Against Savings: A Suggested Exposition of the Markets for Money and Credit
24 Pages Posted: 22 Aug 2017 Last revised: 1 Dec 2017
Date Written: November 30, 2017
The notion of savings in economics has a variety of mutually incompatible meanings, and for the sake of clarity should be jettisoned. The textbook loanable funds model, for example, was developed in the context of unintermediated lending, and when applied to bank lending, results in a naïve conception of banking in which banks are "pure" intermediaries of savings into loanable funds. More broadly, the notion of savings as non-consumption has no economic relevance except in a single-good Ricardian economy. In order to address these problems, this paper offers an “augmented” loanable funds model in which 1) the supply of loanable funds is not identical with “savings”, and 2) the banking sector is connected to the supply of money with something more theoretically robust than a simple money multiplier. The resulting construction clarifies the relationship between the markets for money and credit, and is more faithful to the image of banks as creators of credit, while still retaining the pedagogical simplicity of the original loanable funds model.
Keywords: Macroeconomics, Saving, Banking, Loanable Funds, Pedagogy
JEL Classification: E21, E51, A22, B12, B22
Suggested Citation: Suggested Citation