Most people today who pay any attention to the news will be familiar with key economic concepts – consumption, investment, public expenditure, output, exports, imports, unemployment, economic growth, the balance of payments, public borrowing, interest rates, inflation, the national debt. Yet the one measure we hear little about is saving. Saving has become the Cinderella of economic thinking. This is because saving was discredited by Keynes in his The General Theory of Employment, Interest & Money.
In the nineteenth century and up to The Second World War classical British economists such as Adam Smith, David Ricardo and James Mill as well as neo-classical economists such as John Stuart Mill, Edgeworth, Marshall and Pigou paid great attention to saving. Saving was key to investment and economic growth. Within society saving was seen as a virtue. It enabled people to stand on their own two feet and fend for themselves and their families should they encounter adversity. It enabled them to build up some capital and buy their own homes.
Facing the problem of mass unemployment in the 1930s Keynes argued that increased saving would not necessarily be channelled into investment through the banking system or capital markets, but simply remain an inert stock of savings, which was good for very little. The emphasis switched to stimulating consumption expenditure by increasing investment which would have a multiplier effect on increasing income. In the concluding notes of The General Theory (ch.24) Keynes recognised that his policy prescription would lead to the ‘the euthanasia of the rentier’ which he described as ‘the functionless investor’.
Serious deflation however is rare. In the past century it occurred in the 1930s. in this century there was a prospect of it following the banking crisis of 2008. In both these cases deflation was not just a prospect of falling prices but the collapse of the financial system as well.
With the publication of Andrei Rogobete’s monograph on The UK Savings Crisis, CEME embarked on a project to explore the importance of saving in the UK.
Today we are publishing four short essays on different aspects of each of the subjects. Andrei explores how the state is creating disincentives to saving alongside the growth of new savings products which are emerging. Peter Warburton shows how the Bank of England’s ultra-low interest rate policy is deterring saving, stoking inflation and protecting zombie companies from the discipline of competitive markets. Richard Turnbull examines the significance for present policy of the large number of small local savings banks, building societies and co-operative institutions which emerged in the 19th century and enabled a culture of saving to make an important contribution to economic growth. Bishop Peter Selby in his admirably contrarian and idiosyncratic style, challenges us by the teaching of Jesus regarding the purpose and character of saving as well as the practice of profligate generosity.
Brian Griffiths
Lord Griffiths of Fforestfach, Chairman CEME.