I use basic economic terms quite frequently and it may be useful to set out their definitions:
- Consumption ~ is any purchase/sale that is not between entrepreneurs. That is, purchases from entrepreneurs by consumers.
- Savings ~ the excess of income over expenditure on consumption. Savings can include debt repayment and money lost or hidden in your mattress — they do not have to be deposited with a bank.
- Investment ~ an addition to the real capital stock of the economy. Alternatively, any purchase between entrepreneurs that is not part of user cost.
- Income ~ the value in excess of user cost which the producer obtains for the output he has sold.
- User cost ~ the measure of what has been sacrificed to produce finished output.
“Income is created by the value in excess of user cost which the producer obtains for the output he has sold; but the whole of this output must obviously have been sold either to a consumer or to another entrepreneur; and each entrepreneur’s current investment is equal to the excess of the equipment which he has purchased from other entrepreneurs over his own user cost. Hence, in the aggregate the excess of income over consumption, which we call saving, cannot differ from the addition to capital equipment which we call investment. Saving, in fact, is a mere residual.”
Richard Koo (The Holy Grail of Macro Economics) points out the flaw in this argument: when savers are forced to repay debt, savings no longer equal investment.
Steve Keen also highlights this:
“However when one thinks in truly dynamic terms, income is not all there is to aggregate demand. In a dynamic setting, aggregate demand is not merely equal to income, but to income plus the change in debt.”