Featured Post

I = S - M

The modern way of thinking about economics has been I = M - S Where I is the I as in me, M is what is 'mine' and S is what ...


Output equals Income. What is produced generates an income that is equal to it. Understanding this is a matter of good economics. Disaggregating it is even more important.

Output equals the sum of consumption, investment, government purchases and net exports. Income equals the sum of consumption, saving and tax revenues. Putting this into symbols we have:

C + I + G + X = C + S + T

Moving the terms around a little we get,

I - S = (T - G) - X


S - I = (G - T) + X

Dissonance in our saving and investment is reflected in the sum of the dissonance in the government's budget and balance of trade. I use the term reflected with care. I do not present a causal relationship.

There is so much talk about government budgets worldwide. There is so much stress, so much argument. No one seems to know what to do with the ballooning budget deficits on one hand, the unplanned and excessive surpluses on the other. International trade and its utter and complete imbalance gets everyone worrying for our future. And yet this unbalance in government, this unbalance in foreign trade in the aggregate is simply a reflection of the unbalance between saving and investment.

We must proceed cautiously. What is wrong with saving? Surely, the old pat answer that there is too little of it is looking at a small aspect of it and missing the big picture. After all as economist James K. Galbraith has pointed out the Soviet Union, right up to its dissolution, had very high saving rates! That did not help very much now did it? No, what is wrong with saving is not that it is too low but that the nature of saving, how and why we save, its very basis, is wrong. In the past a farmer would save seed, for planting in the future. We save money, but why? Is it not out of fear? So saving is driven in our modern world economy by fear.

What about investment? In times past the act of saving was the act of investment. I was once a farmer so I set aside seed (saving) in order to sow in the future (investment). Today investment is undertaken out of greed. We encourage a large gross volume of investment by rewarding it disproportionately to its real contribution to society. Hence we have the situation in the United States where billionaire traders of derivatives and other spurious instruments of investment pay less taxes than do school teachers. Greed drives investment.

To bring saving and investment into balance means to create the beginnings of a society where saving is done out of love not fear. Investment is done out of love not greed. We have the beginnings of that worldwide. There are so many communities, so many ideas springing up that beginning to create balanced saving and investment in our earth rather than extracting from the earth.

When saving and investment are in balance everything else is also in balance.

No comments: