The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Over-Saving

  • Michael Bleaney
Reference work entry
DOI: https://doi.org/10.1057/978-1-349-95189-5_1680

Abstract

The possibility that saving could disrupt the circulation of commodities through a lack of demand was recognized at least as early as the Physiocrats. A similar argument was presented by Adam Smith. However, in both cases the analysis referred only to hoarding (i.e., the accumulation of a stock of money outside the banking system) and not to savings which were lent at interest to finance investment. Indeed both Smith and the Physiocrats regarded saving in order to transfer resources to investment with favour and were anxious to promote it. In neither case was the possibility that planned savings and planned investment could diverge examined (other than by hoarding, which was dismissed by Smith as irrational because of the loss of interest involved and therefore by implication insignificant), so that there was an implicit assumption that a decision to save was also a decision to invest.

The possibility that saving could disrupt the circulation of commodities through a lack of demand was recognized at least as early as the Physiocrats. A similar argument was presented by Adam Smith. However, in both cases the analysis referred only to hoarding (i.e., the accumulation of a stock of money outside the banking system) and not to savings which were lent at interest to finance investment. Indeed both Smith and the Physiocrats regarded saving in order to transfer resources to investment with favour and were anxious to promote it. In neither case was the possibility that planned savings and planned investment could diverge examined (other than by hoarding, which was dismissed by Smith as irrational because of the loss of interest involved and therefore by implication insignificant), so that there was an implicit assumption that a decision to save was also a decision to invest.

Nevertheless the first series of writers to present over-saving as a serious problem to the economic system proved unable to pinpoint the fallacy in the equation of saving and investment intentions, which was undoubtedly a major reason for their defeat. Prominent amongst them was Thomas Malthus, but some of the elements of Malthus’s arguments are to be found in earlier work by the Earl of Lauderdale (1804) and William Spence, whose pamphlet Britain Independent of Commerce (1808) stimulated James Mill to his well-known restatement of Say’s Law in Commerce Defended (1808). Malthus claimed that if savings were at too high a level they would cause a deficiency of effective demand, which would make investment unprofitable. Recent attempts to formalize his ideas along these lines include Costabile and Rowthorn (1985) and Eltis (1984). These authors cite passages from Malthus which they take to indicate that he did not assume equality of planned saving with planned investment. However, many commentators (for references see those just cited) have held the contrary opinion, for the reason that at many points Malthus seems to be arguing something quite different. Thus in his Principles of Political Economy the burden of the argument appears to be that the transfer of resources from consumption to investment will inevitably lead to an increase in supply whilst simultaneously depressing demand. This does not imply a distinction between planned saving and planned investment (indeed quite the opposite) but rather reflects confusion over different time periods in the analysis: investment expenditure represents demand during the gestation period, and only on completion results in increased (potential) supply – but at this point the project ceases to absorb current savings.

A slightly different strand of argument, initiated by Sismondi, emphasized the impoverishment of the masses in the factory system and argued that this created a problem of lack of markets. As a comment on industrialism this line of argument was taken up by certain writers within the Russian populist movement in the later 19th century, notably V. Vorontsov and N.F. Danielson (Bleaney 1976). As a theory of crises it became absorbed into labour movement culture as theoretical support for demands for higher wages. The essential idea was that inequality in the distribution of income created too high a propensity to save. This notion was developed most cogently by J.A. Hobson in a number of books (Hobson 1902, 1909, 1922).

In general these theories lacked an adequate discussion of the determinants of investment, or exhibited a tendency to believe that there was a stringent upper limit to the rate of investment which was compatible with a balanced economy; the existence of alternative growth paths, characterized by different rates of investment, was implicitly denied (or held to be true only within strict limits). There was usually no explicit discussion of the loanable funds theory, according to which the problem would be resolved by a sufficiently low interest rate discouraging saving and encouraging investment. But one exception is Hobson (1922), who defends his position mainly on the grounds that saving and investment are relatively insensitive to the rate of interest.

It is interesting to consider these over-saving theories in the light of Kaldor’s (1955–6) theory of income distribution. In this theory redistribution of income between wages and profits at full employment is the mechanism by which planned savings are adjusted to planned investment. Over-saving theorists such as Hobson could be interpreted as stating that aggregate planned savings were too high relative to planned investment because the real wage was persistently too low and profits too high; the required redistribution from profits to wages (i.e., from those with a higher to those with a lower marginal propensity to save) was prevented because the weak bargaining position of labour ensured that any fall in prices would be matched by a compensating fall in money wages. Hence the fall in savings tended to come about through a contraction of output rather than a redistribution of income at full employment.

There was some tendency to link this idea in the years around 1900 to the growth of trusts and cartels and the increasing concentrating of industry. This can be discerned in the works of Hobson and Hilferding (1910); the latter argues that capitalism is entering a new stage in which its original dynamism has given way to a tendency to stagnation. In Hobson’s view the increasing concentrating of industry exacerbates the over-saving problem by raising profits at the expense of wages; the activities of trade unions, therefore, help to resolve it. Hilferding, by contrast, puts more emphasis on the redistribution of profits from capital outside to capital inside the cartels; he argues that this reduces the aggregate volume of investment because cartels obtain their high rate of profit only by restricting output.

In the post-war period it has sometimes been argued that a tendency to over-saving continues to exist but has been counteracted by the growth of military expenditures. This idea goes back at least a century, to Vorontsov, and assumes that the tax revenue raised to finance military expenditure successfully absorbs saving rather than reducing consumption. Modern theories of over-saving have tended to rest on the Hobson–Hilferding argument that an increasing concentration of industry redistributes income towards profits; Cowling (1982) represents the most coherent attempt to develop this theme, based on a model developed from the work of Kalecki, but including a much more detailed discussion of the theory of oligopoly. According to his data the degree of monopoly (the ratio of price to prime cost) increased significantly in the UK from 1945 to 1975. However this was entirely accounted for by the rise in the proportion of salaried workers (allocated by Cowling to fixed costs) and may simply reflect technical developments. Even though industry has become more concentrated at a national level since 1945 (measured by output), many observers would argue that industrial markets have become less concentrated because of reductions in tariff barriers and transport costs.

See Also

Bibliography

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© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Michael Bleaney
    • 1
  1. 1.