Saving is the Accounting Record of Investment

Abstract

Economists have long viewed saving and investment as independent behavioral relationships undertaken by households, firms, and governments. Business firms, the administrators of the economy’s capital stock, are responsible for most investment spending. Households, the ultimate owners of the economy’s private net worth, undertake most of the economy’s saving. Governments tax and spend. They save by running a budget surplus and not spending all their income. But saving and investment are identical ex post as a national income identity. The unresolved question concerns the mechanism that brings these two alledgedly independent volitional magnitudes into ex post equality?

In real life research is dependent on the human capacity for making predictions that are wrong, and on the even more human gift for bouncing back to try again. This is the way the work goes. The predictions, especially the really important ones that turn out, from time to time, to be correct, are pure guesses. Error is the mode. … We all know this in our bones, whether engaged in science or in the ordinary business of life.

Lewis Thomas, 1983: 82

The accounting identities equating aggregate expenditures to production and of both to incomes at market prices are inescapable, no matter which variety of Keynesian or classical economics you espouse. I tell students that respect for identities is the first piece of wisdom that distinguishes economists from others who expiate on economics. The second? … Identities say nothing about causation.

James Tobin, 1997: 300

The extent to which one sees one’s destination before one discovers the route is the most obscure problem of all in the psychology of original work. … It is the destination which one sees first, [though] a good many of the destinations so seen turn out to be mirages.

John Maynard Keynes, Moggridge, 1992: 552