Fisheries Economics

6.1.4. Savings and Investment - Introduction

6.1.4. Savings and investment

Saving is defined as that part of income which remains unspent on consumption. It applies to the saving of both individuals and the economy. Income less consumption expenditure amounts to saving. When saving is high at the level of individuals, disposable income becomes large. If it could be used for investment to enhance production which in turn will increase consumption then it is good. Keynes argued that increased saving will decrease consumption spending and effective demand which will lower income, output and employment. Keynes assumed that this happens when accumulated savings is not matched with proportionate investment. This situation is called “paradox of thrift”.

It arises due to different purposes of saving and investment. Keynes resolved this paradox by arguing that an increase in thriftiness implies reduction in consumption expenditure. Further, since one man’s spending is another man’s income, any attempt to increase one’s own saving will result in a fall in overall income of the economy and thus eventually the actual aggregate saving will turn out to be smaller. In other words, in a society if an increase in saving is not be equalised with an increase in investment, it will result in a decreased overall saving. Because it causes a fall in consumption expenditure which brings down the effective demand, employment, income and output levels.