Thursday, 30 September 2010

Saving: vice or virtue

From Mario Rizzo's comment on Coordination Problem (an Austrian blog):
Keynes...does turn certain virtues (like saving) into vices -- from an economic or consequentialist perspective. What is particularly disturbing is that from a long-run perspective surely saving is a "virtue."
But surely it's not. Investment is a virtue; and saving, usually, is what enables investment.

Saving in itself is a neutral act, because one person's savings are another person's debt. In the Keynesian model, attempts to increase saving while investment is falling simply lead to a spiral of shrinking income. It's investment that creates future wealth.

According to the savings identity, total savings does equal investment, but that statement is misleading for two reasons: one, because this definition of investment includes inventory (which may be built up involuntarily, and is not especially "virtuous"); and two, because it hides the effects of savings in one period on investment in the next.

If we could all agree how much saving we wanted to do, and then make the total available as an investment fund available for allocation, then savings really would be virtuous. But that requires a level of coordination which is unrealistic in a complex economy - a problem which I'm sure is easily recognised by commenters on a blog called Coordination Problem!

Price is meant to be the coordination mechanism for allocating economic resources: more savings => lower interest rates (the price of deferred consumption) => more investment. And often that works perfectly. But cognitive economics shows us many flaws in this mechanism. And this is why Keynesian policy, sometimes, might have a role to play.

No comments: