Saving from the economic viewpoint

Economic theory defines saving as every share of income which is not consumed.

Similarly, enterprises’ saving is defined as the firm’s undistributed profit which is again invested in it. In connection with private households, the non-consumed share of disposable income is considered as saving. Saving may further be classified as net and gross saving. The net volume of saving is calculated by subtracting gross saving from credit taken by the household during a specific period, while gross saving represents the total volume of saving (SOCHER 1977:81-94).

Economists do not recognize the virtues of saving in every case. The mercantilistic view, for instance, concentrates upon an active trade balance to provide money for the state’s prosperity. Mercantilists prefer spending a maximum amount of money in favor of the state's economy instead of hoarding or saving. The same opinion is held by the physiocrats, who do not stress the virtue of saving strongly, as money saving does not comply with the circulation theory. QUESNAY (1894) is of the view that landowners and

other similar occupations do not like 'sterile' saving methods which may withdraw a share of their income from circulation and distribution.

The Classical school of thought also shows no consensus on the virtues of saving. The majority of the Classical authors considers saving as a means to prosperity for an individual as well as the whole nation, as SMITH (1812:149) emphasizes: "Parsimony and not industry is the immediate cause of the increase of capital.“ The danger Classicals see is the ultimate fall of purchase power and overproduction as a consequence of an extraordinarily higher saving quota. MALTHUS (1936:8f, 363) holds a special position among Classicals; SMITH also realizes the worth of saving but still keeps the expected risks of an extraordinary higher saving rate before his eyes. According to MALTHUS, underconsumption by capital owners and landowners causes a compelled underconsumption of workers and disturbs the production and distribution sectors of the economy.

HESSE (1982:12-13)⁷ considers capital formation and technical development as a central condition to increase the per capita production in a country, because technical advancement also requires a net investment. In spite of the drastic change in the position assigned to real capital formation within the context of short-term development politics and the strong emphasis laid on a few other factors such as behavior, attitudes, institutions etc., the significance of capital formation for the increase of per capita production remained unchanged.

There exist many interesting correlations between income, saving and consumption.

KEYNES (1936) in his "Absolute Income Hypothesis" observed that the saving quota depends upon the household’s consumption habits. On the average, every human being tends to increase his consumption expenditure, even when his income increases slightly only. This increase, however, is not always equal to the increase in income. Consumption takes some time to change. It does not increase immediately after the fluctuation in income; the short period between income increase and consumption increase may result in saving. Similarly, consumption expenditure tends to remain the same in the case of any unexpected reduction and prevents saving.

DUESENBERRY (1949) emphasizes the relative place of the income receiver in the income pyramid as a decisive base to determine his saving rate in his "Relative Income Hypothesis.“ A household’s saving behavior is always influenced by the consumption quota of the other households of the same income stratum. In his view, if all households achieve the same increase in income, they will also tend to retain the saving quota. In the case of any attempt to increase saving, one has to consume less than the other members of one’s social strata, which means spending less than the standards by the society. The behavior shows that saving volume and form do not vary considerably within one stratum. He also developed a "ratchet effect" that people strive for higher standards of living; therefore, even when income recedes, they are reluctant to return to a lower level of consumption, thus, consumption and saving are a function of past peaks.

According to the overinvestment theory, a lack of saved capital leads to the generation of credit to effect required investments. The expansion of such subsidized credit is the actual cause of economic crises in a state (RAAB 1966:22). In a situation when overconsumption causes undersaving, theorists prefer the mobilization of saving as a

7 For further details, see HESSE (1982:17;41;64)

positive instrument for harmonizing the economy instead of feeding extra capital, which may enhance consumption and disturb further the ratio of saving and investment.

Three factors are considered decisive in determining economic growth according to the modern theory of growth: population number, improvement of technical know-how and expansion of real capital. The modern theory of growth concentrates upon these major influencing factors. Theorists like PETER (1960:46ff) and MEINHOLD (1955:340ff) hold the view that saving stabilizes the value of money and its related questions of income and capital distribution in a growing economy with a higher employment rate and a fully utilized production capacity.

Saving is not considered as a definite prerequisite for the grant of credit through credit institutions in the modern theory of credit (GESTRICH 1957:19; HAHN 1930:127ff).

The intention of credit institutes to disperse more credit depends upon their liquidity status and not on the amount of available deposits. Although modern theorists do not see any direct relation between saving and credit, they limit their theory that a balance between saving and credit is vital for a smooth process of economic growth.⁸ Similarly, the interest rate of credit is not determined by saving, it depends rather upon the readiness of banks to grant credit and the intention of the borrower to accept credit at the claimed interest rate. The traditional theory of credit calls for an increase in saving as a consequence of the expansion of credit dispersion at a low rate of interest. The modern theory, however, rejects the old view with regard to this point and suggests that a higher interest rate increases the saving rate, while a low interest rate reduces it.

Political economics observes saving from the viewpoint of political goal settings. The classical national economy saw the most important factor of growth in saving, since the time of ADAM SMITH, because saving builds capital and capital acts as a limited production factor. The antagonistic view of saving is best described in the works of BÖHM-BAWERK. He shows in his 'Positive Theory of Capital' (1921) how capital goods can be produced with the saving in consumption goods. A fundamentally negative assessment is then done in the works of KEYNES (1936): The increased rate of saving does not induce an automatically higher rate of investment. First of all, it increases the supply of saved capital and reduces the interest rate, which may decrease the saving rate by increasing hoarding. Ultimately, capital available for the investments decreases more than its expected volume. The hard core of the theory lies in the view that an increase in saving does not always lead to the achievement of these goals. In political economy, saving may be advantageous for the achievement of a goal but not for others. A number of goal settings remain in conflict. If all these goals are organized in hierarchical scale to analyze the amount of saving required for an optimum achievement of each goal, optimum saving politics may be formulated.⁹ Anyhow, even in the presence of an optimum saving level, the instruments utilized to achieve a goal have to be selected by politicians. From the viewpoint of political economy, every instrument of saving politics cannot be determined in accordance with the stable economic theory of politics. In most of the cases, the saving rate is kept at a limit if it comes in conflict with the principles of free income utilization of the market economy. The decisions of politicians depend upon such goals as winning maximum votes and obliging the majority of voters for the preparation of the next election.

8 The idea has to be understood carefully; such an independency of credit from saving should not be understood as the material insignificance of saving for credit.

9For further details, see SOCHER (1977:81-94).