Back to Homepage Income Measures Income: Saving and Investment Methods of Buying That Save Money The Choice of Goods Methods of Buying That Reduce Mistakes In Selection Methods of Securing Information Concerning Goods Plans and Motives of Consumers Consuming the Product Who Is the Consumer? The Consumer in the Market Priorities and Preferences in Consuming Decisions The Consumer as User of Wealth The Consumer as a Buyer Consumers as Self-Conscious Agents Criteria of a Good Market Information Versus Persuasion of the Buyer The Rate of Interest Interest Rates and Economic Activity Saving, Investment, and Income Saving Motives Saving Plans and their Realization Total Spending Is the Key to Prosperity The More We Spend, The More We Have Spending by Private Enterprise

Saving, Investment, and Income Since an understanding of the ideas of this school on saving, investment, and income is basic to the comprehension of the theory of economic maturity, we shall let Dr. Hansen expound them at some length. Of first-class importance in appraising the functioning of our economy is to examine the question, what is it that keeps the income stream going; how can it be raised to a higher level; and how may it be maintained at a high level? That income stream flows day by day to everyone participating in the productive process, including not only the production of commodities but also of services of every kind and description, trade, professional, and governmental. It is large or small according to the volume of purchases currently made. These purchases are of two kinds; one type consists of the purchase of consumption goods and services; another type consists of the purchase of capital equipment, industrial plant and machinery, public utility and railroad equipment, commercial and residential building, and the like. How large the income stream will be depends upon the volume of these two expenditure streams. Now the expenditure stream which is mainly responsible for the rise and fall of the total income is the outlay made on equipment and plant expansion. When large expenditures are made on industrial, commercial, residential and public construction; when office buildings, hotels, apartments, houses, school buildings, and public works of all kinds are being erected in large volume; when investment is made on a large scale in railroad, utility, manufacturing and mining, and agricultural equipment; the income is lifted to a high level. Let us consider what is necessary in order to keep the income stream flowing on a high level, once it has reached that level. The income received or realized out of the productive process of the prior week or month will either be expended for consumption or it will be saved. The part that is spent on consumption goods and services automatically becomes the source of a new income stream. The part that is saved may or may not feed into the income stream, depending upon whether or not these savings are used either by the saver himself or by a borrower for the purchase of capital goods. If the saver does not himself use the funds, or if he fails to find a borrower who will use them to purchase plant, equipment, and other capital goods, the income stream dries up and unemployment prevails in the capital-goods industries. It is highly essential that all that part of the current flow of income which is not expended on consumption goods, namely that part which is saved, shall be expended either directly by the saver himself or indirectly through a borrower on new plant and equipment of some sort. If the amount which is saved is large, as it is likely to be at a high income level, it is necessary that equally large outlets be available for these savingsin equipment and plant expansion, and in residential and public construction. In every boom period, the flow of savings is expended on capital outlays of this sort, and frequently these funds are augmented by additional sums; created out of an expansion of bank credit. In a depression, expenditures on capital projects fall off, savers are unwilling themselves to purchase capital goods with their savings, or are unable to find borrowers to do so. The income stream thus dries up. In addition, owing to the fall of employment, the stream of expenditures on consumption declines, and so the income stream shrinks still more A society geared to a high peak load of capital-goods production is likely to experience violent fluctuations in income and employment. A high-savings economy will remain a highly dynamic economy so long as it is able to experience periodically great bursts of capital outlays on plant and equipment. It is then rapidly expanding and progressive, despite its instability. But if such an economy fails to find adequate investment outlets in plant and equipment for its new savings and for its depreciation allowances, it will lose its dynamic quality and become a depressed and stagnant economy, with a large volume of chronic unemployment. The high-savings economy can escape a fall in income and employment only through the continuous development of new outlets for capital expenditures on industrial plant and equipment and on commercial, residential, and public construction. Such is the general theory of saving, investment, and income assumed by writers of the mature economy school. This theory, it should be added, is held with various reservations by many economists who do not belong to that school, including those who are strongly opposed to it. Taken by itself the theory is neutral. In this respect it differs from the remaining elements of the philosophy of economic maturity, which are without exception peculiar to that philosophy.   Home