According to the prevailing Keynesian dogma, consumption is the main form of spending in the economic system, while saving is mere nonspending and thus a “leakage” from the spending stream. This dogma underlies much of government economic policy in the United States, including the so-called economic stimulus package that has just been enacted. In this article, I prove, to the contrary, that consumption is not the main form of spending in the economic system and that the source of most spending is, in fact, saving. I prove my claims by starting with the very formulations of the expenditure aggregates presented by the Keynesian doctrine itself.
Thus, the simplest, core accounting relationship of Keynesian economics is that national income, which is essentially the sum of profits plus wages, is equal to the sum of consumption expenditure plus net investment.
It is only a small step from national income to gross domestic product (GDP). Essentially all one does is add business depreciation allowances to profits on the left-hand side of the equation and to net investment on the right-hand side. This last raises net investment to what contemporary economics calls gross investment. The sum of consumption plus gross investment is held to equal GDP. FULL ARTICLE
Standing Keynesian GDP on Its Head: Saving Not Consumption as the Main Source of Spending
All Rights Reserved ©
Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.