Sunday, December 9, 2012

Did Keynes Hate Saving?

The cry often goes up that Keynes “hated saving” or “crafted a theory that condemned living for tomorrow and deferring gratification”.

These strange characterisations of Keynes and Keynesian theory seem to stem from an inability to separate micro from macro phenomena.

On the micro level (that is, in terms of the individual) did Keynes hate saving? I doubt it. Even though one does find talk in Keynes’s writing of the hoarding of money as an immoral thing (Keynes called money saved but not spent on capital goods investments “idle funds” or “hoards”), this was really about the macroeconomic effects of aggregate saving of money without investment (if anyone can find references in Keynes’s work to individual saving/hoarding as bad or immoral per se I would like to see such references).

But most obvious way to approach the question whether Keynes hated saving in terms of the individual act is to ask: did Keynes spend his life as a spendthrift, spending every pound he ever earned? Did he die a pauper with no, or little, savings?

Not exactly: Keynes’s net worth in 1945 was £411,238 (Moggridge 1992: 585) and according to Skidelsky (2000: 479) after his death (on 21 April, 1946) his net wealth was £479,529, about £400,000 in securities alone.

In inflation-adjusted 2011 pounds (in terms of goods and services) £400,000 would be roughly the equivalent of £13,745,000. After 1929, Keynes’s investments included car company shares, gold shares, American utilities and aircraft stock.

Was a man who died with a net worth of about 13 million pounds a person who hated saving? Clearly not.

Meanwhile, there is no doubt that Keynes was concerned about the macroeconomic effects of saving when it was not matched by an equal amount of investment. This was his criticism of neoclassical economics (what he called the “classical theory”): Keynes questioned the neoclassical belief that savings and investment are automatically equilibrated.

He saw negative effects on output and employment from an increase in savings unmatched by sufficient investment.

There is no contradiction in saying that saving is good and beneficial to individuals (at the micro level) and that people will clearly need to save in the course of their lives, but at the same time that saving can possibly be deleterious in its macroeconomic effects in some circumstances.

The macroeconomic reality is that strong government spending to create and maintain full employment and economic prosperity actually helps many individuals to save for the future. That is to say, saving as a micro phenomenon of benefit to individuals will be strongly aided and increased by Keynesianism, not hindered.

It is rather easy to prove this. All we have to do is look at the historical data for the US personal saving rate:
The data in this graph begins in 1959. During the last years of classic Keynesianism in the US (1946–1973) the saving rate seems to have been increasing. At any rate, the historical average for the 1946–1973 period was between about 8–10%; certainly the savings rate was stable in this period, not falling.

Then after full employment and Keynesianism were abandoned in the late 1980s and the revived neoclassical economics infected policy makers and central banks, the savings rate plunged – and spectacularly so in the 1990s – as people were driven into private debt as real wages fell under neoliberalism, and the plague of speculative asset bubbles hit the economy.

Why did the savings rate fall so sharply after about 1985? The reason, I think, is that the effects of the fall in real wages that began in the 1970s (itself a function of neoliberal policies) started to be felt and people had to dip into their savings to maintain living standards. But this is not the only reason, of course. Part of the reason might be reduced income uncertainty as married women entered the workforce from the 1970s and 1980s (and families had more security from having two incomes, although this was itself partly a function of the fall in real wages).

But the most important reason in my view was the explosion in the availability of easy credit as financial institutions were deregulated after about 1980. Lending standards fell, and it became much easier for households to run up debt for consumption, and as a solution to their money problems. But this created the perverse effects that savings could be drawn down even more for spending (in the expectation of more credit to deal with the debt load) and then as an effect of the need to service a much greater burden of personal debt.

The neoliberal economic model was one that substituted private debt for Keynesian public spending as the engine of growth in Western economies.

The results are now here for all to see:
(1) the huge unsustainable asset bubbles in the 1990s and 2000s,

(2) the vast private debt to GDP ratios,

(3) the financial crisis of 2008,

(4) the subsequent crisis of deleveraging and debt deflation (or what Richard Koo calls the “balance sheet recession”), and

(5) the continuing and general economic malaise with high unemployment, because not enough has been done to fix the private debt crisis. Furthermore, the need for large-scale public investment spending to help the private sector delever (and to provide employment and income) is unmet.
So, if we want to blame anything for the collapse of the US personal saving rate after about 1985, it is neoliberalism, not Keynesian economics.

Keynesianism actually allowed a stable – possibly even a rising – personal savings rate.

And Keynes – far from hating saving – saved a lot of money in his time!


Moggridge, D. E. 1992. Maynard Keynes: An Economist’s Biography. Routledge, London.

Skidelsky, R. J. A. 2000. John Maynard Keynes: Fighting for Freedom, 1937–1946 (vol. 3), Penguin Books, London.


  1. The one thing that Keynes did disliked was rentism. He really disliked rentist, throughout his life. Ironically, so did Ricardo, but not Malthus. Keynes disliked the former and was fond of the latter.

  2. LK, I'm curious as to why you emphasize debt deleveraging.

    Have you read Dean Baker talking about the lost demand from the housing bubble being what's dragging down the economy rather than underwater homeowners?

    1. Yes, Baker is right. Steve Keen says the same thing.

      Deleveraging needs to occur, but what I am saying is government needs to accelerate the process by greater fiscal policy, more public investment, perhaps even more drastic measures like debt restructuring.

    2. I talked to Baker about this and I totally agree. The aggregate demand drag in the US does NOT appear to be driven by deleveraging:

      Other countries ARE experiencing a form of debt deflation, but NOT the US and Post-Keynesians need to stop making this argument because it is NOT supported by the evidence.

      So, what is the problem? It's structural. The US economy cannot run close to full employment given the present wage structure and import/export balance. In order to run at close to full employment the economy required asset price bubbles in the form of the housing bubble or the stock market bubble. These bubbles certainly do require private debt and it is because the private sector are now skeptical of leverage that another bubble will not form. BUT this does not mean that deleveraging is causing the crisis in the US per se. The crisis in the US is structural.

    3. "It's structural. The US economy cannot run close to full employment given the present wage structure and import/export balance. "

      You're suggesting outsourcing, free trade, capital movement is the major cause of unemployment?

      Or can you explain Baker's views more fully or link to something that does?

    4. Baker doesn't think we think we have structural unemployment, I think that's that guy's own view.

      Here's one link:

      He does often emphasize the need for a lower dollar, though. Here's one post on that:

      Here's a longer one with with some more general stuff:

    5. Baker does think that the unemployment is structural. He thinks that if the US devalues the dollar this will return the economy to full employment AND put the US back on a path of former glory. I TOTALLY disagree with this. All the data indicates that devaluations of the dollar do not have long-term effects on the trade balance -- indeed, the causality appears reserved (weird!) at first glance.

      The real problem in the US is better thought about in wage-led/profit-led terms, as some Kaleckians are now doing.

      Simply put: the US is not a profit-led (read: potentially export-led) economy. It is, and probably always has been, a wage-led economy in a very strong sense. Because wages are low the economy requires large amounts of debt to sustain full employment. So, either the wage structure has to be fixed or the government has to stimulate. Otherwise the economy will remain mired in unemployment stagnation (possibly for decades, since if it remains mired in unemployment wages will also stagnate rather dramatically...). And if a recovery ever does truly take place it will be in the form of another asset price bubble (note: I doubt this will happen in the coming decades).

      My opinion is that a devaluation of the dollar will only produce short-term gains and will be damaging to the rest of the world; Baker's is the opposite (although he doesn't say much about the rest of the world).

      So, the debt deflation people get the solution pretty much 100% right. But the evidence simply does not show that they diagnose the disease properly -- at least, in the case of the US.

      One more thing: if I'm right, then this means that the policies of inflation advocates (market monetarists) and those that support NGDP targets would be very dangerous. Krugman and Baker favour these (i.e. get the Fed to cause inflation). I'm pretty convinced that the Fed cannot actually do this. But if they succeeded it is likely that wage-bargaining would not keep pace due to the high unemployment. Thus, the policy would in effect have a transfer effect from worker to capitalist (who had lower wages to pay out) and would exacerbate the underlying problems.

    6. Philip, I think you're misrepresenting his position. He has always and repeatedly stressed the need for more government stimulus.

      If you read the links I provided he does deny the recession is structural (first link).

      He also makes the case that the trade deficit is simply unsustainable (second link).

      And argues against the idea that lowering the dollar implies a need for a beggar thy neighbor policy (third link).

      I believe his position on wages is that if the government pursues full-employment policies that will give wages the opportunity to rise, but that we've rarely been at full-employment the past thirty years.

      He also writes constantly on upward redistribution of income. (I haven't read his book The End of Loser Liberalism yet, but I believe this is what it's about, and it's available for free online.)

      Just yesterday he wrote this: "The dsitributional issue raised by Krugman is extremely important, both for workers who are not seeing gains in living standards, and also for the economy as a whole, since a continual upward redistribution of income will lead to stagnation as a result of inadequate demand."

    7. 1. Dean is talking about structural unemployment (i.e. skills not matching jobs) in that link. This is nonsense. I'm talking about the macroeconomic problems being structural -- i.e. due to institutional arrangements that bias the economy with deficient aggregate demand. Dean would agree. We just disagree on the solutions.

      2. I totally disagree that the trade deficit is "unsustainable". Yes, its a drag on aggregate demand and raises unemployment. Yes, it is not the best way to run the US economy. BUT it is sustainable for as long as foreigners want to accumulate dollars. They are incentivsed to do so for a number of reasons; the dollar being a de facto reserve currency for one, and the fact that you as a foreigner can make a lot of money on Wall Street being another.

      3. His argument against beggar-thy-neighbour is a cop out. China cannot just deficit spend to increase domestic consumption. The economy is, for example, too sensitive to inflation. Besides, if the US devalued substantially, other economies would likely follow. A race to the bottom would ensue. Dean knows that because he knows economic history, but he avoids it because it doesn't square with his argument.

      4. Yes, of course Dean agrees on the distribution and government spending points. That has never been in dispute.

    8. I'm not at all sure that the US can devalue the dollar, because to devalue the dollar some other currency has to go up.

      And if those are exporting to the US, then they will buy dollars and bury them to prevent the dollar going down.

      The US dollar can only go down if the export led economies let it.

  3. Deficit hysteria and income/wealth inequality tightens the funding of private net saving desires so less saving/full employment is possible.

  4. Good post but I'm sick of constant ranting about the 'neoclssical' boogieman, it makes as much sense to me as ranting about "differential calculus economists", strictly speaking neoclassical economics is just a modelling device (some call it "methodological individualism"), and thus can support any policy from the very left wing: to obviously right wing policies. Stiglitz for instance has a very 'neoclassical' approach to his analysis of bank regulation and capital requirements. Why don't you call it what it is: right wing economics. Generalizing about neoclassical is just pointless sectarianism, I know plenty of neoclassicals that would agree with what you're saying here, for intance Daniel Kuehn is essentially saying the same thing on his blog.

    1. Their models generally do not support the types of policy they advocate. The New Keynesians are even more inconsistent in what they publish versus what they say than the old neo-Keynesians. Frankly, they don't make much sense.

    2. "Their models generally do not support the types of policy they advocate."

      That is a really really incorrect statement, seriously, you must have an incredibly deficient reading of the literature on this sort of stuff (assuming we're talking about bank regulation).

    3. "(assuming we're talking about bank regulation)"

      Baseless assumption. Never said that. Try to stick to facts, mate.

      I'm talking about fiscal policy. New Keynesian and New Consensus models generally show that it is ineffective in the long-run.

    4. BTW speaking of deficient readings of the literature, neoclassical economics is not JUST characterised by methodological individualism. It is also characterised, among other things, by the neutrality of money in the long-run and the ergodic axiom. These are immensely important and have enormous implications for both theory and policy. Trying to paint neoclassical economics as being as "neutral" as differential calculus is a complete perversion of the facts.

    5. I have to agree with Philip, though with the caveat the "New Keynesian" has different strands.

      The type of neoclassical New Keynesianism of the Gregory Mankiw and Assar Lindbeck type seems hardly worthy of the label "Keynesian" at all.

      These most neoclassical of the “New Keynesians” were and are skeptical of fiscal policy.


      “As Greg Mankiw (1991), one of the leading New Keynesians, stated, New Keynesian economics could have been as easily called New Monetarist economics. New Keynesian work became associated with partial equilibrium models that explained price rigidities, such as menu costs and implicit contract models. Thus, New Keynesian economics was soon interpreted as being New Classical economics with price rigidities.”

      David Colander (ed.), Post Walrasian Macroeconomics, p. 66

      “there is no unified new Keynesian view of the role of fiscal policy although new Keynesians do give much greater weight to the stabilizing role of monetary policy compared to the old Keynesian view"

      Brian Snowdon and Howard R. Vane,
      Modern macroeconomics:
      its origins, development and current state, p. 364.

    6. This is why these New Keynesians come across to me as being both politically and theoretically irrelevant. Okay, ignore the theory and lets talk politics (ideology?). The NKs are obsessing over "perfect information" and trying to get rid of complete and utter fantasy assumptions. The policy advice based on this? Regulate the banks.

      This is so irrelevant. The PKs know what the financial services sector does: it redistributes wealth and siphons money away from real production. And even if you regulate this will continue. But the NKs don't want to deal with this because without the marginal theory of distribution their whole paradigm collapses (as it almost did in the 60s). So, they avoid it and pursue irrelevant stuff in their theory and then make concessions in their policy based on their ideological proclivities.

      It's not only a terrible bunch of fakery. It's also just all so irrelevant. If this is what the "left" are engaged in, then the "right" need not worry. Frankly, I'd side with an honest right-winger rather than a left-wing charlatan any day.

    7. ""(assuming we're talking about bank regulation)"

      Baseless assumption. Never said that. Try to stick to facts, mate."

      My original comment was in reply to the implication in the post that the deregulation of the financial sector in the eighties was somehow the only policy consistent with neoclassical economics, which is completely false.

      "I'm talking about fiscal policy. New Keynesian and New Consensus models generally show that it is ineffective in the long-run."

      And what did Keynes say about the long run?

    8. "The NKs are obsessing over "perfect information" and trying to get rid of complete and utter fantasy assumptions. The policy advice based on this? Regulate the banks."

      Blah blah blah, New Keynesian analysis is jut a method to evaluate how monopolistic competition and price rigidity (and other various factors) can cause the economy to be above or below capacity for extended periods even given the assumptions of forward looking expectations and micro-founded behavior, essentially turning the models of new classical's against right wing economists and demonstrating how the Lucas Critique doesn't come close to killing demand management effectiveness, which is a convincing retort to them given that they cannot use any of their arguments (such as the aforementioned Lucas critique) against it. For the vast majority (certainly every "New Keynesian" I have ever spoken to or worked with), it is NOT a model of everything and is not a general framework for how they would evaluate any and all economic questions. Papers on bank regulation never utilize New Keynesian analysis, there is usually many different ways in which bank regulation is analyzed, usually a mix of micro and econometrics (see here for intance:, as well as behavioral economics, game theory, contract economics, industrial organization and many other approaches (you know because in reality mainstream economics is actually pluralistic, not neoclassical: I know you think it "doesn't make sense" because you are too stuck in a black and white world where everyone can be neatly pigeon holed into ultra specific models associated with a specific school of thought. Get over yourself, the majority of economists aren't even macro-economists and have nothing to do with New Keynesian or "New Consensus" economics.

    9. 1. Keynes said that in the long-run we're all dead. Implying that only short-run policy was valid for analysis.

      2. I cannot believe you see the world in such political terms. It's worse than a Fox News viewer. And to think these people call themselves "scientists". They're just ideologues engaged in political battle.

      3. The Lucas critique was made irrelevant in the 1970s when it was shown by the SMD theorem that neoclassical micro-theory is inconsistent on its own terms. [] Why not focus on that? Or why not focus on Axel Leijonhufvud's actual work (which led to the Lucas critique) and implied that general equilibrium analysis should not be applied at a micro or macro level? Oh, I know. Because you have a metaphysical construction to defend against logical criticism... You're another dissenting priest who wants a reformation but fears that proving the non-existence of their God will rob them of their authority.

      3. All the "pluralistic" strands you mention fit perfectly within the neoclassical and general equilibrium framework. They're also a load of nonsense. Neoclassicals will tolerate dissent: provided that it doesn't undermine their precious metaphysical system.

      4. Of course, when all else fails the trick is to hide in ambiguity. Economics becomes, as we like to joke, the "Teflon science". No criticism can stick because the proponents, when faced with them, simply deny that they believe in the theory -- all the while implicitly relying on the theory in all their arguments. That, I think, would be a pretty good definition of "ideology" in science, actually.

    10. By the way, although it would take us far off point (or would it):

      "...the majority of economists aren't even macro-economists..."

      I would argue that this is because the majority of economists being trained today no longer do economics. What they instead do is apply some of the worst a priori economic principles (utility maximisation framework etc.) to sciences (like psychology) that have already advanced far beyond them. Then there are a few doing mathematical puzzles (game theory), which is the academic equivalent to getting paid to do Sudoku. Oh, and then there's the "pure" econometric analyses which never actually come to any conclusions because there is no solid theoretical framework behind them. And then when they do come to conclusions they resemble the conclusions of idiosyncratic cranks with no firm approach to understanding economic questions -- and who, because you cannot critique them because they don't have a theory are completely free to argue whatever their personal idiosyncrasies dictate.

      So, yes, I agree. Much of the profession have moved. But they are not actually doing economics any more. And most of them don't understand economics and cannot do good economic analysis. Meanwhile, macroeconomics -- which advises policy -- is dominated by charlatans, even the best of which deny some very basic facts about our world.

      The Teflon science is only non-stick because it is an irrelevant placeholder to justify contemporary popular discourse on economic questions. It has become so rotten from the inside out that people are basically allowed to do whatever they feel like without a proper point of reference as to what is and what is not true. Freedom, yes. But the freedom to be completely and utterly irrelevant. A bit like Marxist "science" in the post-Brezhnev era.

    11. More outrageously sectarian ad hominems and vitriol, huge generalizations without any basis; your vapid insults just make you sound more and more like an extreme ideological crank. You are doing everything wrong if you want to try to convince anyone to embrace post-Keynesian economics (which I am immensely sympathetic with), it is commentary like this which will make everything you say and you are associated with to be rejected en masse as people with sensible heuristics dismiss you as a crackpot like they would dismiss a frothing at the mouth creationist. Fortunately not all post-Keynesians are like you, Lord here for instance is usually able to maintain civility and provide an admirable level of scholarship, and doesn't come off as the most unbearably smugly sanctimonious narcissist like you, so post Keynesian econ has a shot of reaching a wider and wider audience despite the likes of you being a massive obstacle (I suppose it might be subconscious desire on your part to remain as much of a hipster as possible, post-Keynesian economics becoming more accepted will be inconvenient to this aggressive victim complex narrative you have concocted). Is it so hard to actually provide anything of substance? I'll show you how it's done:

      I'm done.

    12. Oh and if the "I'm done" wasn't clear, I will no longer take part in this 'debate' as it's clear your narrative is impenetrable and you will always find some ad hoc justification for its extremity and sweeping generalization despite the certainty that you have not read more than 0.01% of the literature required to even have sufficient knowledge to be able to maintain such a broad dismissal of it with any credibility. This is the last post I will make in this particular blog entry.

    13. "More outrageously sectarian ad hominems and vitriol..."

      Followed by... ad hominems and vitriol. (Let's see: hipster, victim complex, narcissist... shall I continue with the "libels", as you call them, you hypocritical moron?).

      And a bunch of links that supposedly "prove" Britonomist's arguments vicariously.

      Nice work. Idiot. What's that Nietzsche quote I'm thinking of?

      "Battle not with monsters, lest ye become a monster, and if you gaze into the abyss, the abyss gazes also into you."

      What Nietzsche forgot to mention was that the monsters you battle with are usually only your own... Which is confirmed if you examine the above comments and conclude that you're the one who started engaging in slurs. ("you must have an incredibly deficient"; "you are overwhelmingly among the least objective and ideologically charged commenters"; "libelous").

      Be careful. Take a glance in the mirror and you might fall in. Idiot.

    14. Hey Britonomist, question: do you believe that the creationists and the phrenologists are incorrect? If so, how do you know this by only engaging with their arguments in what they would consider a superficial manner? Is it because their entire approach is incorrect and flawed? Serious question. Not that you'll be able to answer it without attacking my character and providing me with a reading list (i.e. argument based on authority).

  5. The real schism here is between those who think that investment causes saving and those that think that savings causes investment. The Austrians and the neoclassicals think that saving causes investment, Keynes and the Post-Keynesians think the opposite.

    If you think that investment causes savings, then everything you advocate will encourage investment because this, in turn, accommodates savings. Thus, Keynes should have been seen as an advocate of savings -- its just that he thought the causality was reversed from what the neoclassicals/Austrians think. It's because they don't understand this distinction that the Austrians think that Keynes "hates savings".

    By the way, they're also empirically wrong. As your graph indicates, investment does cause savings and not vice versa. You'll find this across all country data all the time. Its quite incredible that economists do not recognise this. But then, they have a vast metaphysical system through which they view the world and this totally distorts their ability to be objective.

    1. "distorts their ability to be objective."

      Ironic, seeing you are overwhelmingly among the least objective and ideologically charged commenters that I see on blogs, systematically misrepresenting the actual positions of economists on a massively libelous scale.

    2. Define "ideologically charged". I don't think I care much for ideology. Tax breaks are as good as spending for me. Provided that they are sufficiently large and targeted at people who will consume. But fill me in: what do you mean by "ideologically charged".

      Also, libel is targeting a particular person in an attempt to damage their character based on personal slurs. Saying that a profession is corrupt and incompetent is not "libel". Nor is attacking an academic's argument because its nonsense or metaphysics. Besides, if I actually was "libelous" I'm sure would have been brought to court by now given that, unlike most blog commenters, I don't hide behind usernames.

      To give a more concrete example: if you published under your real name and lived under the British legal system (not unlikely), I could take you to court for saying that I engaged in libel. You would then have to prove that I engaged in libel or I would take all your money. Not interested in doing that, of course, just making a point.

      Conclusion: its not clear that Britonmist understands the English language. Or, at least, he/she has some rather interesting definitions of words that could land him/her in trouble if he/she used them in reality.

  6. The love of money as a possession---as distinguished from the love of money as a means to the enjoyment of the realities of life---will be recognized for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease. JMK