The Role of Savings in Defining the Difference Between Finance and Economics

Michael J. Gootzeit

No 14_2013, STOREPapers from Associazione Italiana per la Storia dell'Economia Politica - StorEP

Abstract: The savings concept has never been investigated adequately even though it plays an important role in both the development of economics and finance. The finance version of savings initially emerged from the discussion of investment during the period starting about 1830. It emphasized direct business saving or “internal finance” in order to expand a firm, under the influence of Senior’s and Mill’s writings. The late 19th and early 20th century neoclassical version of “external finance” or “indirect” or “passive” personal saving in intermediaries, also emphasized by Keynesian macro, caused the idea of internal savings to retreat into the background and helped to create a cleavage between the disciplines of economics and finance. A subsidiary issue was what was the main cause variable for savings. Recent empirical microfinance studies of internal corporate growth in the finance literature emphasized wealth (net‐worth or book value) or profitability (cash‐flow, an income concept) of a business, while the mainstream economics literature continued to emphasize the interest rate and/or personal income as cause variables for savings in intermediaries. These ideas show how the different versions of the savings concept defined the differences between finance and economics.

Keywords: Personal savings; business savings; investment; finance; growth (search for similar items in EconPapers)
JEL-codes: B00 B41 E21 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2013-09
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