Keynes's Difficulties with the Classical Savings Theory of Growth and His Misidentification of Saving with the Hoarding of Cash Are Illustrated by a Thrift Campaign in His Banana Economy

It is easy to understand Keynes’s difficulties with the classical savings theory of growth when one recognizes his misidentification of saving with the hoarding of cash. In the Treatise Keynes illustrates this misunderstanding with a banana economy model in which a thrift campaign leads to a fall in the demand for bananas, a fall in the price level, and a loss to the plantation owners who then lay off some of their employees (1930). Had Keynes conceived of saving as the transfer of purchasing power from income earners to borrowers or issuers of financial assets, he might have realized that saving does not reduce the total demand for bananas. Some borrowers of the savings would use the funds to purchase bananas for consumption, while others would purchase bananas for processing into banana products, such as banana cream pies.

--James C. W. Ahiakpor, “The Classical Theory of Growth and Keynes's Paradox of Thrift,” in Classical Macroeconomics: Some Modern Variations and Distortions (London: Routledge Taylor and Francis e-Library, 2005), 154.