Key Figures in the Economics of Saving
Benjamin Franklin (1706-1790)
Franklin is quoted on thrift more than almost anyone, usually inaccurately. Poor Richard's Almanack, which he published from 1732 under a pseudonym, contains "A penny saved is a penny got" — the familiar "a penny saved is a penny earned" is a later paraphrase, and several other maxims attributed to him were adapted from older English proverbs. Franklin also left a far more concrete demonstration than any aphorism. A codicil to his will directed 1,000 pounds sterling each to Boston and Philadelphia, to be lent in small amounts to young tradesmen, with a partial distribution after 100 years and a final one after 200. The funds were wound up in 1990, and both had grown by several orders of magnitude — one of the few genuinely documented long-horizon compounding cases.
John Maynard Keynes (1883-1946)
The British economist whose General Theory (1936) made household saving a macroeconomic variable rather than a private virtue. Keynes introduced the consumption function and the marginal propensity to consume, and he identified three motives for holding money: the transactions motive, the precautionary motive, and the speculative motive. The precautionary motive — holding liquid balances against unforeseen contingencies — is the theoretical ancestor of the modern emergency reserve. Keynes also articulated the paradox of thrift, which concerns what happens when an entire economy attempts to save more at once. His framework treats saving as the residual of an income-consumption decision, which is why national accounts define it that way to this day.
Franco Modigliani (1918-2003)
An Italian-American economist at MIT who, with Richard Brumberg, developed the life-cycle hypothesis of saving in 1954. The theory holds that people form a view of their lifetime resources and try to keep consumption relatively smooth across it, which means saving is concentrated in the years when income is highest and dissaving occurs at the start and end of adult life. It predicts a hump-shaped wealth profile by age, and it explains why the aggregate saving rate of a country depends partly on its demographic structure and growth rate rather than on national character. Modigliani received the Nobel Memorial Prize in Economic Sciences in 1985, citing this work among his contributions.
Milton Friedman (1912-2006)
An American economist whose A Theory of the Consumption Function (1957) advanced the permanent income hypothesis. Friedman split measured income into a permanent component, reflecting long-run expected resources, and a transitory component, reflecting temporary deviations. Consumption, he argued, tracks the permanent component; transitory income is largely saved or, if negative, borrowed against. The hypothesis resolved a puzzle in the data — that the relationship between income and consumption looked different in cross-sections than over time — and it has direct implications for how a temporary tax rebate is expected to affect spending. Friedman received the Nobel Memorial Prize in 1976. Subsequent empirical work finds that households with little liquidity depart from the prediction noticeably.
Richard Thaler (born 1945) and Shlomo Benartzi
Thaler, a Nobel laureate in 2017, and Benartzi, a behavioural economist at UCLA, published Save More Tomorrow in 2004. Their contribution was to design around documented behaviour rather than assume it away. Because commitments that begin in the future are less painful than commitments that begin today, and because inertia keeps people in whatever arrangement they already have, a plan that raises contribution rates automatically at future pay increases tends to be accepted and then not reversed. The same body of work established how powerful default options are in retirement plans. This literature describes what happens under different plan designs; it is a finding about choice architecture, not a recommendation about how much any person should save.