All employment is caused by spending. If for example no one bought clothes all the tailors would be unemployed, and if people bought more clothes there would have to be an addition to the number of tailors to meet the extra demand. The amount of employment depends upon the amount of spending done.
When money is spent an equivalent income is created. The money which a customer spends on his suit is income to the tailor. Let us consider an economy in which everyone spends all his income and in which there is full employment. There is no reason why full employment. There is no reason why full employment should not be maintained since there will be no reduction in the spending which gives rise to it. Suppose now that one of the inhabitants of this community begins to save some of his income instead of spending it. The fall in spending involves a fall in the demand for goods and therefore a fall in production. If the fall in production is sufficiently pronounced manufactures may dismiss some of their labour, causing unemployment. The saving has caused a fall in the community’s output of of goods, even though the ability of the producers to make them is unchanged.
Suppose now that when the saving was done someone else decided to invest an equivalent amount in the production of new machinery. He might finance this investment by borrowing the savings, or he might get a loan of newly created credit from a bank, whichever he does the effect is the same. There is now no reduction in total spending. All that happens is that less is spent on consumer goods and some is now spent on capital equipment. There need be no fall in employment if the labour displaced from the consumer goods industries find employment in the capital goods industries. The saving has not resulted in less production, but in a different kind of production. The community is better off as it now owns capital equipment which it did not own before.
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