The Role of Saving in the Process of Income Formation

Abstract: The present paper attempts to explain some very serious fallacies contained in the idea of “circular flow of macroeconomic activity”, upon which virtually everything in mainstream macroeconomics is built and which provides a substantial portion of its conceptual framework. The critique proceeds by analyzing the concept of Gross Domestic Product (GDP), which is widely accepted as being “the most comprehensive measure of a nation’s total output of goods and services”, but which actually counts almost exclusively just consumers’ goods, and points out the nature of the consumption illusion of mainstream macroeconomics. The fallacies are clearly seen if set against the alternative approach to problems of aggregate production and aggregate spending as developed by Professor George Reisman. Unlike mainstream economists, who routinely view savings as a “leakage” from the spending stream, a correct account of things points the way to an entirely different understanding of the role savings play in the market process and consequently to an entirely new macroeconomic theory along the lines of the Austrian and Classical schools.