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Saving does not finance Investment: Accounting as an indispensableguide to economic theory

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  • Fabian Lindner

Abstract

The paper analyses the accounting relationships between the financial and the real economy. It will be shown that accounting can clarify the nature of economic phenomena and be an important building block for economic theory. The paper will argue that there is much confusion about key macroeconomic concepts like saving, investment and finance. This confusion is best summarised in the statement "saving finances investment". After clearly defining the accounting relationships between lending, financial saving and physical investment it will be shown that this is a nonsense statement. The theory behind it - the loanable funds theory - will be analysed and critiqued. It will be shown that the loanable funds theory confuses the concepts of income and production, lending and saving, and financial saving and non-financial saving. It will further be shown that this has not only theoretical but also important policy implications.

Suggested Citation

  • Fabian Lindner, 2012. "Saving does not finance Investment: Accounting as an indispensableguide to economic theory," IMK Working Paper 100-2012, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    • Handle: RePEc:imk:wpaper:100-2012
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    References listed on IDEAS

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    1. Bibow, Jorg, 2001. "The Loanable Funds Fallacy: Exercises in the Analysis of Disequilibrium," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 25(5), pages 591-616, September.
    2. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1996. "The Financial Accelerator and the Flight to Quality," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 1-15, February.
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    4. Hans-Werner Sinn, 2010. "Rescuing Europe," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 11(SPECIALIS), pages 1-22, August.
    5. Börsch-Supan, Axel & Gasche, Martin, 2010. "Zur Sinnhaftigkeit der Riester-Rente," MEA discussion paper series 10197, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    6. M. G. Hayes, 2010. "The loanable funds fallacy: saving, finance and equilibrium," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 34(4), pages 807-820.
    7. J. M. Keynes, 1997. "The General Theory of Employment," Voprosy Ekonomiki, NP Voprosy Ekonomiki, vol. 5.
    8. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
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    Cited by:

    1. Jakab, Zoltan & Kumhof, Michael, 2015. "Banks are not intermediaries of loanable funds – and why this matters," Bank of England working papers 529, Bank of England.
    2. Jakab, Zoltan & Kumhof, Michael, 2018. "Banks are not intermediaries of loanable funds — facts, theory and evidence," Bank of England working papers 761, Bank of England, revised 17 Jan 2020.
    3. Severin Reissl, 2015. "The return of black box economics - a critique of Keen on effective demand and changes in debt," IMK Working Paper 149-2015, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    4. Bofinger, Peter & Ries, Mathias, 2017. "Excess saving and low interest rates: Theory and empirical evidence," CEPR Discussion Papers 12111, C.E.P.R. Discussion Papers.
    5. Bofinger, Peter & Maas, Daniel & Ries, Mathias, 2017. "A model of the market for bank credit: The case of Germany," W.E.P. - Würzburg Economic Papers 98, University of Würzburg, Department of Economics.

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    More about this item

    Keywords

    Saving; Wealth; Capital; Investment; Production; Financial Markets; Macroeconomics; Money and Credit;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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