Savings Vs. Money: Which Is More Important?

Conventional wisdom holds that savings is the amount of money left after monetary income was used for consumer outlays. Hence, for a given outlay, an increase in money income implies more savings and thus more funding for investment. This in turn sets the platform for higher economic growth.

Following this logic, one could also establish that increases in money supply are beneficial to the entire process of capital formation and economic growth. (Note: increases in money supply result in increases in monetary income and this, for a given consumer outlay, implies an increase in savings).

How Savings Support Goods Production

Savings are the amount of consumer goods produced in excess of the consumption of these goods. For instance, if a baker produces ten loaves of bread and consumes two loaves his savings are eight loaves of bread.

Now, let's say that the baker exchanges his saved bread for the services of a technician in order to enhance his oven. With an improved oven, the baker could increase his production of bread. Note that the saved bread, i.e., the baker's savings, paid to the technician enables him to maintain his life and well-being while he is improving the oven. Likewise, the other producers of consumer goods, by exchanging these consumer goods for the services or the products of various other producers, are supplying the latter with the means that support their life and well-being.

The producers of consumer goods can exchange saved goods with each other, with the producers of raw materials, the producers of tools and machinery, or the suppliers of various services. The saved consumer goods support all the stages of production, from the production of consumer goods to the production of raw materials, tools, and machinery, and all intermediate stages. (Note that individuals do not want various tools and machinery as such but rather as consumer goods. In order to maintain their lives and wellbeing, people require access to consumer goods.)

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