Monday, April 20, 2009

the cleavage between saving and investment motivations

the most important single fact about saving and investment activities is that in our industrial society they are generally done by different people and done for different reasons.
this was not always so. and even today, when a farmer devotes his time to draining a filed instead of to planting and harvesting a crop, he is saving and at the same time investing. he is "saving" because he is abstaining from present consumption in order to provide for larger consumption in the future-the amount of his saving being measured by the difference between his net real income and his consumption. but he is also " investing" ;i.e., he is undertaking net capital formation, improving the productive capacity of his farm. not only are saving and investment the same things for a self-sufficient farmer, but his reasons for undertaking them are the same. he abstains from present consumption (saves) only because he wants to drain the field (to invest). If there were no investment opportunity whatsoever, it would never occurto him to save; nor would there be any way to save for the future, should he be so foolish as to wish to.
in our modern economy, net capital formation or investment is largely carried on by business enterprises, especially corporations. when a corporation or small business has great investment opportunities, its owns will be tempted to plow back much of its earnings into the business. to an important degree, therefore, some business saving does still get motivated directly by business investment.
Nevertheless,saving is primarily done by an entirely different group: by individuals, by families, by households. An individual may wish to save for a great variety of reasons: to provide for his old age or for a future expenditure (a vacation or an automobile). Or he may feel insecure and wish to guard against a rainy day. Or he may wish to leave an estate to his children or to his children ’s children. Or he may be an eighty-year-old misr with no heirs who enjoys the act of accumulating for its own sake. Or he may already have signed himself up to a savings program because an insurance salesman was persuasive. Or he may desire the power that greater wealth brings. Or thrift may simply be a habit, almost a conditioned reflex, whose origin he does not himself know.
whatever the individuals ’s motivation to save, it often has little to do with the investment opportunities of society and business.
this truth is obscured by the fact that in everyday language "investment" does not always have the same meaning as in economic. we have defined " net investment," or capital formation, to be the net increase in the community ’s real capital ( equipment, buildings,inventories). But the plain man speaks of "investing" when he buys a piece of land, an old security, or any title to property. for economists these are clearly transfer items. what one man is buying, someone else is selling. there is net investment only when additional real capital is created.
In short, even if there are no real investment opportunities that seem profitable, an individual may still wish to nonconsume-to save. he can always buy an existing security asset; he can accumulate, or try to accumulate, cash.

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