Growth, Normal Capacity Utilization and the Long-Run Saving Ratio: A Comment

ABSTRACT

In a recent paper Attilio Trezzini presents an explanation of the saving ratio that does not rely on normal capacity utilization positions. Trezzini instead focuses on the fluctuations of consumption and investment. But that very focus, I argue, requires a different kind of approach. Once the traditional theory of saving is discarded, the ‘indeterminacy’ of the saving ratio opens the way to an analysis of the evolution of consumption, and of how that evolution affects aggregate demand. The generation and evolution of autonomous demand are matters of obvious relevance to the classical Keynesian approach to the analysis of growth. The present comment takes James Duesenberry’s criticism of demand theory as the starting point for an examination of the evolving standard of consumption and autonomous (‘innovative’) investment, therefore addressing directly the investment–consumption relationship. There are of course a number of complicated questions involved and they have not yet been satisfactorily analysed. They are part of the necessary task of articulating a theory of consumption consistent with demand-led growth and forward-looking investment decisions.

KEYWORDS:

• Investment
• consumption
• economic growth
• Sraffian economics

JEL CODES:

• E11
• E12

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1 The origins of this theoretical approach can be traced back to Garegnani (1962, 1978–1979, 1983); other early contributions are those of Vianello (1985), Ciccone (1986) and Kurz (1986). The main contributions on the question of long-run capacity utilization are provided by Garegnani (1992), Serrano (1995), Bortis (1997) and Trezzini (1995).

2 ‘In particular, the average value of the saving ratio over the business cycle is inversely proportional to the marginal propensity to consume c and inversely proportional to the rates of growth of the structural component of consumption during expansion and recession’ (ibid., p. 194).

3 The Cambridge theory of saving posits distinct saving propensities for two social classes. In the same way, these parameters may vary for different social groups.

4 Later both Milton Friedman and Franco Modigliani sought to provide neoclassical microfoundations for the consumption–saving choice.

5 ‘If no changes in taste except autonomous ones occurred, the preference system scheme would serve its purpose [i.e. enable us to avoid relying upon psychological assumptions]. But if tastes are interdependent, a dynamic development in taste is implied. Analysis in the dynamics of tastes requires an analysis of the driving forces in the development’ (Duesenberry 1949, p. 17).

6 Duesenberry’s book has had little impact on the conventional theory of saving. The non-neoclassical theory of savings, however, has incorporated elements of his argument (e.g. Marglin 1984).

7 On habit formation, see also Pollak (1969, 1970).

8 In other words, the ratchet effect is part of an analysis that is not limited to aggregate spending.

9 They pertain to the development of needs, the evolution of the consumption sphere and market creation (Gualerzi 2001, 2010).

10 For this reason I have used the term ‘innovative investment’ (Chapter 9).

11 I have dealt with these questions in Gualerzi (2001, 2010, 2012).