Money & Macro12

Savings is Not an Economic Aggregate

Garrison on Saving
Source: Mises Institute Facebook page

I see variations on this theme in a lot of Austrian and right-wing circles – I add right-wing because it conveys a sense of valorizing austerity, similar to what Lars Christensen called Calvinist Economics.

As sympathetic as I am personally to normalizing non-consumption, the thinking here – while intuitively plausible – depends on a 19th century Ricardian understanding of the economy. In the end, while there are a few ways to “save” the concept of savings, none of them really comport with the claim in the image. Given its Ricardian baggage and the fact that there are more apt terms for everything it might be defined to cover, it seems better to drop the term entirely from macroeconomics.


The intuitive appeal of the idea that savings lead to growth comes from what I’ll call a “realist” vision of the economy. In the realist vision, money is a veil, so to speak. The relationships in a money economy are isomorphic to some pattern of barter relationships. This pattern is easier to do economics on: if you imagine the economy this way, certain things are supposed to stand out much more clearly than if you get mucked up in money relationships.

The idea of savings-led growth is one thing that follows from this conception. In a frictionless barter economy, an investor can only amass a stock of wealth for investment if he either abstains himself from consumption for a while, or solicits a loan from someone else who has abstained from consumption. There is, accordingly, a determinate amount of “saving” in the economy that can be intermediated by banks toward investment projects. Superimpose money back onto the economy, and we can define it in terms of a single dollar-valued scalar.

By contrast there is also a “nominalist” view of the economy, in which money is irreducible to a pattern of barter relationships. Money constitutes the exchange relationships in a way that alters them from any conceivable barter economy.1

By contrast to the realist model, in a proper money economy investment does not depend on anyone’s conscious decision to save. All it requires is the purchasing power to bid away resources into investment use. This purchasing power can be amassed by abstaining from consumption, as in the realist scenario. However, the more practical scenario is to solicit a loan from the bank. In a money economy, the bank creates the money ex nihilo, marking up its assets and its liabilities in a stroke. This is a fundamentally different operation than the intermediation of accumulated savings in a Ricardian-realist economy. The investor is able to bid away resources from other uses without any deliberate abstention on the part of would-be consumers. There is no “stuff” saved up for him to borrow, and the money he borrows does not in any sense represent saved up stuff.

In sum: a nominalist vision of the economy destroys the idea of savings as a stock of stuff measured in physical terms.


There have been more than a few attempts to rehabilitate the idea of savings into something operational in a money economy. Much of this, I think, is motivated by the intuition that the realist vision is basically right, even if we have to nuance it a bit. Unfortunately the realist vision turns out to be a rather poor guide for economic intuition, at least in this case.

One way to make “saving” a necessary precondition of investment, while recognizing the importance of monetary credit, is to broaden the concept to include “forced saving”, a term used for the aforementioned bidding of resources away from consumers and toward investors via credit issue.

Forced saving comes across as a morally loaded term in its own right, no doubt because it seems like something foreign to “normal” Ricardian saving.2 But if all investment is made on the basis of gratuitous credit, then “forced saving” is very much the norm. This wipes out any moral significance to saving as a deliberate act implied by the original image. If it counts as “saving” whether or not anyone has deliberately abstained from consumption, it’s hard to see how the statement carries any normative weight.

If we are willing to abandon the moralizing, however, the idea of forced saving holds forth the prospect of still being able to define a stock of saving by partitioning the transactions destined for consumption from those destined for investment. This is the approach taken by some Keynesians, who try to sidestep the problem by redefining S=I as an accounting identity rather than an equilibrium condition, so that investment spending ipso facto represents saving.3 Savings are defined as aggregate assets, and investment as aggregate liabilities – equal by definition and quite consonant with the actual process of credit creation.

This move has the virtue of being an intelligible concept of saving. It is also very far from the Ricardian notion of saving as abstention,4 and gives up entirely on the proposition that saving is a precondition for investment (which, to be fair, many Keynesians want to do anyway).

There are a few hitches, however. First, it’s not clear that “aggregate liabilities” and “aggregate assets” are economically meaningful categories if they are defined so as to be equal. Every liability is an asset to someone, but as Mehrling (2012) points out, not every asset is a liability to someone. Most importantly, saving can be held in the form of base money, but it can also be held in any number of liquid goods. If a substantial portion of savings are held in this form, assets do not equal liabilities, at least for ‘saving’ in the usual sense of accumulated surplus value. And if we exclude those sorts of assets, why not refer simply to the quantity of x liabilities or class of liabilities, rather than shoehorning it into the old concept of saving?

(In fact, the definition of savings as aggregate liabilities makes the paradox of thrift totally non-operational. For an increase in saving to impair the volume of spending would require saving to be defined as, or at least include a large degree of, holdings of non-liability assets. Gratuitous bank credit turns out to be the very thing that breaks the link between the demand for liabilities and the volume of spending.)

On the other hand, if we are not willing to make saving and investment equal by definition, we have to identify a non-arbitrary criterion for what transactions count as investment and which as consumption. As Barnett (1980) complained about simple-sum monetary aggregates, without a clear theoretical and functional definition, “any aggregate is inherently arbitrary and spurious and does not define an economic variable.”5 The fact that he could justifiably say this about aggregates like M2 goes to show that just because an aggregate exists and is kept track of, doesn’t necessarily make it economically meaningful.

I can think of no non-arbitrary criterion for cleanly (or even roughly) partitioning spending into consumption and saving/investment in a way that corresponds to the ostensible economic meaning of those terms. All transactions probably have elements of both, especially if Stigler and Becker are to be believed. When we have to draw arbitrary lines and place transactions into rigid buckets, it suggests our theory is problematic. People do borrow for consumption too after all, and while this may be in principle distinguishable from investment borrowing in a Ricardian economy, it makes no sense to do so in a money economy.


There are also attempts to define an inherently monetary stock of savings. Selgin (1988, ch. 4), for example, attempts to translate the process of gratuitous bank credit back into Ricardian language by interpreting the stock of “savings” as the public’s willingness to hold circulating bank liabilities.

This conception is similar to the Keynesian approach in that it matters whether the public holds its savings in liabilities or base money – though it’s better equipped to account for the latter as “dead” savings rather than “not savings”. And because S=I is no longer true by definition, it supposedly rehabilitates the ability to interpret the supply of loanable funds as a “savings” curve.

This makes some sense in light of his argument that the public’s demand for a bank’s liabilities limits the quantity of those liabilities it can maintain in circulation (ch. 3). In short, the bank maintains some level of “precautionary reserves” given a gross volume of clearings in order to keep the risk of failing to meet its regular redemption obligations at some acceptably low level. Unwanted liabilities are returned for redemption via the clearing mechanism and impinge on the bank’s reserves. In order to maintain its precautionary reserves, therefore, the bank’s quantity of issues is determinate. If we suppose that the public’s holdings of base money are negligible, this strict relationship between demand for liabilities and the bank’s capacity to issue credit supposedly renders intelligible the idea of a determinate “quantity of savings”.

This argument, however, assumes a constant risk preference for the bank. Facing particularly enticing investment prospects, a bank may on the margin decide that the risk of lowering its precautionary reserves is worth the expected return. So unless we are willing to stipulate some objectively “correct” level of acceptable risk for the bank, bounded both from above and below, this destroys any strict proportion between the public’s abstention from consumption and the supply of credit.

It might be objected that the supply of credit is surely a function of savings in this sense, even if it is not a function solely of savings. True enough. But having departed this far from the basic Ricardian-realist framework, what benefit is there to retaining its terminology? Even if we are to accept the consistency if this definition, given that the loanable funds supply/demand construction is liable to a Ricardian-realist interpretation, what analytical purpose does the term “savings” serve that isn’t more precisely communicated by something like “the demand for bank liabilities”?

In any case, even if we do interpret savings this way, it seems rather odd to say that “economic growth only comes from savings”, i.e. from the demand for bank liabilities. Especially given the possibility of “dead” savings, it would be more apt to say that “economic growth only comes from investment”, or even (if you feel like fighting a Ricardian) that “economic growth only comes from fractional-reserve banking“.

Coming soon: a replacement for the canonical loanable funds model that takes seriously the inherent monetariness of bank credit.


  1. Nominalism in this sense should be distinguished from what I’ll call hyper-nominalism, which denies entirely the the conceptual validity of “real” (as opposed to nominal) variables. This is Mehrling’s (1999) accusation when he argued “Inflation was difficult for Minsky to understand because of the thoroughgoing nominalism of his thought. . . . In Minsky, there is no margin along which the ‘real’ value of money might be established.” (quoted in White [2015])
  2. I interpret Hayek’s (1933) use of the term as an attempt to “force” a post-Ricardian theory into the then-standard Ricardian-realist terminology. In fact, the vestiges of Ricardian-realism haunted his entire capital and business cycle theory. Garrison, for his part, seems rather more content inside the Ricardian frame.
  3. Incidentally, that’s a very good post on the importance of accounting identities in general.
  4. And, incidentally, incompatible with Garrison’s use of the Keynesian apparatus, which – by bringing in the loanable funds diagram – takes S=I to be an equilibrium condition
  5. The same could just as well be said of the Y=C+I+G+X construction.


Banking, Money, George Selgin, Perry Mehrling, Roger Garrison


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  • 1


    Jul 28, 2016 at 17:31 | Reply

    It is an old story, semantics; are capital and savings funds, or do they refer to valuable production-goods. In order to organize and deploy the latter we need institutions that facilitate the former. Garrison is talking about real savings, the availability of resources to produce valuable goods and services and thus create value.

    • 2

      Cameron Harwick

      Jul 28, 2016 at 17:47

      I mostly agree – as you noticed, I’m thinking of this is in the same spirit as your work on capital and Duration. But if “capital” is irreducible to a physical aggregate, the same would seem to be true of “real savings”. If that doesn’t make sense to talk about as an aggregate, is there any sense in which it’s useful to talk about a stock of monetary “saving”, rather than the supply and/or demand of some classes of liabilities?

      “Capital” may or may not be worth replacing with some other term, given that it has the same Ricardian baggage. But any coherent notion of “saving” definitely has clearer and more precise alternatives.

    • 3


      Jul 28, 2016 at 17:49

      Yes, true. Aggregates are a big problem. And Roger used them in his model for pedagogic purposes only. You are correct to say that there is a price to be paid. We now have to point out that aggregate non-consumption as a fund may be a necessary condition for economic growth, but it is in no way sufficient. For that one needs successful entrepreneurship at the micro level.

    • 4

      Cameron Harwick

      Jul 28, 2016 at 17:56

      Part of my discomfort too is that I’m not even sure what something like “aggregate non-consumption” means. Any economic good is more or less durable, and provides a shorter or longer stream of services. You *could* operationalize it as the holding of money balances (or something else), but then that has a rather different economic significance.

      You could interpret it as something like “don’t be wasteful” – but that’s more of an efficiency/inefficiency question than a saving/consumption question.

      Hm, there’s a thought – I wonder if part of the problem is that those two axes are being mixed up.

    • 5


      Jul 28, 2016 at 18:26

      No, there is an objective measure of non-consumption. It is a monetary aggregate, it is a value. As Mises emphasized we use money to enable calculation and calibration. In an economy with capital markets, loanable funds facilitate the acquisition of productive resources by entrepreneurs. If people do not save, this cannot happen.

      And, another matter, it turns out that the only sensible way you can talk about time in investment is in terms of its duration in value terms. Physical durability has nothing directly to do with it. Savings allows for the ‘extending’ of production in the sense that it allows for projects for which you might have to wait longer on average to earn a dollar.

    • 6

      Cameron Harwick

      Jul 28, 2016 at 18:52

      I interpret what you said as: people save productive resources, and loanable funds enable entrepreneurs to buy them. Is that right? If so, I’m not sure why the emphasis is on “saving” those resources rather than “producing” them. If not, what’s the connection between monetary saving and the accumulation of productive resources? (Or does saving just assist in the acquisition of those resources?)

      What is the monetary measure of non-consumption – the entire money stock, the portion held as bank liabilities, or something else? In a monetary economy, I’m not sure why any of these should necessarily be the mirror image of consumption.

    • 7


      Jul 28, 2016 at 21:41

      I don’t think that is a good interpretation of what I said. People save money – an option to consume an unspecified thing in the future. That enables other people to invest in resources – by borrowing the money.

      As long as things are valued in money they can be aggregated. In order for there to be loanable funds there has to be saving in the sense that people save – in money – what they do not consume. Do we really disagree about anything?

    • 8

      Cameron Harwick

      Jul 28, 2016 at 22:21

      Not sure yet if/how we disagree – I think it’s terminological now, but we’re getting close in any case. The problem I have with your formulation there is that entrepreneurs don’t borrow saved money; they borrow *new* money, created ex nihilo on the bank’s balance sheet. The demand for that bank’s liabilities (saving?) limits how much of that the bank can safely do, but even so saving in that sense is not the same thing as the quantity of loanable funds.

      See if this a more agreeable interpretation:

      1. Saving consists in money balances held rather than spent
      2. Saving has nothing to do with the *accumulation* of productive resources, but facilitates the *transfer* of those resources to entrepreneurs

      If this is the case, is there a difference between saving and the demand for money?

    • 9


      Jul 28, 2016 at 22:42

      Whoa. I think this is hugely confusing. You are mixing two things. Saving and money creation.

      Saving is not the same thing as money balances. Putting money in a pension fund, in a mutual fund, buying and insurance premium, etc. all increase the amount of loanable funds. Financial intermediation is the key. It is a crucial part of the capital market. It is the essence of capitalism. It is only in a system with capital markets that the act of saving (broadly understood) can be separated from the act of investment, thus reaping the huge rewards of specialization in production. But investment cannot occur without saving.

      As for money creation if I put money in a commercial bank, does that increase loanable funds? Yes. Presumably banks decide on their loans on the basis of the average amount of deposits with them. For example using my commercial bank I do not actually save anything. By the end of the month my balance is zero. So the bank cannot loan out any of my money. But, presuming that the bank has it has a positive overall average balance from depositors, it will loan out money based on its expectations of withdrawals, keeping on hand a sufficient amount of reserves to meet withdrawals. Does then the act of depositing lead to the creation of money, so that entrepreneurs will be borrowing “new” money. Not unless my or anyone’s deposit is a net addition to the system. If I receive the money I deposit from someone else’s payment out of their account there is no net addition to reserves and no new money can be created. Thus, unless the Fed is injecting reserves into the system, no “new” money is created and my savings in any financial intermediary frees resources for entrepreneurs. If on the other hand it is the “new” money, from newly injected reserves, that is borrowed, then only the illusion of savings occurs and this precipitates a credit-induced cycle.

    • 10

      Cameron Harwick

      Jul 28, 2016 at 23:35

      Good point about investment funds actually loaning out literal savings. I’ll have to think about what that difference entails – I know Europe depends more on banks and the US on financial markets for investment, but my first-face intuition is that the process ought to be basically the same in its essentials as far as it involves money (or near-money) creation. After all, a corporation issuing shares is pretty much the same sort of balance sheet operation (though from the borrower’s perspective) as a bank issuing liabilities to make a loan.

  • 11

    George Selgin

    Aug 25, 2016 at 20:56 | Reply

    Cameron, to the extent that I can follow your argument, and especially the meaning you attach to the notion of “gratuitous” credit creation, I’m led to conclude that you have read my discussion of credit creation in TFB rather carelessly. In it I very carefully distinguish between “transfer” and “created” credit, noting that both are in fact “money” based, while only the last involves forced savings. Yet so far as I can tell, the distinction, which I regard as fundamental, is one you don’t recognize. (Peter Lewin, on the other had, seems to recognize and make use of a similar distinction in his remarks.)

    I also have grave doubts about the value of such grandiose exercises in economic revisionism as yours, which appear to have become even more de rigueur than ever among younger Austrian PhD holders and candidates, and their more sympathetic fellow-travelers. With so many working to deny the meaningfulness of the economics being done by others, who, prey tell, is planning to supply useful alternatives? So far as I can tell, viewing things at ground level at Cato, the answer is: no one at all!

    • 12

      Cameron Harwick

      Aug 25, 2016 at 21:41

      Hm, well, I did reread your section on transfer credit and created credit in TFB right before writing this. If I have been careless in doing so, I think it would help to know in practice how one would look at a given bank’s (or economy’s?) balance sheet and distinguish between the two.

      My impression was that there are two things necessary to make the distinction operational: 1) the reduction of abstinence to a single monetary value, and 2) a constant risk preference for the bank, as I argued above. I take your argument to be that the demand for bank liabilities serves purpose (1) – and though I might not find it helpful to identify that with “savings”, that’s just semantic. As for (2) – while it’s true, as you argue in TFB, that the demand for bank liabilities limits the bank’s ability to create credit, without a constant risk preference, I don’t see how there could be an objectively “correct” quantity of credit above which is recognizably created rather than transfer.

      If you do read this as an exercise in Austrian revisionism, I hope you read it in the same spirit of revisions to the Austrian canon such as your integration of monetary disequilibrium theory, or Prof. Lewin’s integration of the aftermath of the Cambridge capital controversy – both of which were extremely valuable (even grandiose) additions! My hope is that, by doing theory with an eye to making concepts both economically meaningful and practically operational, putting meaningful alternatives into practice will be more or less straightforward. From my own view, this is precisely what many of the younger Austrian PhD holders and candidates are working on.

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