Monday, November 09, 2009

Wealth Creation

I've been reading a lot of Keynesian posts about the American savings rate, and why it is unhealthily high. And why, these are Keynesian posts after all, the government needs to act counter-cyclically "because not everyone can save at the same time."

That sentence may be correct in practice, but in theory it is not. Saving, by definition, is consuming less than your produce. What happens if everyone consumes less than they produce? It's called wealth creation. Infrastructure, capital (human and otherwise), investment--that all can go on by everyone at the same time. In our finance-ridden world, having everyone save paper assets may not be the greatest thing to do, but in the real economy, everyone saving can be highly beneficial for future growth.

5 Comments:

Blogger Noumenon said...

That's how it would work in your basic Econ 101 model where there are only two goods in the economy, donuts and robots. There savings on consumer goods (donuts) means you automatically get more investment (robots). But savings doesn't automatically equal investment in more realistic models. It lowers the cost of investment, but you still have to take the business outlook into account. (eg, if no one is buying donuts because Lucifer's Hammer hits tomorrow, no one is buying robots either).

There are lots of places savings can go other than investment. It can go into an asset bubble (stocks or houses). Your government can ask you to save it all in the post office (Japan) or mail it to your biggest customer for exports (China). You don't get any richer doing those things.

Saving, by definition, is consuming less than your produce.

Another definition is "deferred consumption."

"not everyone can save at the same time"

You gotta ignore the financial assets, they're just paper. Everyone can "save" at the same time by bidding up the price of stock. But look at the actual goods. Can everyone save up donuts now and then eat them in 2030? No, it won't last.

We are going to need to produce those extra donuts in 2030 and it doesn't matter how much we save now, if there are only subsistence farmers in the economy then we will starve. And with the stock market as inefficient and distorted as it is it might just give all our savings to some Internet entrepreneur and not build any new robots (or donut farms) at all.

12:52 PM  
Blogger Octavo Dia said...

Please note the sentence, "That sentence may be correct in practice, but in theory it is not."

You're using examples from practice about why it doesn't work, when I was arguing that it could work, which is still valid.

5:22 PM  
Blogger Octavo Dia said...

The point of all this, by the way, is that saying, "Not everyone can save at the same time" creates barriers in your mind.

If you phrase it as a question, "How can we best use our surplus resources?" a whole different set of answers emerges.

10:30 PM  
Blogger Noumenon said...

You're using examples from practice about why it doesn't work

I figure to show that the simple theory is outmoded and advanced theory is needed. If you say in theory the universe is going to go crunch because of gravity, I can bring up the fact that it's actually expanding "in practice," because that "in practice" prompted the development of a new theory that outmoded the plain gravity one.

But I'm not exactly sure of the theory behind "everyone can't save at once." It's just a catchy phrase. It sounded true to me because it matches what Laurence Kotlikoff says about an entire society not being able to save for its retirement, but that's not what they're talking about. They're talking about saving being bad for aggregate demand.

1:30 PM  
Blogger Octavo Dia said...

Of course, the theory that replaced it created problems of its own, which were replaced by an another theory, but the law of gravity remained.

9:12 PM  

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