Hi, I’m Eve. I could add a lot more to Richard Murphy’s post, but I’ll keep it brief. Murphy doesn’t explicitly mention the loanable funds fallacy that was debunked by Keynes and Kaldor. Investment does not come from existing savings. Lars Schill states: Excellent high standard of care hereOne of his arguments that may be worth noting is that “we assume that savings and investment can be treated as independent entities. For Keynes, this was a serious error.”
The second problem is Murphy’s focus on household savings. In fact, the household sector should be net savers because household debt is not economically productive. And high levels of household debt, or worse, net household borrowing, are strong precursors to financial crisis, as 2008 demonstrated. Meanwhile, corporations, as a whole, should be borrowing to invest. But as we pointed out in our Conference Board Review article, since the early 2000s, corporations have paradoxically become net savers in non-recessionary periods. And that trend has continued.
By Richard Murphy, Adjunct Professor of Accounting Practice at the School of Management, University of Sheffield, Director of the Corporate Accountability Network, Member of Finance for the Future LLP, and Director of Tax Research LLP. Originally published in Funding the Future
This morning’s video is a little different in that it’s unfortunately audio only. I wasn’t in the mood to sit in front of the camera yesterday, but I was happy just talking into a microphone. So I did that.
In the resulting monologue, I argue that William Beveridge, in his 1944 report that formed the basis of the British welfare state, argued that the concentration of too much savings in a few hands could be deeply destructive to an economy – and the title of this blog post is a direct quote from him.
of The audio version can be found here.
The records are as follows:
Hi, this is Richard Murphy. I’m sorry I can’t see you in this video. I’ve had a bad ear infection and I’m not feeling well today. So rather than show you a less than optimal version of myself, I thought I’d jot down a few thoughts. It may not be the normal course of events for someone lying in bed recovering to read Beveridge’s 1944 report, “Full Employment in a Free Society”, which was, of course, one of the foundations of the British welfare state, but I was encouraged to do so this morning.
And in particular, I found a paragraph that supports one of the hypotheses I often put forward, that saving is not a beneficial economic behavior, which often angers people because of course it is a natural tendency for many people to save, and there is undoubtedly value in people having some savings.
I always advocate for this and encourage people to have at least a rainy day fund so they can deal with the crises that life inevitably brings. I’m not opposed to that.
And to some extent, I am not opposed to pension savings, although, as many who know me are aware, I have some reservations about how pension savings are used. shareland, buildings etc., these are all second hand items purchased by these funds.
But that’s not what I’m really trying to say. I’m saying this: SavingsBeveridge addressed this issue in his report. He says it in paragraph 123. I’ll read it to you. He said:
SavingsSaving in itself has only a negative meaning; it means not spending. Saving may be desirable from the point of view of the individual who saves in order to secure future spending means and independence. Apart from this benefit of securing independence, saving in itself has no social virtue.
So he is echoing a point that I have made many times, but in a very specific economic context. He does so in the context of the arguments of JM Keynes, John Maynard Keynes, and at the time Lord Keynes, who in my opinion was the most prominent economist of the 20th century, who made the point, in contrast to classical and neoclassical economics, that savings do not fund investment.
There was no obvious connection between the two. And the interest rate mechanism could never equate savings with investment, because that would not work. Moreover, as Keynes and Beveridge agreed, there was no reason why large amounts of saving in an economy were necessarily socially beneficial. In fact, as Beveridge agreed and supported Keynes’s view, there was a socially destructive element to the whole notion of saving.
Now, you have to put this in context: he was writing during the Second World War, and the majority of people in Britain at that time didn’t have much to save, apart from their increased wages, which certainly had risen during the war.
But then, as now, the bulk of savings was owned by a relatively small proportion of society, and it was this portion of savings that caused the Beveridges greatest concern.
He said that the savings of people who were saving money Any form of rainy day fund that had surplus money from normal income was a problem. He clearly understood that it was useful. He also made the valid point that for every person who was saving in that situation, there were probably others who were drawing down their savings and using those funds for rainy days. So they were very unlikely to cause any form of economic dislocation as a result of what they were doing.
However, when it comes to the savings of the super-rich, I agreed with Keynes that it could seriously destabilize the economy. If the rich save too much and become even richer, it could actually significantly reduce demand from the economy. Some people would then not have enough to live on because there would not be enough economic activity to provide them with the means to make a living. Others might be forced to go into debt to make up for the deficit they face due to the lack of economic activity caused by the excess savings of the wealthy.
He found this extremely problematic. In fact, he said, it undermines the whole logic that the savings of the wealthy are the basis for investment, which is the basis of wealth in the economy.
According to him, quite the opposite may also be true: Savings do not necessarily lead to growth. In fact, the savings of the wealthy, to use a term popularized by Keynes, are very likely to cause a recession if they judge their “animal spirits” to be low and therefore are unwilling to spend their money for constructive purposes, including direct spending.
So the problem in society is that people are oversaving. Since then, the government has done everything it can to encourage people to save. As a result, financial assets in the UK have ballooned to around £15 trillion, six times what they were in the 1990s. National Income.
Why is that a concern? Because the savings are so large that their very use could destabilize the rest of the economy. And in some ways Rachel Reeves is right to focus on the role of pension funds, because pension funds own and control more than £6 trillion of wealth. And another big part is the value of land and buildings. That’s over £5 trillion.
So these are by far the two biggest factors in recording the value of your financial assets and savings.
But if pension funds are actually taking money from the economy, then they are a waste, and yet we are spending around £70 billion a year of government revenue, or rather lost government revenue, in the form of tax breaks and grants to boost pension fund assets, which may in fact be completely counterproductive.
Beveridge recognised that if the already wealthy (and, incidentally, the majority of people with sizable pension funds are already wealthy) tried to save more, their very goal of accumulating wealth could be the cause of economic recession and lack of growth, and that this could be exacerbated by not using those funds constructively in any way, as there was no obvious link between saving and investment.
So what I’ve been saying for a long time is purely Keynesian. It’s at the root of the idea of the welfare state. And what I’ve been saying for a long time reflects an economic truth, but it also reflects an economic truth that we’ve chosen to forget: the idea that savings have any inherent value, that financial assets have to be held because they are the basis for investment and economic prosperity, is just simply wrong.
The foundation of our economic prosperity is having people in good jobs at a fair wage so they can live an adequate life. That’s what builds a prosperous society, and we haven’t focused enough on that.
In particular, I want to ask: rather than putting this much money into pension savings, should we be subsidising that process directly, at £70 billion a year? These are really important questions.
Interestingly, this point was understood in 1944, yet 80 years later, the issue still needs to be addressed.
We overemphasize the importance of savings in the economy, and on this point Rachel Reeves is completely wrong. Also, what we do not emphasize is the importance of investment in the economy, and it is a simple and obvious mistake to confuse savings in pension funds and other media with sources of investment, which is not what is happening.
So we need a fundamental change in thinking on this issue. Beveridge was right. Rachel Reeves was wrong. Keynes was right. History has forgotten him. It is time to understand that savings can be bad for the social good, especially when there is too much of it and it is in the hands of a relatively small proportion of society. This is the problem we have in Britain.
And now is the time for us to put this right.
