In der Auseinandersetzung mit Thomas Mayer habe ich schon vor einiger Zeit ein wenig zum Verhältnis von Sparen und Investieren in einer Marktwirtschaft gesagt. Eine große Verwirrung gibt es aber auch unter Keynesianern hinsichtlich der Frage, ob in der Europäischen Währungsunion die Kapitalströme die Ungleichgewichte in den Leistungs- und Handelsbilanzen verursacht haben oder ob, wie wir es hier für richtig halten, umgekehrt die Unterschiede in den Lohnstückkosten und Preisen die Kapitalströme nach sich gezogen haben. Während für die meisten, die sich Keynesianer nennen, klar ist, dass die inländischen Ersparnisse nicht die Investitionen bestimmen, fallen sie im außenwirtschaftlichen Verhältnis doch leicht auf die neoklassische Sichtweise zurück.
Was offenbar nicht leicht zu verstehen ist, ist die fast vollständige Analogie der internationalen zur binnenwirtschaftlichen Sichtweise. Das hat vielleicht damit zu tun, dass wir bei der außenwirtschaftlichen Sicht auf eine Art auf den Leistungsbilanzsaldo schauen, wie wir das binnenwirtschaftlich mit den Salden der einzelnen Sektoren, also zum Beispiel mit dem Sparen der privaten Haushalte, selten tun. Zudem tendieren wir oft dazu, Länder wie Personen zu behandeln und ihnen dementsprechend „eigenständige Motivationen“ wie einer Person zuzuschreiben. Länder handeln aber nicht. Menschen und Unternehmen in den Ländern handeln. Aus all diesen Gründen wird häufig der Nettosaldo der gesamtwirtschaftlichen Ersparnis, also der Leistungsbilanzsaldo eines Landes, im Nachhinein so behandelt, als ob eine identifizierbare Institution für ein Land darüber entschieden hätte, wie viel sie in einer bestimmten Zeit sparen will. Das aber ist falsch. Es gibt weder diese Institution noch eine Entscheidung von irgendeiner Person oder Institution. Erst das komplexe Zusammenspiel von sehr vielen Vorgängen bestimmt das Ergebnis, das wir Leistungsbilanzsaldo nennen.
Ich habe in der Studie für die Rosa-Luxemburg-Stiftung, die ich mit Costas Lapavitsas zusammen erstellt habe, basierend auf Arbeiten bei der UNCTAD, versucht, etwas Licht in dieses Dunkel zu bringen. Ich möchte den Text hier zur Diskussion stellen und hoffe, viele Interessierte machen sich die Mühe, das einmal gründlich durchzulesen und mir Hinweise zu geben, was man noch besser machen kann oder wo es bei dieser Argumentation hakt.
4. The savings conundrum
Despite decades of intensive research, the forces driving growth and structural change are still relatively mysterious. Only a few facts can be taken for granted. One is the central role of accumulation of capital and improvements in technology. The close correlation between overall growth and investment growth is evident, along with the simple fact that no country has ever jumped from agriculture-driven growth to industry-driven growth without largely expanding innovation and investment. About the main determinants of investment the jury is still out and on the academic battlefronts positions are still far apart.
Much has been said on the preconditions that must be fulfilled for a significant increase in investment in manufacturing capacity to take place. It is certainly true that in primitive societies nobody could invest (mainly in the form of raising cattle and storing current agricultural produce in order to ensure a supply of food and animal feed in the future) without reducing consumption of food and water beforehand. But does that mean that in more highly developed societies (where investment takes the form of increasing capacity in manufacturing and services) people have to become thrifty first, i.e. to reduce expenditure for current consumption, to allow for investment? And if so, why are some relatively thriftless societies prospering whereas others with a much lower propensity to save are lagging behind?
Obviously, the gross domestic product of a closed economy (or the world) can be split into a part that is consumed immediately (in the same period in which it is produced) and a part that is saved and is to be consumed later. Hence, for a closed economy what is assumed is found, namely, that saving equals investment. For a single open economy with both, domestic saving and foreign saving (with positive foreign savings being the logical correlate of a current-account deficit), the identity of saving and investment is fulfilled, with “national saving” defined as comprising domestic and foreign saving.
In more formal terms, the investment-saving theory is extremely simple. Let Y be the gross domestic product of a closed economy (or the world), then the whole product obviously can be split into a part (C) that is consumed immediately (in the period of production) and a part (S) which is saved to be consumed later or to be invested (I) in order to increase the product Y in a later period. The product can be written as:
Y = C + I or Y = C + S,
which means to “find” for the closed economy what was assumed, namely, that:
S = I
For a single open economy, savings ex post consist of domestic savings (Sd) and foreign savings (Sf ), where the latter is the correlate of the current account deficit if its value is positive with:
Sd + Sf = I
The more recent academic debate did not try to improve our understanding of the dynamics and the causalities behind the identity, i.e. the different determinants of S and I. It has uncritically taken this identity as the axiomatic basis for macroeconomic analyses, repeating the error of the economic discussion in the twenties of the last century. The recent and current debate have been ignoring that some 70 years ago, in his “fundamental equations” in the Pure Theory of Money, which forms the first volume of his “Treatise on Money”, Keynes clarified the inherent logic of this classical approach. The famous equality of saving and investment is valid from an ex-post point of view, or if the economy under consideration is in a state of perfect equilibrium. The latter describes a stationary economy, an economy where real income is constant and where there are no incentives for entrepreneurs to change the existing level of activity as the level of profits is exactly zero. In all other cases, it is not S = I that rules the course of events but an equation like:
Q = I ─ S ,
where Q denotes the profits or losses of entrepreneurs (Keynes 1930, p.136). In this world, any act of individual saving, be it by governments, private households or the rest of the world, reduces profits, the saving of companies, because it decreases effective demand in the corporate sector as a whole.
The difference between the two models is remarkable and, unfortunately, very often not adequately reflected even in economic theory and economic policy. With profits Q being the equilibrating force between saving and investment, the picture of the world changes fundamentally and in such a way that the traditional model of a perfect capital market can no longer describe it. To paraphrase Keynes: The Euclidian geometry does not apply to a non-Euclidian world (Keynes 1936, p.16). Indeed, the problem with mainstream economic theory as applied in EMU today is quite similar to the one Keynes fought against in his time. In his General Theory, he concluded that the classical theory is “faulty because it has failed to isolate correctly the independent variables of the system. Saving and investment are the determinates of the system, not the determinants” (p.183).
The weakness of the orthodox approach becomes evident if it has to deal with concrete changes in the behaviour of economic agents in an economy that is subject to objective uncertainty. For example, if the savings of the public sector suddenly rise under conditionality from the troika, companies faced with falling demand and falling profits, will react by reducing their investment. For the companies information is available only about the drop in demand but not about the systemic reasons behind this change.
In the situation described, the “rational expectations” branch of neoclassical theory assumes that companies can expect growth to accelerate as a result of the rise in savings. However, this reasoning involves circular logic. In a world where companies would increase their investment expenditure because demand is falling, they would just switch the financing of the higher amount of investment from equity (cash flow, profits) to interest-bearing loans. The mechanism behind this remarkable transition in this theory is a fall in interest rates as a result of higher savings or lower government debt.
The implication of this approach is perplexing and absurd: after the increase of the government’s savings rate (or the reduction of debt through lower expenditure or higher taxes), companies are expected to acquire the same level of profit as in a situation of unchanged demand from the government. But now companies have to raise their investment exactly by the amount that is now saved instead of being used for consumption expenditure. Companies are expected to do this although demand for their products has dropped. The implication is that they demand interest-bearing credit to exactly fill the profit gap opened by the decrease of consumption. In other words, the investing companies increase their borrowing from the capital market by exactly the same amount that they would have acquired “for nothing” if households were spending as much as before. Even if interest rates approach zero it is evident that the funds that companies need to protect their profit rate are now more expensive than before. Thus, the traditional theory assumes that companies invest more than before although they have to pile up unsold inventory or reduce their capacity utilization, and although financing of such investment has become more costly.
If the assumption of constant or zero profits would be accepted a priori the system’s dynamics could be explained in terms of private consumption smoothing over time. This means that companies passively adjust to any decision by households, without endangering the equilibrium values of the model or its inherent stability. Such an economy would be exclusively driven by autonomous consumer decisions as the model assumes totally reactive entrepreneurs who never take into account actual business conditions when deciding on investment. Instead, as a rule, the deterioration of their business in the present is taken as proof for a warranted (expected) improvement in the future. The whole idea is close to absurdity but it reflects exactly what the creditor countries in the euro-zone, led by Germany, are preaching (Schäuble 2011).
Policymakers relying on this model fail to understand that it cannot capture key factors that are shaping economic life in realty: the time factor and, closely related, the availability of information that affects the sequence of decisions taken by economic agents take under objective uncertainty about the future. In a world of money and uncertainty, the decision to save more and consume less has grave repercussions on the goods market before it can impact on the capital market. But even considering the possible reaction of the capital market, the decision “not to have dinner today depresses the business of preparing dinner today without immediately stimulating any other business (Keynes 1936, p.210 and Davidson 2013).
In a world of uncertainty and flexible profits, the intention of individuals or the government to save an absolutely higher sum than before may completely fail because the future income they realize at the end of the period may be lower than the income they expected at the beginning of the period. Even if households succeed in raising the share of savings in their actual income (the savings rate) or the government reduces the debt level, the absolute amount of income saved (and invested) may be lower, as the denominator of the saving rate, real income, may have fallen due to the decline in demand and profits, with an induced fall in investment.
The implications for economic policy of the difference between Keynesian and neoclassical theory are tremendous. If the level or the growth rate of real income is not given and constant, then the implications of globalization, the opening of markets and of policy interventions are of great importance. The neoclassical fixed-profits model does not require much room of manoeuvre for economic policy, and where it considers economic policy options they are the direct opposite of those put forward under the Keynesian flexible-profits model. For policy makers it is of vital interest to know on which model the policy recommendations that they receive are based. Frequently, the Washington-based international financial institutions that formed the so-called Washington Consensus argued that there is a rational choice between the two models and that economic policy can opt for interest rate flexibility instead of flexibility of profits and real income: “In one view, saving is seen as resulting from a choice between present and future consumption. Individuals compare their rate of time preference to the interest rate, and smooth their consumption over time to maximize their utility. The interest rate is the key mechanism by which saving and investment are equilibrated. The other view sees a close link between current income and consumption, with the residual being saving. In this view, saving and investment are equilibrated mainly by movements in income, with the interest rate having a smaller effect.” (IMF, World Economic Outlook, Spring 1995) (p.73)
It is important to bear in mind that “utility maximization” in the fixed-profits model describes an entirely different objective for the society under consideration than “income generation” in the flexible-profit model. Smoothing consumption may maximize utility in a very narrow and static sense in a world without entrepreneurial behaviour, that is, in an economy just moving along the consumption frontier or along a pre-defined growth path. Maximizing income in a dynamic setting is a totally different target. Allowing for temporary monopolies, new technological solutions and investment will shift the production frontier (and thereby the consumption frontier) outwards by increasing potential output – and in a monetary economy even beyond the financial resources provided by the planned saving of households.
The IMF approach suggests that movements of income are as good as movements of the interest rate to equilibrate saving and investment. This is only true in a world where economic policy has no means whatsoever of influencing the overall economic outcome. In reality, however, higher real income (or faster income growth) is the main objective of economic policy in all countries of the world, especially in poorer countries. The “instruments” of a change in real income and a change in the interest rate can be seen as alternatives only if it is assumed that the growth rate of real income is given (exogenous) and cannot be influenced by entrepreneurial activity or economic policy. But then the whole discussion is useless from the beginning.
Consequently, governments have to choose whether their economic policy approach shall rest on the idea of investment induced by “thrift-savings” or on the idea of investment induced by profit-savings. Obviously, depending on the model used by policy makers, the economic policy strategies will be totally different. In the orthodox fixed-profits model the adjustment of investment to savings is an automatic process, which brings about the optimal result in terms of growth and jobs without government or central bank intervention. In the other model, in which profits are flexible, the economy is inherently unstable. In this case, government and/or central bank intervention is needed to stimulate investment, as interest rate flexibility may not be sufficient to stabilize the economy.
If income growth is the main goal of economic policy, then economic policy should clearly focus on a process where investment plans regularly exceed saving plans due to the flexibility of profits. In such a world, even with the private incentive for “thrift” left unchanged, the economy as a whole may expand vigorously. The “savings” corresponding to increased investment are generated precisely through this investment, which is “financed” through liquidity created by bank credit based on expansionary monetary policy. Increased investment stimulates higher profits, as temporary monopoly rents arise in the corporate sector. These profits provide for the macroeconomic saving required from an ex post point of view to “finance” the additional investment. In the flexible-profit approach “… the departure of profits from zero is the mainspring of change in the … modern world… It is by altering the rate of profits in particular directions that entrepreneurs can be induced to produce this rather than that, and it is by altering the rate of profits in general that they can be induced to modify the average of their offers of remuneration to the factors of production.” (Keynes 1936, p. 140)
Hence, in a world of uncertainty and of permanent deviation from the fiction of perfect competition, shocks on the goods and the capital market lead to an adjustment of quantities and profits rather than price adjustments. In respect of the labour market, the right incentive for change requires high labour mobility or centralised wage negotiations. EMU with the “flexibility approach imposed by the troika is heading exactly for the opposite. However, if the law of one price rules the labour market, and if wages of different skill groups are given for each single company, companies compete by differing productivity performances, as discussed in section II.4 above. An innovation or a new product triggers a relative fall of unit labour costs for the innovating firm. The lower cost level may be passed on into lower prices, increasing the company’s market share, or, if prices remain unchanged, it may increase the company’s profits directly. In such a world, the flexible response of quantities and profits does not reflect a pathological “inflexibility” of prices and wages. Rather, it is the main ingredient of market systems in the real world, namely, the fight for absolute competitive advantage at the level of companies. In its inter-temporal dimension this fight is about achieving higher productivity at given wages. In its international dimension it is about the combination of lower wages with a given high productivity.
In a world of differing productivity performances of companies, prices are sticky but profits are flexible. Seen the other way round, if prices and wages reacted flexibly to changes in the performance of individual companies, profits would be sticky. In a dynamic setting, where prices and wages are given for an individual company, the flexibility of individual profits provides the steering wheel, and investment is the vehicle to drive the economy through time. In this world, the branch of industry, a particular region or a state are not the main actors, and any analysis focusing on these entities without leaving room for the role of profits and entrepreneurship fails to capture the nature of the process of dynamic economic development.
Basically, the savings-based approach argues just the other way round. This model expects shocks from trade or technology to be buffered by a flexible reaction of prices and/or wages, whereas quantities react less and may even remain constant. Profits do not respond to shocks, since the model of perfect competition – by assumption – functions in such way that changes in profits do not occur. In this approach, increasing imports of cheaper manufactures from developing countries, for example, force wages and unit labour costs in the North to fall and, thus, the prices of domestic products adjust to those of the cheaper imports. A rise in unemployment can only be avoided by stretching the wage structure between workers of different skills, as well as between those sectors and firms that are exposed to the new competition from abroad and those that are not. However, this model clearly has been refuted empirically by the rise in unemployment in the aftermath of the crisis of 2008.
In conclusion, if the growth rate of real income is not assumed as being given a priori, economic policy attempts at improving growth performance are useful. The savings-based approach favoured by mainstream economics and the troika is therefore misleading. If markets do not automatically deliver positive and stable growth rates of real income, then the dynamic view, highlighting the incentive of temporary monopoly rents for pioneering investors, is the only relevant model for the development of the system as a whole. The orthodox approach, putting primary focus on the decision of consumers to “smooth consumption over time” under conditions of perfect foresight, offers an elegant version of Leon Walras’ idea of market clearing, but it does not at all capture the key features of modern economies.
Moreover, something that is very often forgotten in the theoretical dispute between the advocates of the two models is that the adjustment of saving to investment in the real world is overlaid by various kinds of exogenous shocks. For example, interest rates may not fall if monetary policy is fighting a higher price level stemming from a negative supply shock, as has been the case during the oil price explosions in the industrialised world in the 1970s. Interest rates may be already extremely low without igniting sufficient amounts of investment, as it is the case in the whole industrialized world at this moment of time so that the interest rate channel cannot work to move additional savings to productive use in terms of investment. The negative effects of falling private demand on profits may be aggravated by pro-cyclical fiscal policy if “austerity” is erroneously seen as a solution. An overvaluation of the real exchange rate may disturb the adjustment process by forcing monetary policy to react pro-cyclically or by directly enforcing pro-cyclicality of monetary conditions.
Overall, in mainstream economic theory the search for variables “equating” saving and investment in a smooth way ends up “solving” the problem by assuming it away. An assertion of the kind: “In equilibrium, however, the world interest rate equates global saving to global investment”, as made by Obstfeld and Rogoff (1996, p.31), is simply wrong. As saving and investment are always identical ex-post, the notion of “equilibrium”, as well as the associated proposition that the interest rates plays an equilibrating role, is clearly misleading. Models dealing exclusively with economies that are growing under “steady state” conditions are useless. In these models the openness of the society that is reflected in objective uncertainty (Davidson 2013) is defined away as economic agents are assumed to have perfect foresight about the future and complete information about their economic environment.
5. External imbalances in an open economy
According to the orthodox view that has dominated economic thinking during the last two decades, in an open economy, “if saving falls short of desired investment, … foreigners must take up the balance, acquiring, as a result, claims on domestic income or output.” (Obstfeld/Rogoff 1996, p. 1734). Or, as Krugman put it once: “An external deficit must [italics in the original] have as its counterpart an excess of domestic investment over domestic savings, which makes it natural to look for sources of a deficit in an autonomous change in the national savings rate” (Krugman 1992, p. 5). However, suggesting that the identity implies causality and giving “saving” a specific, namely a leading role in the process, is unjustified, as shown above.
The fact that – from an ex- post point of view – a gap has emerged between saving and investment in one country does not hint at an “autonomous” decision of any economic agent in any of the involved countries. The plans of one group of actors cannot be realised without taking into account a highly complex interaction of these plans with those of other actors, as well as price and quantity changes under conditions of objective uncertainty about the future. In order to give the savings-investment identity informational content, it is necessary to identify the variables that determine the movements of each, saving, consumption and investment, and in consequence the national income of the country, along with the national incomes of all its trading partners. Moreover, the accounting identity of savings and investment does not give any indication about the efficiency of the process leading to ex-post equality of saving and investment, and thus cannot be treated as an equilibrium condition. The identity says nothing about the equilibrating factors and their role in the adjustment process.
In a non-stationary environment, any increase in expenditure (increase in a net debt position of one sector) raises profits and any increase in saving (net creditor position) reduces profits. Whether saving or investment change here or there, whether the beneficiaries (or losers) of the adjustment process are located in the country where the shock originated or in other countries, does not change the course of events. The decision of a certain group of economic agents (private or public, domestic or foreign) to spend less out of their current income diminishes profits. A drop in foreign savings can actually mean higher domestic profits and more investment instead of a drop in investment.
A current-account deficit, or a growing “inflow of foreign saving”, very often emerges in the wake of negative shocks on the goods market, for example falling terms of trade or a lasting real currency appreciation. A real appreciation directly diminishes the revenue of companies if market shares are protected by a pricing-to-market strategy. If companies try to defend their profit margins, a fall in market shares and, as a rule, a swing in the current-account towards deficit, is unavoidable. Higher net inflows of foreign savings, which are logically associated with an increase of net imports (higher imports and/or lower exports), can by no means compensate for the fall in overall profits or even induce companies in the respective country to invest more than before. Under normal conditions, the process leading to a deterioration of the current account reduces real income of the economy under consideration (by reducing profits or other types of income with negative repercussions on profits). Hence, simply looking at capital flows in isolation does not mean to compare the situation before and after the swing. In most cases a higher net capital inflow indicates a negative shock and not, as neoclassical theory suggests, a positive one.
6. External balances and the role of fiscal policy – the German case
The interplay of saving and investment can be analyzed to a certain extent by looking at the net financial flow among the different sectors of the economy. Germany is an important case in this context, as it seems to have solved the problem of stimulating demand without sacrificing its fiscal thriftiness. Chart 18 depicts the pattern of net financial flows in Germany over the past 50 years.
In the 1960s the pattern of financial balances in Germany was such that net borrowing of the corporate sector was the main counterpart to net savings of households. In that period, neither the government nor foreign countries significantly contributed to the absorption of private savings. With the start of EMU the German corporate sector increasingly moves away from its traditional deficit position to assume a role as net saver from the middle of the first decade of this century. While at the beginning of the first decade of EMU the government was still in deficit, it decided to virtually stop current net borrowing in 2009 by introducing a “debt break” into the German constitution, which henceforth would allow only for very small amounts of annual net borrowing by the state.
The counterpart of increased attempts on all sides of the German economy to become a net saver was a growing indebtedness of foreign countries vis-à-vis German lenders. The mechanism to achieve this as described in detail in Chapter II, namely a real depreciation via wage dumping, ignited by government pressure on the trade unions. The result for EMU is disastrous, while the result for the German economy is an unsustainable growth trajectory and an enormous challenge for economic policy.
The challenge for Germany is to push its companies back into a situation where they earn much less but invest much more. Obviously, the incredible increase in German profits during the second half of the first decade of EMU was due to the tremendous success of German firms all around the world at the expense of their European neighbours. As we have shown already, without the export channel the German experiment of wage moderation would have been a complete failure as it served to slow domestic demand growth. Nor would the accumulation of profits have been possible without export growth largely driven by the real depreciation. But with the export channel wide open, German companies specialized in tradable goods used the golden opportunity to expand their market shares and their profit shares at the same time. Secondary income distribution also moved in their favour, due not only to wage compression but also to a significant cut in corporate taxes.
With most of the former importers of German goods now in dire straits and no longer willing assume the role of debtor the model has to be changed radically. The mechanisms available to policy makers are based on wages and taxes. A restructuring of aggregate demand towards more domestic and less foreign demand can only be achieved by turning wage moderation around and pushing for an extended period of wage growth exceeding the moderation path by a wide margin and even exceeding the line of productivity trend plus the inflation target. Strong government intervention will be crucial to achieve the required shift in the balance of power on the labour market in favour of labour. Higher wages would induce an increase in domestic demand that has been flat in Germany for more than as decade. At the same time, the government has to restore corporate tax rates at normal levels and to use the proceeds for infrastructure investments, thereby benefitting companies specialized in domestic investment and in satisfying domestic demand.
The task ahead for Germany is all the more challenging as the philosophy behind the whole edifice of its economic policy is based on achieving export surpluses. “Export orientation” is defended tooth and claw in politics and in the media and described as the only way for the economy to prosper and create jobs. German policy makers (and companies) now have to learn the lesson that other nations cannot be systematically used as debtors first and then dismissed as being “lax”, “lazy” and insufficiently solid in their economic behaviour without questioning the foundations of one’s own economic model. This is particularly difficult when the process of giving economic policy a new orientation is not triggered by an external event like a currency appreciation. In the context of the currency union, this process has to be initiated internally, by an acknowledging that the model chosen by a vast majority has turned out to be unsustainable. Given the limited ability of human beings to admit personal error, it would be almost unreasonable to expect that such a process will take place.
We therefore tend to believe that a cooperative solution is very difficult to achieve. It is either joint political pressure of the southern European countries, including France, that will move the German position, or the crumbling of the walls in one country after the other, and/or a looming panic in many countries at the same time. Provided they recognize their individual weakness and their collective power, a coalition of the debtor countries threatening the end of EMU may be the best way to force Germany to change its economic model. Should EMU come to an end, the new (old) currencies of these countries would devalue significantly against the old euro and whatever would be the new German currency, destroying a huge part of the German export markets over night.