizen economy upon which everything else is leveraged. It is a nonlinear system as evidenced by the recent collapse in gold prices…
Here’s what I think is common sense, if I may humbly submit: investing and saving are apples and oranges. (1) Saving is adjusting your spending so that your net wealth increases over time. The increase in net wealth is savings; even if the net wealth is negative. (2) Investing is acquiring capital that will increase income, by exchanging less productive capital (money or some other capital) for it. There isn’t a change in net worth, per se, just (hopefully) an increase in income in the future. (3) Investment spending is paying money for productive capital. (4) Consumption spending is spending on goods and services that don’t produce net income, but are consumed, depreciate or wear out. (5) Spending on a consumable doesn’t immediately change your net worth; that only happens as it is consumed or depreciates. That can happen very quickly of course, for example if you buy a yacht. (6) If you borrow money from a bank, your net worth hasn’t changed, per se. If you borrowed to invest in productive capital, hopefully your net income will increase, even allowing for any depreciation of the capital. (7) Cash under the mattress is like a consumable; unfortunately it almost always depreciates. (8) If you pay off a loan with cash, your net worth hasn’t immediately changed, but your income will go up. So that is logically an investment (remember item 2). (9) Since investment spending causes your net worth to go up and consumption spending causes it to go down, they are OPPOSITES! (10) Time is money. A person’s productive time is capital, part of his net worth. He can spend it on investment or consumption. If he invests, his net worth will increase. If he consumes, it will go down.
Apparently it is not enough to agree on terms. There are some basic assumptions abut the value of “savings” as well.
at http://www.american.com/archive/2013/april/why-expanding-social-security-is-a-bad-idea
Andrew Biggs complains that SS wealth decreases savings and that “The problem is that real saving provides the capital that businesses use to build factories, buy computers, conduct research and development, and more. ”
Help me out. Is this something that all economists agree on, that supply-side economists agree on, or BS. Clearly right now saving is not increasing productive capital. It seems to me that increasing capital without increasing consumption is a bad thing.
Perhaps some unwritten assumptions that I am not aware of are the problem, but right now I am not able to see eye-to-eye with Andrew’s reasoning. (and no I do not want to turn this into another SS thread – the topic is what people mean by savings)