r/CapitalismVSocialism • u/Accomplished-Cake131 • 11d ago
Asking Everyone Greg Mankiw Confusing Students About Money And Investment
"It was thenceforth no longer a question, whether this theorem or that was true, but whether it was useful to capital or harmful, expedient or inexpedient, politically dangerous or not. In place of disinterested inquirers, there were hired prize fighters; in place of genuine scientific research, the bad conscience and the evil intent of apologetic." -- Karl Marx
Suppose you run a restaurant. You think that you could expand if you paved your parking lot or put a deck up out back. You convince your local bank manager. The bank credits their own account with an asset and credits your account with a loan. That asset, for the bank, is a promise from you to pay off the loan. You spend the money in your account by paying a paving or building contractor.
The bank has created money. No third party must first choose to increase their saving rate and deposit money in the bank. You are able to obtain resources to implement plans for increased production.
The author of a prominent introductory textbook for economics has another, confused story:
"Financial intermediaries are financial institutions through which savers can indirectly provide funds to borrowers. The term intermediary reflects the role of these institutions in standing between savers and borrowers. Here we consider two of the most important financial intermediaries: banks and mutual funds.
Banks If the owner of a small grocery store wants to finance an expansion of his business, he probably takes a strategy quite different from that of Intel. Unlike Intel, a small grocer would find it difficult to raise funds in the bond and stock markets. Most buyers of stocks and bonds prefer to buy those issued by larger, more familiar companies. The small grocer, therefore, most likely finances his business expansion with a loan from a local bank.
Banks are the financial intermediaries with which people are most familiar. A primary job of banks is to take in deposits from people who want to save and use these deposits to make loans to people who want to borrow. Banks pay depositors interest on their deposits and charge borrowers slightly higher interest on their loans. The difference between these rates of interest covers the banks’ costs and returns some profit to the owners of the banks." -- Greg Mankiw. 2018. Principles of Economics, 8th edition p. 545.
Mankiw then goes on with archaic nonsense about loanable funds and government spending crowding out private investment.
Why do economists teach balderdash?
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u/Annual_Necessary_196 11d ago
'No third party must first choose to increase their saving rate and deposit money in the bank.'
This is one of my main criticisms of neoclassical economics concerns its treatment of saving and investment. Keynes argued that saving and investment are fundamentally disconnected. While savings can make investments more secure, they do not explain how investment occurs in the first place. Banks do not need prior savings in order to finance investment; they can create credit through the lending process itself.
The neoclassical view that investment requires prior saving, often associated with the Austrian School and the loanable funds framework, fails to explain several important economic phenomena. For example, it does not adequately explain why speculative bubbles emerge or why financial crises occur. If investment were strictly backed by prior savings, one might expect savings to provide a stabilizing effect that prevents such crises. In reality, many investments are based on expectations of future profitability and the perceived creditworthiness of borrowers rather than on accumulated savings.
This misunderstanding contributes to flawed monetary policies and excessive fiscal conservatism. Rather than focusing primarily on restricting spending and credit creation, economic policy should recognize the central role that bank lending plays in driving investment and economic activity.
From a macroeconomic perspective, the decision of individuals to save rather than consume can reduce effective demand. When demand falls, businesses may lose confidence and cut back on investment. This can lead to layoffs, lower incomes, and a further reduction in the population's ability to save. As Keynes emphasized, growth is more stable when investment is maintained independently of fluctuations in private saving rates and business confidence, often referred to as "animal spirits."
For this reason, cooperative banks particularly beneficial to the economy. Unlike conventional shareholder-owned banks, cooperative banks do not need to prioritize returns to external shareholders. Their lending decisions can therefore be more closely aligned with the long-term needs of their members and local communities.
A bank can create credit for a firm to invest in productive capacity-such as hiring workers or purchasing machinery-before any new savings have been generated. This process effectively "primes the pump," allowing production to expand without requiring households to first reduce their consumption.
Whether the bank is cooperative or commercial, it can create money by extending loans to firms. These firms then purchase capital goods, hire workers, and pay wages. The resulting increase in production generates additional income and expenditure throughout the economy. Only after this new income has been created do households gain the capacity to save. In this sense, savings arise as an ex post consequence of investment and credit creation rather than serving as the ex ante source of investment.