Yves here. There is a great deal more that one could add to Richard Murphy’s post, but I will try to keep it brief. Murphy does not explicitly discuss the loanable funds fallacy, which was debunked by Keynes and Kaldor. Investment does not come out of pre-existing savings. Lars Syll gives a good high-level treatment here. One of his arguments that might get your attention: “It assumes that saving and investment can be treated as independent entities. To Keynes this was seriously wrong.”
A second issue is that Murphy focuses on household savings. In fact, the household sector should be a net saver because household debt is not economically productive. And high levels of household debt, or worse household net borrowing, is a strong predictor of financial crises, witness 2008. Businesses in aggregate, on the other hand, should be borrowing to invest. But starting in the early 2000s, as we noted in an article in the Conference Board Review, they had, perversely, become net savers in a non-recessionary time. And that tendency has persisted.
By Richard Murphy, part-time Professor of Accounting Practice at Sheffield University Management School, director of the Corporate Accountability Network, member of Finance for the Future LLP, and director of Tax Research LLP. Originally published at Fund the Future
This morning’s video is slightly different in that it is, I am afraid, audio only. I really didn’t feel like sitting in front of a camera yesterday, but I was happy enough to talk into a microphone. so that is what I did.
In the resulting monologue, I argue that William Beveridge, writing in 1944 in the report that became the foundation of the UK welfare state argued that too many savings in too few hands could be deeply destructive within an economy. Hence, the title for this blog post, which is a direct quite from him.
The YouTube version of this is here:
The audio version is available here.
The transcript is as follows:
Hello, this is Richard Murphy. I’m sorry that I’m not looking at you in this video. That’s because I’ve had quite a vicious ear bug, and as a consequence, I’m not feeling at my best today. So, rather than show you me at, well, less than optimal performance, I thought I’d just record some thoughts. And it may not be normal practice for people who are lying in bed recovering from a bug to read Beveridge’s 1944 report on Full Employment in a Free Society, which was, of course, one of the foundations of the UK’s welfare state, but that’s what I was encouraged to do this morning.
And in particular, I found a paragraph that supports one of the hypotheses that I often put forward, which is that savings are not a useful economic exercise. Now this frequently offends people because it is of course a natural inclination of many people to save and there is indisputably a value to people having some savings.
I would always argue that and always encourage people to have a rainy-day fund at the very least which will enable them to deal with the inevitable crises that come along in life. I am not arguing against that.
Nor, to some extent, am I arguing against savings for pensions, although I do, as many people who know me will realise, have some reservations about the way in which pension savings are put into shares, land and buildings, all of which are second hand in the way that they are purchased by these funds.
But that is not what I’m really talking about. I’m talking about here the economic consequences of saving. And Beveridge tackled this in his report. It’s on He did so in paragraph 123. And I want to read it to you. He said this:
Saving, in itself, is merely negative. It means not spending. Saving may be desirable from the point of view of the individual who saves in order to ensure to him the means of spending and of independence later. Apart from this merit of securing independence, saving in itself has no social virtue.
He is, therefore, reflecting the point that I have made many times over, but he does so in a very specific economic context as well. He does so in the context of the arguments of J. M. Keynes, John Maynard Keynes, and by then, Lord Keynes, who was, in my opinion, the most eminent economist of the 20th century and who had made the point, in contrast to classical economists, and neoclassical economics that savings did not fund investment.
There was no obvious link between the two. And most certainly savings were not equated with investment by the mechanism of the interest rate because that simply did not work. What is more, as Keynes and Beveridge agreed, there was no reason why large quantities of savings within the economy were necessarily socially beneficial at all. In fact, as Beveridge agreed, supporting Keynes in the view, there was a socially destructive element to the whole idea of savings.
Now, we have to put this in the context of the period. He was writing during the course of the Second World War, and the vast majority of people in the UK did not have much to save at that time, except, admittedly, their rising wages because wages did rise during the course of that war.
But the vast majority of savings then, at that time, as is also still the case now, were owned by a relatively small proportion of society And it was this part of savings which caused the Beveridge the greatest concern.
He wasn’t saying that the savings of those people who were putting money aside out of regular earnings to provide for the rainy day fund were in any shape or form a problem. He clearly understood that they were useful, and he also made the valid point that for everybody who was saving in that situation, there was probably somebody who was dissaving – drawing on those funds to meet the costs of that rainy day. And, therefore, they were very unlikely to create any form of economic disruption as a consequence of what they were doing.
But when it came to the savings of the very wealthy, he agreed with Keynes that these could be deeply economically destabilising. If the wealthy saved too much, and therefore became wealthier, they could in fact therefore remove so much demand from the economy. that some people would have insufficient to live on because there would not be enough economic activity undertaken to provide them with the means to earn a living. And others might just be forced into debt to make good the deficits that they were facing because of the lack of economic activity because of the excess savings of the wealthy.
This he saw as deeply problematic. He did in fact say that this undermined the whole logic that the savings of the wealthy were the underpinning of the investment that was the basis for the wealth of the economy.
The exact opposite, he said, could well be argued to be the case. They do not necessarily cause growth., The savings of the wealthy could, in fact, quite probably cause depression if they decided, using the term Keynes was making familiar, that their ‘animal spirits’ were low, and therefore they did not wish to actually use the money for any constructive purpose including straightforward spending.
So, what there is in society is a problem when we have excess savings. That has made it particularly perverse, that in all the years since then, governments have gone out of their way to encourage excess saving, to the point that we now have financial worth in the UK of £15 trillion or so, which is six times or so greater than the national income.
Why is that worrying? Because they are so large that the use of those savings can by themselves destabilize the rest of the economy. And in a sense, Rachel Reeves is right to look at the role of pension funds in this because they own and manage over £6 trillion of that wealth. And a significant other large part is the value of land and buildings – that’s coming to over five trillion.
So, those two are by far the biggest two factors in the recording of the value of financial wealth and so savings.
But if pension funds are actually taking money out of the economy, they’re a drain. And yet we are spending roughly £70 billion a year of government income, or rather, lost government income, by way of tax reliefs and subsidies given to support these pension funds to increase their wealth in a way that might actually be wholly counterproductive.
Beveridge recognised that seeking to accumulate savings for those already wealthy- and by the way, the vast majority of people with significant-sized pension funds are already wealthy – the accumulation of wealth by those people as a goal in itself could be the cause of economic recession or a lack of growth, and their failure to use those funds in any way constructively, there being no obvious link between savings and investment, could exacerbate that trend.
So, what I’ve been saying for a long time is purely Keynesian. It underpins the thinking of the welfare state. And, what I’ve been saying for a long time reflects an economic truth, but it also reflects an economic truth that we have chosen to forget. The idea that savings are inherently of worth and that financial wealth must be preserved because it is the foundation of our investment and the prosperity of our economy is quite simply wrong.
The foundation of the prosperity of our economy is the putting of people to work in gainful employment at fair wages so that they can afford to live well. That is what makes a prosperous society and we have not put sufficient focus on that.
In particular, I’d ask the question, are we giving £70 billion a year of direct subsidy to that process in the way that we should be instead of giving that much money towards pension savings as we are? These questions are really important
It’s fascinating to note that this point was understood in 1944 but here 80 years later, this issue still needs to be addressed.
We are over emphasising the importance of saving in our economy, and to this extent, Rachel Reeves is entirely wrong. And what we are not emphasising is the importance of investment in our economy, and to confuse saving into pension funds and other media as being the source of the investment is simply and straightforwardly incorrect. That is not what happens.
Therefore, we need to change our entire thinking on this issue. Beveridge was right. Rachel Reeves is wrong. Keynes was right. History has forgotten him. It’s time we understood how savings can actually be negative for the benefit of our society, particularly when they are excessive and in the hands of a relatively small part of that society, which is the problem that we suffer in the UK.
And now it is time for us to put this right.
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Good for Richard. The “sainted saver” trope is macroeconomically illiterate, ignoring as it does the associated demand destruction and unemployment savings cause. And increases in inequality associated with disproportionately high savings rates at the top of the income and wealth distributions are a threat to our systems of democratic governance and accountability, since the rich inevitably get around to buying politicians and policies favourable to themselves.
In a strictly narrow sense, “investment” by the wealthy in Politicos is ‘productive’ from their class interests.
A follow on to the arguments given above would be, “Eat the Rich.” The excreta from said exercise would well and truly, to paraphrase Jefferson, “..fertilize…the tree of liberty…”
We are entering a period of revolutionary ferment.
There is more to a nation than its political economy although I would love to understand how this, which seems to be a subset of what lacy Hunt calls Net National Saving i.e. the sum of private saving, foreign saving and government saving mesh together in an Empire. The only two episodes of negative NNS seem to be the 2008 slump and Covid expenditures for the US, wars don’t seem to be a problem.
First, the US data, predictably, is no good. Gabriel Zucman investigated the yawning gap between total banking assets v. liabilities around the world and ascertained their was an 8% discrepancy, 2% which could be tracked to reported holdings in tax havens, the rest presumably hidden.
Correcting for that considerably reduces US capital imports, which means our trade deficit is lower than reported.
Second, I do not buy your contention about savings. Private savings are held to a significant degree in government bonds. The US consistently goes into recessions when deficit spending is reduced or produces yawning private sector borrowing as mentioned before the crisis. Similarly, the UK ran persistent and very large deficits during its period of most rapid growth in the 1800s.
http://qje.oxfordjournals.org/content/128/3/1321.abstract
April 9, 2013
The Missing Wealth of Nations: Are Europe and the U.S. net Debtors or net Creditors?
By Gabriel Zucman
Abstract
This article shows that official statistics substantially underestimate the net foreign asset positions of rich countries because they fail to capture most of the assets held by households in offshore tax havens. Drawing on a unique Swiss data set and exploiting systematic anomalies in countries’ portfolio investment positions, I find that around 8% of the global financial wealth of households is held in tax havens, three-quarters of which goes unrecorded. On the basis of plausible assumptions, accounting for unrecorded assets turns the eurozone, officially the world’s second largest net debtor, into a net creditor. It also reduces the U.S. net debt significantly. The results shed new light on global imbalances and challenge the widespread view that after a decade of poor-to-rich capital flows, external assets are now in poor countries and debts in rich countries. I provide concrete proposals to improve international statistics.
No capeesh this: ” and by the way, the vast majority of people with significant-sized pension funds are already wealthy”. Not in my household.
Perhaps we need to keep calling humble actual retirement savings “savings”, and start calling ‘savings’ by the wealthy and corporations “hoarding money”.
I’ve heard at least one economist that had the viewpoint that saving represents a theft of future spending as it will not be circulating in the economy. Of course such an idea can only work in a high trust society where the government protects people who fall on hard times. But if we are talking about savings, let’s talk about the elephants in the room – our oligarchs. As an example, Jeff Bezos has a reputed net worth of about $190 billion and at age 60, I doubt that he could ever spend it down. In fact, through investments, it is probably increasing faster than he can spend it. And that is one individual. For a very long time, the GDP and wages kept pace with each other until the 70s when GDP kept rising like a rocket while wages flat-lined. Today on a chart there is a massive difference in GDP and wages so what happened to those trillions of dollars that never went into wage increases? I suspect that Jeff Bezos could answer that one.
“I’ve heard at least one economist that had the viewpoint that saving represents a theft of future spending…”
This is interesting, since to the extent that saving becomes investment, then saving should allow for increased spending in time and that is precisely what has happened in the course of Chinese development these last 45 years. Very high saving, has allowed for very high investment and in turn very high growth. Paul Krugman dismisses this and I take Krugman very seriously, but the data suggest Krugman is wrong.
It’s interesting to ask people (and economists in particular) how they think these pension saving subsidies are even supposed to work. After all the state is in dire debt straits, running on borrowed money, etc., so these “savings” are actually borrowed. In other words the solution to avoiding bankruptcy in future, is to borrow more now, stash the money away and then… be rich? Like who is going to pay the debt that was incurred to get the money to save?
As for the explanation that excessive saving by rich is in itself bad, it seems a bit unsatisfactory. After all savings are borrowings for someone else, the money isn’t just sitting there, but is recycled and moved somewhere else. IMO this circular character of money flows makes things really messy, and you can very easily get lost chasing who borrows from whom and who is saving to who. What if the excessive savings of the rich are hoovered up by the state, which will call that its debt, and then invested in productive things?
I think it’s useful to forget about money, which are just numbers in computers anyway, and look at the material reality.
So for example in the case in pensions, it’s immediately clear that while we are supposed to forgone consumption now so we can consume in the future, the physical things we don’t buy are not in fact stored away. There is no vault under the bank running your pension fund, filled with cans of beans, pickle jars, medicines, TVs or cars. The whole economy runs on just-in-time scheme, what is produced today will be consumed today, the apple you didn’t buy and eat today because you sent the money to pension fund will not magically appear in twenty years. If in the future there are not enough people to produce things for everyone including pensioners, which is often the stated reason for pension savings, then there simply will not be enough things, period.
This leads to a lot of intriguing questions. Like for example who actually eats the apples we don’t eat and watches TVs we don’t have, because we send all the money to the bank instead?
Consider the federal debt started growing with the New Deal, so not only was Roosevelt putting unemployed labor back to work, but unemployed capital as well.
When the medium enabling markets is privately managed, we are all tenant farmers to the banks.
The secret sauce of capitalism is public debt backing private wealth.
As a social super organism, government functions as the nervous system, while money and banking are blood and the circulation system. With public government and private banking, the banks rule and the only real job the flunkies in Washington have, is running up the debt the banks need to grow metastatically.
Russia and China have effectively gone back to private government, with Putin and Xi as respective CEO’s, to control their oligarchs, which is why our oligarchs hate them so profoundly.
Savers should be taxed, not spenders. If we replaced income taxes with wealth taxes, the man who spent all his money each month would pay no tax (because he supports the great wheel of life) and the man who saves all his salary would pay a great deal of tax.
This pro-spending policy js not pro-spendghruft: the expenditure could be on investment goods, which which to win more commodities or produced more goods and services.
Also, we should heed the teaching of a man nearly as important as Keynes – Jesus. The Parable of the Talents is very clear on saving.
Matthew 25:14-30
English Standard Version
The Parable of the Talents
14 “For it will be like a man going on a journey, who called his servants[a] and entrusted to them his property. 15 To one he gave five talents,[b] to another two, to another one, to each according to his ability. Then he went away. 16 He who had received the five talents went at once and traded with them, and he made five talents more. 17 So also he who had the two talents made two talents more. 18 But he who had received the one talent went and dug in the ground and hid his master’s money. 19 Now after a long time the master of those servants came and settled accounts with them. 20 And he who had received the five talents came forward, bringing five talents more, saying, ‘Master, you delivered to me five talents; here, I have made five talents more.’ 21 His master said to him, ‘Well done, good and faithful servant.[c] You have been faithful over a little; I will set you over much. Enter into the joy of your master.’ 22 And he also who had the two talents came forward, saying, ‘Master, you delivered to me two talents; here, I have made two talents more.’ 23 His master said to him, ‘Well done, good and faithful servant. You have been faithful over a little; I will set you over much. Enter into the joy of your master.’ 24 He also who had received the one talent came forward, saying, ‘Master, I knew you to be a hard man, reaping where you did not sow, and gathering where you scattered no seed, 25 so I was afraid, and I went and hid your talent in the ground. Here, you have what is yours.’ 26 But his master answered him, ‘You wicked and slothful servant! You knew that I reap where I have not sown and gather where I scattered no seed? 27 Then you ought to have invested my money with the bankers, and at my coming I should have received what was my own with interest. 28 So take the talent from him and give it to him who has the ten talents.
Lol. The reason why the Ancients devised debt jubilees 3000 years ago, as a circuit breaker to compound interest.
As they found free land owners more effective soldiers than half starved debt serfs, when the neighboring tribes came visiting.
And here we are, stuck in the same doom loop.
What needs to be better appreciated is that money functions as a social contract, as medium of exchange, not as a store of value.
Blood is a medium, fat is a store. Try mixing them up and see how long you live.
Roads are a medium, parking lots are a store. If we treated roads like we treat money, everything would be paved over and we would be fighting over our lots.
As a medium, we own money like we own the section of road we are on, or the air and water flowing through our bodies. It doesn’t have our picture on it, we don’t hold the copyright and, most importantly, are not responsible for its value, like a personal check.
Money Is A Public Utility!!!
Not some commodity to mine from the economy and store in a bank.
For millions of years, people were tribal and one’s status was a function of what one adds, not what one can extract. That is why our culture is so increasingly necrotic.
While it might seem a long time, the last 3000 years, of going from mostly tribal cultures to nations of millions of people, has been fairly short, in evolutionary terms. Eventually, after we finish blowing up this world, we will have to come to terms with the fact the only way large groups of people can save is collectively. This doesn’t mean everyone gets a free lunch.
It’s based on responsibility, with rights as reward. That might seem judgemental, but that’s part of the learning curve and when we begin to fathom that, then we can evolve to the next stage.
One is the node. Oneness is the network. Organisms and ecosystems, individuals and societies.
Adair Turner, aka Lord Turner, or Baron Turner of Ecchinswell, (gotta love those Brits) also discussed the loanable funds fallacy. His book, Between Debt and the Devil: Money, Credit and Fixing Global Finance is good reading.
One thing left out of this discussion is that some of us are just savers. I’m sorry I’m not contributing to the economic health of society, but I just feel better with money in the bank.
Technically, you in fact are contributing to the society! You are producing and giving more goods/services to the rest of society than you are taking, the difference expressed in money terms is your savings.
Our society has sadly devolved to the point where everything is viewed as yes or no, left or right, black or white, with no shades of grey in between. As the article and previous comments made a point of differentiating – there is a big difference between money in the bank rainy day savings of you and I, and the Bezos / Musk / Gates / Walton level of savings that can buy Senators and alter the economy at whim. (and by the way – drive up asset prices so our kids can’t afford a roof over their heads.)
Unless your savings are growing faster each year than you spend every year, you’re not in the second category. But you are in the category of ‘useful idiots’ who parrot the conventional ‘wisdom’ supporting the status quo.
Culture has always viewed good and bad as some cosmic conflict between righteous and evil, while in nature it is the basic biological binary of beneficial and detrimental. The 1/0 of sentience. That is because it is the function of culture to organize society as a super organism.
While the reality is too much good can be bad and some bad is necessary to grow.
Our current god is Mammon and the high priesthood are the banks and billionaires.
The banks are having their let them eat cake moment.
It’s like the heart telling the hands and feet to go suck dirt, because it’s keeping the blood for itself.
Safe to say, the whole organism is dying.
Once saving is rendered impossible ( through continuous devaluation of money or other means) demoralizing conditions will prevail in all society till final collapse. Not being able to save for the future is the ultimate slavery for humanity.