Prosperity and Depression.pdf

Chap. 8Recent Discussions on the Trade CycleL.et us no\v consider the converse case, whereHow 5 and I money is withdrawn from circulation. Let usare equated assume that some people do not spend the whole ofin the case their income, or more generally of their moneyo.l deflation. receipts, 1 and accumulate cash or idle deposits.This has been conveniently expressed by sayingthat saving exceeds investment, because part of the savings arehoarded 2 instead of being invested.According to Mr. KEYNES' definition of saving and investment,this way of describing the nlatter is no longer permissible. Therecan be no divergence between J and 1. How are they then equatedin this case? The answer is very simple. If some people savepart oftheir income and keep it in liquid form, one of two things,or a combination of them, must happen : either goods whichotherwise would have been sold accumulate and that constitutesinvestment which corresponds to the saving, or else sales aremaintained at the former level by cutting prices, and the retailerssuffer losses; these losses reduce their income--and hence theirsaving-by an amount equal to the original decrease in spending. 8Hence, the original saving is cancelled by·an equal decrease insaving (which, if we start from a position. of zero saving, becomesnegative-dissaving) by somebody else.1 Not all money received by an individual or a firm is (net) income.Part of the receipts of a producer is to be set aside for the replacement ofcapital, either of working c,apital or of fixed capital. In the first case, itis sometimes said that the money constitutes" working capital" ; inthe second case, we speak of " depreciation allowances n or " amortisationquotas". Naturally, the more durable a capital instrument is,the greater is the freedom and arbitrariness in distributing over theperiod of its life-time the corresponding amortisation allowances. Thereforemany writers (for example, Mr. Hawtrey) define gross incomeinclusive of depreciation allowances. It should, however, not be forgottenthat the transition from fixed to working capital is gradual and that, inprinciple, the same problems are involved in the replacement of either.• It should be noted how easy it is to describe the phenomenon withoutusing the words" saving" and U investment" in terms of receiving andspending of money.• It could be objected that a retailer may cut his consumption andmaintain his saving. This is quite true, but this further decrease inconsumers' outlay (act of saving) can be treated exactly as the originalone: it must again reduce somebody else's income and cannot give riseto a divergence between 5 and I.