18.08.2018 11:56

The flow of income and its different factors has always been a topic widely discussed in classic economic theory throughout history. One of the factors affecting the circular flow of income and overall consumption are savings by economic agents. Different classical economist have presented a varied range of opinions about the effect of savings on economic growth and development. Some as Keynes, just see savings as a leakage from the flow of income and put forward the idea of the government keeping up consumption levels in the economy by increasing public expenditure to cover up savings. On the flipside, neoclassical economists as Paul Samuelson or Robert Lucas, both Nobel laurates, believe that savings are a potential tool for future economic growth by providing the economy with greater capital in the long term, and therefore increasing its productive capacity; following the Chicago school trend of thought. 

Independently of economic history and different theories about saving in the economy, it is clear that the last economic crisis, the Great Recession of 2008 was caused by an excess of leverage in investment and a lack of capital reserves not just by banks, but by individuals who had their savings accounts at historically low numbers. This trend hasn’t changed much recently in terms of savings, as in some European countries as Spain, saving rates are still at minimum, due mainly to the expansionary monetary policy promoted by the ECB since 2011, with the lowest interest rate possible (sometimes even negative), and enormous debt purchasing programmes, known as QE (Quantitative Easing), promoting irresponsibility and unproductive investments, with no real profitability. Savings are the key to economic success and long-term prosperity, as was demonstrated during the belle époque of the XIX century, which showed how saving promoted efficient investment in profitable sectors, increasing productivity in the market and rising socioeconomic standards overall. 

Firstly, it should be stated that savings create capital formation, further leading to greater investment in research and innovation, fostering technical progress and automation, which increases productivity levels by increasing the size and weight of economies of scale and division of labour chains, promoting greater specialization. An acceleration in the rate of labour productivity due to all the facts mentioned before will result in a faster and more stable rate of economic growth, as investment and consumption rates will increase in the economy due to a revaluation of wages and income; while maintaining high savings rates at the same time. Leveraged investment represents the utilization of non-disposable resources and over employing available components of production. On the other hand, greater saving rates lead to a fuller and more efficient exploitation of available resources, while even though being scarce, will increase exponentially over time in correlation with savings and investment, if we consider that the most important resources in nowadays’ developed economies are national output, income and labour (employment).

Secondly, having a sufficiency of capital resources and not exceeding supply or demand limits can just be made by increasing saving rates, preventing credit bubbles which could lead to demand-pull inflation or excess supply which, on the other hand, will lead to a deflationary trend with the consequent monetary devaluation following it. Any situation of destabilization in the market will lead in the long run to greater unemployment, as with inflation consumption will lastly fall, due to a loss in consumers’ purchasing power, delocalizing resources from previous productive uses. On the other hand, deflation will cause unemployment in the short term, as consumers and investors’ expectations will be for prices to be lower tomorrow, postponing their decision of buying in today, and causing an excess of supply or a devaluation of a firms’ intrinsic value in the short sight. In contrast to this situation, high saving rates will help to maintain a stable purchasing power level throughout the entire economic cycle, as capital reserves will play an important role during recessions by maintaining consumption and investment levels and reducing market volatility (for example by preventing balance of payment problems due to a much more stable currency; as was exposed by David Hume in the XVIII in relation to the self-correcting theory of gold reserves and currency valuation during the first gold standard century). 

As previously depicted, the ECB has imposed a burden of debt on irresponsible European countries by lowering interest rates and forcing banks to lend out money at ridiculously low rates, creating a sovereign debt bubble, as there is no real demand for low rating corporate bonds and nearly for any European state bond. The QE programme has promoted unconscious expenditure by States and individuals while hiding the implicit risks these movements had. Nearly free credit and loans have prevented the vast majority of countries from performing vital structural reforms which were deeply needed for the correct functioning of the economy, as for example the labour market liberalization reform in Spain, or the lowering of the corporate tax rate in Ireland to 12.5%, which was pretty much needed to promote capital attraction. These are some of the few successful cases of structural reforms during the ECB expansionary policy period, but European nations failures are much greater in number, as Italy or Greece, which have accumulated debts of 140% and 177% over GDP respectively. From recent economic data, we could argue that greater savings rates will make the economy free from foreign debt burdens and impositions and improve the welfare state, being a key to economic development. 

Referring to classical economic theory and schools of thought, the Austrian school of economics stands out when talking about savings. Austrians put forward that for any formation of capital savings are required, which is seen as a restriction of spending in the present for the investment of equivalent resources in the future, allowing the production of capital goods which will boost productivity. Some economists as Mises argue that savings may result from an increase in the availability of consumer goods in the market, as wealth creation will allow to maintain the same level of consumption while saving the capital surplus. Other Austrian economists as Eugen Böhm-Bawerk have displayed a theory of capital formation, which explains how as capital tends to be perishable it needs to be changed every certain period of time due to obsolescence, and for that reason high saving rates are required to preserve the capital structure of the economy. 

In conclusion, saving and capital accumulation are the key of any attempt to improve material conditions of economic agents, as they allow for greater and more efficient investment, increasing the range of available goods and services while expanding consumers ‘purchasing power by revaluating wages and income from external sources. Savings have been the base and the foundation of every human civilization since Ancient Egypt, where they save agricultural surplus due to the volatility of the Nile water flow. Public policies to promote saving; as high interest rates, should be promoted, as they allow for capital accumulation and greater material ends, causing faster economic growth.