Background
The Marginal Propensity to Save (MPS) is a fundamental concept in Keynesian economics. It refers to the proportion of an additional amount of income that a household saves rather than consumes. MPS is instrumental in understanding how changes in income levels can impact overall savings in an economy.
Historical Context
The concept of MPS emerged from the work of John Maynard Keynes during the 20th century as part of his broader theory on consumption, savings, and investment behaviors. It plays a critical role in Keynesian models and analyses that seek to predict the effects of fiscal policy on aggregate demand.
Definitions and Concepts
- Marginal Propensity to Save (MPS): The fraction of an additional unit of income that is saved. It is calculated as the change in savings divided by the change in disposable income. MPS is a companion concept to the Marginal Propensity to Consume (MPC).
- Propensity to Save: Refers to the inclination or tendency of individuals or households to save money out of their total income, not limited to incremental income.
Major Analytical Frameworks
Classical Economics
Classical economists largely focused on the overall saving rate without differentiating between average propensity to save and marginal tendencies. The focus was on long-term growth driven by collective savings.
Neoclassical Economics
Neoclassical frameworks incorporate the marginal propensity to save as crucial for understanding consumer behavior and the equilibrium between savings and investments, forming the supply-side of the loanable funds market.
Keynesian Economics
Keynesian economics places considerable importance on MPS, emphasizing its impact on the multiplier effect. The higher the MPS, the smaller the multiplier effect of an initial change in autonomous spending, thus influencing overall economic activity levels.
Marxian Economics
In Marxian perspectives, savings behavior is linked closely to the class structure of societies and the dynamics between labor and capital. While not a primary focus, understanding savings through MPS can shed light on consumption patterns critical for capitalist economies.
Institutional Economics
Institutional economists might study MPS in the context of broader social norms and regulatory frameworks that influence savings behaviors.
Behavioral Economics
Behavioral economists examine how psychological, emotional, and contextual factors influence MPS, often deviating from traditional models that assume rational saving behavior.
Post-Keynesian Economics
Post-Keynesians delve deeper into MPS and MPC concepts to challenge and extend Keynes’ theories, emphasizing the roles of income distribution and uncertainty in savings decisions.
Austrian Economics
The Austrian school de-emphasizes the aggregate analytical approach and instead focuses on individual saving and investment behaviors without formally distinguishing between levels of income variability.
Development Economics
In development economics, MPS is critical for forming savings policies intended to boost investment and development within emerging economies.
Monetarism
Monetarists might explore MPS to understand inflation dynamics, arguing that changes in the money supply affect savings ratios and consumption.
Comparative Analysis
Comparing various schools of thought on MPS reveals diverse perspectives on why people save and how those savings interact with broader economic policies and conditions. For example, Keynesians argue for active fiscal policies to manage savings and consumption, while Neoclassicals might suggest promoting savings to ensure sufficient capital accumulation.
Case Studies
Real-world case studies, such as the Great Depression, post-war economies, and recent financial crises, provide empirical evidence of how changes in income influence MPS and, consequently, broader economic outcomes.
Suggested Books for Further Studies
- “The General Theory of Employment, Interest, and Money” by John Maynard Keynes
- “Principles of Economics” by N. Gregory Mankiw
- “Capitalism, Socialism and Democracy” by Joseph A. Schumpeter
- “Microeconomic Theory” by Andreu Mas-Colell
Related Terms with Definitions
- Marginal Propensity to Consume (MPC): The proportion of an additional unit of income that is consumed.
- Savings Rate: The portion of income that is saved.
- Disposable Income: Income available to households after taxes and transfers.
- Consumption Function: A function depicting the relationship between total consumer spending and gross national income.
- Multiplier Effect: The economic concept that an initial increase in spending will lead to an even greater increase in overall economic activity.
