[ExI] Savings and wealth

[dan_ust at yahoo.com]

--- On Fri, 5/29/09, Stathis Papaioannou <stathisp at gmail.com> wrote:
> 2009/5/29 Dan <dan_ust at yahoo.com>:
> >
> > --- On Thu, 5/28/09, Stathis Papaioannou <stathisp at gmail.com>
> wrote:
> >> 2009/5/29 Dan <dan_ust at yahoo.com>:
> >>
> >>> A reductio ad absurdum of the Keynesian view
> is
> >>> if spending to wealth worked, why wait for a
> >>> recession?  Why not always keep immediately
> >>> consuming our total incomes -- never saving
> at
> >>> all?  (Saving is really postponed
> consumption,
> >>> but it's from such postponed consumption that
> >>> all economic progress aside from pure luck
> arises.)
> >>
> >> If everyone saved and no-one consumed, save for
> the
> >> necessities of
> >> life, why would anyone invest in anything other
> than the
> >> necessities of life?
> >
> > Well, people usually save for future consumption --
> not merely to work ever harder, but live at a subsistence
> level.  So, e.g., someone might save for a down payment on
> a house, for her children's college, for a new car next
> year, a cruise, start a business, invest in the market,
> retirement, or even vaguely for the proverbial rainy day.
>  The role of entrepreneurs is to attempt to forecast what
> people will want to buy in the future, so, in a free economy
> and within the limits of entrepreneurial error, they should
> be more or less successful at this -- and not result in the
> bugbear of Keynesians, original and New, where people
> mindless hoard savings for no reason at all.
> 
> If people will never buy anything in the future because
> they intend to
> die with the greatest possible amount saved, the
> entrepreneur will
> have nothing to do. All saving and no spending is bad for
> the economy.

Yes, but, again, are we talking about real people?  Who does this and how many of them are there?  Keynesians would have us believe most or enough people act this way, but it seems far more likely that people save with various consumptive ends in mind -- e.g., saving for retirement, saving for a cruise, saving to buy a home, saving up for a wedding.  Sometimes the ends might be more vague -- as in the case of someone who decides to save because he fears losing his job.

You're creating an extreme situation here to justify what?

Also, "bad for economy" means what?  That's a subjective construct.  The rate of savings reflects personal personal preferences.  With people interacting through a free market, such preferences would be coordinated with everything else -- not perfectly but much better than the alternatives.  The only way bad could be measured here is how well such coordination takes place -- given different preferences to save.  If everyone suddenly decided that they wanted to consume all their income (and savings), that wouldn't be bad for the economy.  It would just be.  It'd be unlikely under most conditions.

Likewise, if people decided, suicidally, to stop all consumption, that wouldn't be, from the standpoint of economics, bad, but just their preference.  It would be rather short-lived -- as everyone would die off in short order -- but economics is silent over whether this is a good or bad thing.

(And, yes, economics as a science is really silent over whether we should prefer free markets or interventions or complete command economics or even autarky.  It merely tells us what happens under these conditions or those policies and can explain things like why unsustainable booms happen.  Yes, economic theory doesn't rail against unsustainable booms -- any more than thermodynamics theory rails against wasting energy.)
 
> Not only is the saving rate higher in recessions, the
> savings rate is
> also higher in countries with consistently slower economic
> growth.
> This table shows it better:
> 
> http://findarticles.com/p/articles/mi_m4456/is_2002_Dec/ai_98032790/
> 
> Maybe its an effect rather than a cause, but wouldn't you
> expect the
> high savings rate to then give the economy a boost? For
> example, Italy
> seems to have a consistently very high savings ratio over
> decades, but
> Italy has not overtaken all the other countries in Europe
> in economic growth in this period.

I'll take a look at this later, probably next week.  (Gearing up for the weekend.:)

[snip]
> You don't seem to acknowledge that if everyone saved
> everything they
> could, overall productivity would be dramatically lower as
> there would be no market for goods and services.

You fail to acknowledge, again, that they would likely be saving for something -- not merely as an end in itself, but some future consumption.  That's basically what I meant.  Another example might be helpful here.  Imagine someone who's now saving as much as possible to go back to school.  He cuts down his expenditures to the point where he's not eating out, he's just paying the rent and doing the minimum to keep his life going as is but at a lower level.  His goal is to get an advanced degree and then get a better job -- so he'll be able to spend more money in the future.  The short term goal is to save, the mid-term to get a better job, the long-term to have a sustainably higher level of consumption.  Doesn't that make a lot more sense than the view that people will save just to save, never consuming?

Regards,

Dan