Reply To: Savings-Investment Relation


Saving is postponing consumption. Investing is making capital goods. Obviously S=I in all cases.

In self-sufficiency, Robinson Crusoe, to devote resources to making capital goods by which he makes consume goods more indirectly, he must divert them from making consumer goods more directly. He gives up picking coconuts to make a net and then use the net to catch fish. His saving is the reduction in his coconut consumption that is done to release his labor into making the net, which is his investment.

In the division of labor, one person postpones his consumption by lending present money (called financial investing or making an investment expenditure) to an entrepreneur who uses the funds to bid for the production of capital goods, which is making an investment. (If one person saves and makes a financial investment to someone else who uses the funds to bid for the production of a consumer good, then no social saving-investing has taken place.)

Saving and investing are two steps to a single process called capital formation. You are correct, consumption competes with S-I. A person’s time preference determines the split between S-I and consumption.