News

Loading...

Thursday, January 12, 2012

In Which Remarkable Contentions Are on Display

Scott Sumner has a very curious post up today, in which he contends that savings and investment are simply two different words that mean exactly the same thing. I find this post notable for a couple of things:

1) Sumner writes: "Saving isn’t “setting money aside,” it’s BUILDING CAPITAL GOODS... All the textbooks say S=I, so I thought people accepted this. I guess they don’t."

So Sumner's first piece of "evidence" that savings simply is another word for investment is that textbooks have an equation that says "S = I." Now, such an equation might mean a number of things, for instance, "In equilibrium, S = I," or "On the margin, S = I," or "In the long run, S = I," or "Ideally, S = I." One of the most surprising things it might mean is that savings and investment are synonyms, because, in that case, why bother putting this in an equation?! Textbooks by ornithologists, after all, do not feature equations like "BIRDS = AVES." Mathematicians do not typically have in their books "2 = TWO." So the fact that this equation is worth stating is evidence that most economists think there is something interesting going on here ("12 = 1") and not a simple identity. So here Sumner's "evidence" points, in fact, in exactly the opposite direction that he thinks it does.

2) What is more remarkable is that he seems to think that there is a "matter of fact" about definitions, and that this supports him. Of course, in one sense, there is a matter of fact about definitions: we can say, "x is how y is typically used," and that statement can be true or false. But if we adopt that sense of the fact about the definition, Sumner is plainly wrong: savings is not commonly used as a synonym for investment. If I have three gummy bears, and I eat one and set two aside, I will say “I saved two for later.” A science is free, of course, to use ordinary words in an extraordinary way, so this consideration is not decisive. But it does run contra Sumner.

But what Sumner seems to be saying, and saying IN ALL BIG CAP LETTERS, AGAIN AND AGAIN, is that 'savings' being equal to 'investment' is something true of the world, quite aside from our usage. And that is a very weird contention. As I (and most philosophers, I'd dare say) understand definitions, it is absurd to say "My definition is true, and yours is false." What one can say is "My definition is more useful than yours," or "My definition highlights a real distinction that yours obscures." And on this criterion, once again, Sumner loses. To conflate savings with investment is to collapse two useful concepts into one. We lose the ability to say, for instance:
Savings is not identically equal to investment, the equality of savings and investment is an equilibrium condition. Savings is defined as that portion of income not consumed. Investment is that portion of expenditure not consumed. Income and expenditure are not identically equal to each other; they are equal in equilibrium.
Now, we need not agree to everything in the above paragraph to see that distinguishing savings from investment might lead us to think about some interesting things. And that's about all one can ask of a definition. But Sumner will have none of it: "SAVING IS NOT SETTING ASIDE MONEY, IT’S SPENDING MONEY ON CAPITAL GOODS.  PERIOD, END OF STORY."

Well, Scott, if shouting one's own definition louder and louder is the key, you win.



6 comments:

  1. I know that you may not agree with the Austrian use of saving, but that is one of the things that attracted me to the school.

    Now, I know that S=I in equilibrium and that it is true that S=I ex ante. But, it is obvious that S doesn't equal I in the real world or ex post. So, I gave this a lot of thought recently and here is how I make it work in my own little head.

    First, using the definition of "deferred consumption" I broke saving down into 3 primary types: consumptive saving, productive saving and addition to cash balances (I know, this isn't original on my part). Saving for consumption is pretty straight forward, it is merely deferring consumption today for greater consumption in the future (such as saving up for a car), but eventually this type of saving is spent on consumption. Therefor, in the longer run, it cancels out.

    Adding to cash balances is pretty much an uncertainty between consumption and investment. Other than in the special case of a miser who just keeps adding to his cash balance, most people's cash balances will be either spent on consumption or invested, so it too cancels out in the long run or becomes a part of I.

    This means that the only "saving" that is important to the S=I condition is saving for productive use (in equilibrium, this is the only saving). I don't see a problem with this when assuming perfect foresight, just so long as you are aware that this is not how the real world works. Therefore, I think that it is entirely ridiculous to make the statement that savings and investment are the same thing, because in the real world the other types of saving that I mentioned above are very important and real.

    ReplyDelete
  2. No idea what Nick Rowe and Scott are talking about in these posts.

    ReplyDelete
  3. I can see how savings = investment if by "savings" we mean putting money into an interest-bearing bank account. The interest generated is just a flat-rate indirect "return on investment" to the extent that the bank is providing capital to others through loans of your money.

    Sticking your money in a coffee can and burying it in the back yard is also "savings," though, and it's not investment, is it? I guess I could buy the idea that if it's a commodity-based money, and one expects it to appreciate, it could be, but that seems like a bit of a stretch.

    ReplyDelete
  4. Tom and Joe, what really puzzled me about Sumner's post was that he seemed to think his preferred definition was a simple fact about the world. Maybe it does make sense to define savings and investment identically, or perhaps it doesn't -- I'll leave that to the economists to sort out. But as a philosopher, I had to object to how Sumner was treating definitions!

    ReplyDelete
  5. "I'll leave that to the economists to sort out."

    Though I sense some sarcasm in that sentence, I must ask: You do consider yourself an economist, right? At least in the sense sense of the classical economists, who mostly came from a philosophical direction?

    Good post though. BTW you have several very good posts. Just wanted to mention that once, since I only write if I have a serious objection (and actually think I have an argument), but quite never if I agree... Yet I am sure you couldn't care less if I agree, but these blogs should offer something like the Facebook "like" button, possibly with the feature to enter/show your name/pseudonym. ;)

    ReplyDelete
  6. Hi, skylien, no sarcasm at all: I consider myself a philosopher who thinks about economics a lot. In what sense S = I I leave to the full-timers; I just wanted to note the philosophical problem with Sumner's post.

    ReplyDelete