Journal Article Saving and Investment: Definitions, Assumptions, Objectives Get access A. P. Lerner A. P. Lerner Chicago Search for other works by this author on: Oxford Academic Google Scholar The Quarterly Journal of Economics, Volume 53, Issue 4, August 1939, Pages 611–619, https://doi.org/10.2307/1883280 Published: 01 August 1939

I. Why S = I, 297.— Difficulties of seeing this: the confusion between stocks and flows, 299; the paradox of individual freedom and social necessity, 300; the habit of labeling expenditure as "out of" particular income receipts, 302; the failure to recognize the mathematical or analytical nature of the proposition, 304; a misunderstanding of arguments about equilibrium, 305. — II. Miss Curtis' condition that "all income is spent, " 305; her failure to see the place of "wishes" in economic analysis, 307.— III. An attempt to salvage one of Miss Curtis' results, 308.

The formulation of the argument for distributional equality by William Breit and William Culbertson is an improvement on that of The Economics of Control and is more effective in class. Their generalization of the to the case of increasing marginal utility (of income) offset by a greater degree of diminishing marginal utility elsewhere, is also an improvement. Their point that Paul Samuelson did not escape the ''equal ignorance assumption is well taken. Ambiguity, being a case of lack of clarity is a charge that can never successfully be refuted. However, I would like to deny a switching of conclusions. Perhaps the ambiguity would have been avoided if I had added the following words in Roman type to the italicized sentence quoted: . . if it is desired to maximize the total satisfaction in a society, the rational procedure, in the absence of the knowledge that would enable us to equalize the marginal utilities, is to maximize the probable total satisfaction-i.e., to divide income on an equlitarian basis. The theorem on page 32 is not than the and mild one of page 29. It is the same proposition. The ingenous device of the 100 million coconut islands in one way does more than is claimed for it and in another way, does less. If it were possible to divide the total population into pairs which had the same utility functions, the equalization of income within each pair would never involve a wrong movement to be offset by a right oine. That is why there is certainty of improvement from equalization on every island. Furthermore, there would be an absolute maximization, with certainty, of the total satisfaction of the pair on each island from their joint income. On the other hand, the parable assumes that the combined incomes of the pairs have somehow already been equalized; that for every individual in the half of the total population with incomes less than the mean, his partner in the other half of the population (with an identical utility function) has an income greater than the mean by the exact amount that his is less than the mean. (This implies incidentally that no individual has an income as as twice the mean unless his partner has a zero income.) If this is not the case, some islands will be richer than others. We will then have to equalize the incomes of the islands before we could conduct Breit and Culbertson's experiment. The parable, therefore, while not necessary for the meek that income equalization maximizes the probable total satisfaction, is not sufficient for the bold proposition (to which I have never subscribed) that income equalization increases total satisfaction with absolute certainty. Breit and Culbertson's development of their parable reflects the same discomfort they have seen in others. The pair on the island are not satisfied with the proof that the equalization of the incomes has maximized their probable satisfaction. Sharing a widespread human craving for certainty, they want to be quite sure that they have at least increased their actual total satisfactions. This assurance is unfortunately not available as long as the utility functions are unknown. Breit and Culbertson also are seeking for a certainty of gain in a much bolder and more interesting regarding realized satisfactions instead of the maximization of a mere probability, and are accurately represented by the island pair they have invented. They have imagined a certainty of gain only by imagining the discovery of identicalutility twins. But the whole point of the * University of California, Berkeley.

M /[ESSRS. Bowen, Davis, and Kopf have shown 1 that real burden of a project using up resources in can be shifted to generations by internal borrowing, providing one defines in a particular way. It just as easy to prove that all politicians are economists or that all economists are dunces, provided one defines economist in a particular way. But even if I call tail of a sheep a leg that will not turn sheep into quintapeds. The issue of course terminological rather than substantive. It nevertheless one of utmost importance because conclusion reached by Bowen et al., although not incorrect on their own definitions, bound to be misinterpreted as meaning what it seems to be saying in English and as indeed implying that most politicians understand economics better than economists most, if not all, of whom are dunces. Bowen, Davis, and Kopf are right when they agree that there absolutely nothing wrong with standard argument of modern economists that real burden of a debt can not be shifted to generations if it defined as the total amount of private consumption goods given up by community at moment of time borrowed funds are spent. But President Eisenhower appears convinced that costs of debt-financed public projects can be passed on to generations. Like Rabbi in story, Bowen et al. want to say that he too right, but in their enthusiasm they even say that purpose of their note is to suggest that in instance it President who -in at least one highly important sense right,' 2 thus clearly implying that economists are wrong. To make President appear right, Bowen et al. redefine present generation to mean people who lend money to finance project, and they redefine future generation to mean people who pay taxes that are used to repay principal and interest on loans. The perversity of redefinitions obscured by supposing that lenders (this generation), are all 2I years old at time of execution of project when they lend money and by supposing that they are repaid 44 years later, on their 6sth birthday, with funds obtained at that time from 2Iyear-old taxpayers (the next generation). The burden thereby shifted from this generation' to the next generation. What has been proved, if we obstinately insist in expressing conclusion in English, that it possible to shift burden from Lenders to Taxpayers or, we might say, fromn Lowells to Thomases. The Lowells are better off and Thomases are worse off than if Lowells had been taxed to raise money for project in first place. The red herring nature of having Lowells lend money now (so that we can call them generation) and having Thomases pay taxes in (so that they can be called generation) jumps to eye if we note that shifting of real burden of project from Lowells to Thomases (or indeed of any other burden) could take place just as well at time of project (or at any other time) by simply taxing Thomases instead of Lowells. No economist, so far as I am aware, has ever denied possibility of borrowing or of lending or of taxing some people instead of others, or of any combinations of such oper-