SAVING AND SPENDING
[To the Editor of the SPECTATOR.] SM,—In your article in last week's issue on the subject of " Saving and Spending " I fcel that scant justice has been done to the theories of Mr. Keynes and Mr. Hobson concerning the need for a reduction of saving as a remedy for unemploy- ment. May I therefore try to outline what I think is Mr. Keynes' general line of argument in his recent book, A Treatise on Money ?
(1) If full employment is to exist in a country over a long period it is essential that the rate at which earnings are being made in production and the rate at which expenditure is taking place shall be equal. For, since the only source of earnings is in the selling price of products, and this depends on expenditure, if expenditure is below earnings, then some- body must be making a loss and contraction of output and depression will result. (2) Expenditure may take two forms, expenditure on consumers' goods and expenditure on capital goods ; the former kind of expenditure is called " spending " by Mr. Keynes, the latter is called " investment." If people abstain from spending part of their earnings on consumers' goods they are said to be " saving." (3) Now, if the rate of saving and the rate of investment are equal, then total expendi- ture will be equal to total earnings, since savings, although not being spent on consumers' goods, are being spent on capital goods, that is, are being invested. In so far as this is the case equilibrium is preserved, there is no unemployment. (4) When there is unemployment, however, this fact itself indicates that no longer is total expenditure (spending plus investment) sufficient to make it profitable to employ every- one ; that is, people are abstaining to too great an extent from spending and investing, saving is excessive relatively to investment. The situation may be improved in either of two ways : Saving may be reduced, that is, more money may be spent on consumers' goods, or, alternatively, investment
may be increased, more money may be spent on capital goods. In either case unemployment would be reduced and the Choice between the two methods depends on whether it is desirable to produce more consumers' or more capital goods: Quite recently Mr. Keynes was himself supporting a policy for large-scale investment in public works, and - it appears that it is only because it is at present politically impracticable to increase investment that he is now advocating the alterna- tive, increased spending on consumers' goods.
May I now consider one or two points in the article itself ? (1) You state that " heavy spending . . . has the same effect as inflation." But to " have the same effect as inflation" is not to be inflation, and it may be asked, at what point does inflation begin ? Mr. Keynes maintains that we are at present in a state of undesirable deflation, too little money is being spent, and we have depression ; in which case some- thing similar to inflation is necessary to bring us back to normal. Only then would further increases in expenditure be harmful inflation. (2) Again, you find that depression is due to " faulty estimates of the amount of goods required. However careful producers may be in their predictions it would be impossible to eliminate the human error." If, Sir, we were to accept your view, the trade depression must be treated as an Act of God. In suggesting this you are taking up a position contrary to that of almost- all economists, whether they agree with the actual argument- of Mr. Keynes or not ; except for the revolutionaries who see the only remedy for the trade cycle in a completely new economic system.— University College of North Wales, Bangor.
[Our contention that " gluts " are due to the optimism of producers is not contrary to that of most economists : and traders are not more to be intimidated than sailors by fears of an Act of God.—En. Spectator.]
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