- Who's "we"? Because of trade, "we" includes everybody in the world. If one day with trade with extraterrestrial aliens, then the definition of "we" will have to be expanded to include all sentient trading beings in the entire universe. It also includes all groupings of all sentient trading beings including not only individuals, but businesses, and governments as well.
- Why "more or less"? Things like changes in inventories and delays between production and distribution mean that some years we consume slightly more or less than what we produce, but this effect is pretty small. Also, occasionally some goods are produced that nobody wants (centrally planned economies are exceptionally good at causing unwanted goods to be produced).
- What does it mean to "consume"? I'm using a very inclusive definition here. An average college student can consume a can of beer in a few seconds. On the other hand, it takes about a decade to consume a car and a century to consume a house. Of course, neither durable goods such as houses and cars nor capital equipment are generally thought of as being "consumed", but it's not a bad approximation to consider that about a tenth of each car that lasts ten years and a hundredth of each house that will last one hundred years are consumed each year.
So if we consume what we produce, what does it mean to save? What exactly is being saved? Is it just pieces of paper and/or bits in some bank's computer? Are those pieces of paper and bits part of the same infinitely large pool that the Federal Reserve controls? Is it just some sort of accounting gimmick? Or is there something more tangible that's being saved? Why is saving important at all?
I ask these questions for two reasons. First, I'm intending to write a series of posts on savings and debt and these are the fundamental questions I'll examine. Granted, my intentions and action don't always match regarding my blogging, but these are interesting questions to contemplate anyway. Also, my co-blogger Howard (feel free to jump in anytime) can write about these topics at least as well as I can in case I fall down on the job.
Second, if you hear someone say something like "the savings rate of the United States is way too low" then I suggest you start by asking that someone the above questions. If they can't answer them clearly, then I suggest you don't take them too seriously.
5 comments:
Bret:
So if we consume what we produce, what does it mean to save?
I have to preface my answer with the full acknowledgment that, with regard to economics, answers that make sense at the individual level very often don't at aggregate levels, particularly at the level of a national economy.
So, with that said: In my largely ignorant opinion, money, at its most basic level is a constant of proportionality with respect to time. Time is the fixed quantity. Given a standard 8 hour work day, everyone works the same amount of time, but not all time worked is allocated (ignoring for the moment the means of allocation) the same value.
Money is the proportionality constant that defines the value of worked time.
So, at an individual level, saving consists of consuming less of others' time value than what one's own time value, averaged over time. (Here, monetary value is based upon how the quantity of the constant of proportionality is managed with respect to the one true value resource: time, not gold.)
For example, I have, roughly speaking, consumed about 85% as much of others' time value as my time value has yielded over the last twenty or so years. In other words, saving amounts to nothing more than time in the bank.
At some point, I will accumulate enough excess time so that, if I chose, I could stop using my time productively, and spend the rest of my life consuming the others' time that I had accumulated.
[BTW -- the sense, or nonsense of all this, is mine alone. It is just a notion that has been kicking around the inside of my skull as I have tried to get some grasp of just what money means.]
hey skipper wrote: "... Money is the proportionality constant that defines the value of worked time ... saving amounts to nothing more than time in the bank."
Interesting perspective and perhaps in an economic system where the only input to production is labor, savings equals time would be an adequately accurate equivalence. However, economic texts often describe four factors of production: labor, capital (equipment, previously produced goods, etc.), land (natural resources), and entrepreneurship (leadership and willingness to accept risk).
There are people who don't work at all (i.e. spend no time working), yet end up with more wealth at the end of their life than when they began. Is their wealth still "time in the bank"? Maybe some other people's time. But for sure it probably represents capital and/or natural resources and possibly a willingness to accept risk (i.e. make investments, though I suppose the labor required to choose between investments takes time). Since they didn't spend anytime, suddenly the proportionality constant requires a divide by zero which gets us into trouble.
hey skipper also wrote: "At some point, I will accumulate enough excess time so that, if I chose, I could stop using my time productively, and spend the rest of my life consuming the others' time that I had accumulated."
Though the time you would consume is not literally the time of others who had consumed your time. It's the time of a younger generation who hopes to one day be able to redeem their savings for goods produced by yet another generation. In addition, let's say robots start doing a lot of work for us. When you start spending your savings in the future, people might be working a lot less than they do now, yet we'll be far wealthier. So you don't necessarily have a claim on other people's time (though I understand that you might just consider innovation something that changes the proportionality constant), rather you have some claim on goods produced.
Definitely an interesting perspective. Perhaps if you could work in capital, land, and entrepreneurship, I could get behind it more.
Well Bret, you have (knowingly or unknowingly) touched on the Social Security problem. We can only consume what we produce! When the baby boomers retire, they will only be able to consume what is produced by those still working. Of course those still working will only be able to consume what they produce. Nothing will change this fact. Private Social security schemes that promise higher returns (investing in the stock market), Social Security trust fund surpluses, etc. will not help produce more goods and services. In a fiat money system, the govt can make whatever SS payments it wants. Look at it this way, if the govt increased taxes on those working to give more money to those retired, than the govt would be allocating more goods and services to those retired. If the govt increased total SS payments without increasing taxes, then there would be more money in the system to chase the limited supply of goods and services. In this case, inflation would take care of the distribution of goods and services between those working and those retired. Ultimately, SS is all about the allocating of goods and services. The best fix is to foster an economic environment that maximizes productivity gains so more goods and services will be available to all.
mark wrote: "...you have (knowingly or unknowingly) touched on the Social Security problem..."
Knowingly. I've also posted before about nearly exactly what you're saying here.
Bret:
Interesting perspective and perhaps in an economic system where the only input to production is labor, savings equals time would be an adequately accurate equivalence. However, economic texts often describe four factors of production: labor, capital (equipment, previously produced goods, etc.), land (natural resources), and entrepreneurship (leadership and willingness to accept risk).
The four questions you posed are very good, but I believe they all begged another question: When we save, what are we saving?
NB: Reminiscent of my caveat above, I am even further out of my depth when discussing economics at the corporate or aggregate level.
Individually (taken to include the family unit), saving is distinct from production. No matter the form of production, saving is exclusively monetary. Consequently, in order to answer the question What is saving?, I have to answer the question What is money?
Having idly pondered this question, IMHO money -- no matter its form -- is time made corporeal by some material entity acting as a constant of proportionality.
Saving, therefore, is consuming less of other's time, as represented by its corporeal form, than one earns, over some defined time span.
So long as we are talking about saving in money terms, it doesn't really matter how (absent theft) I gain money. Again relying on self reference, in addition to consuming only 85% of the time I earn, I consume 0% of unearned time. That is, the time value of my time other's borrow because they don't have enough time to wait around to get enough time to do whatever they want to do now rather than later.
In other words, unearned income is the corporeal representation of the time value of time. And since it is someone else's time I'm gaining for the privilege of now rather than later, there is no divide by zero issue. The money they borrow from me is corporeal time I have already earned; they pay it back as the original amount of time, plus some amount of their corporeal time.
Consequently, the distinction between earned and unearned income is whose time. If I was sufficiently wealthy, then I could live entirely off of others' time. A little wealthier, and I can pass an inflection point where I can both live off of others' time and get even wealthier in the process.
Hence, at the micro level, saving is only consuming less corporeal time than one produces.
At a corporate level, I suppose that would have to be extended to sequestering a portion of production for sale at some later time. However, while theoretically true, it sure doesn't seem to have much attraction in the real world.
At the national level, things get much more complicated, because control over the money supply can greatly effect the corporeal value of time. For the moment, let's say the government is able to perfectly calibrate the amount of money in the economy to the level of economic activity, perfectly balanced between conraction and expansion.
In that case, the national savings rate is nothing more than individual savings rates aggregated. So long as it is positive, we are consuming less than we produce.
Over time, is that possible, in the aggregate, only if productivity is also increasing?
Apologies if this is rambling nonsense, but complex questions don't typically allow easy answers.
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