The cause of our suffering: too much saving?
[O]ne of the high points of the semester, if you’re a teacher of introductory macroeconomics, comes when you explain how individual virtue can be public vice, how attempts by consumers to do the right thing by saving more can leave everyone worse off.
--Paul Krugman, "When Consumers Capitulate" 10-31-08
Savings a public vice? Krugman tells us we have a savings glut, and explains how we are suffering from too much savings. How can we have too much savings and too much debt at the same time? Ah, yes. Foolish non-Nobel Prize winners. You fail to understand the mysteries of the "Paradox of Thrift," "Liquidity Traps," and "Damnification." It's obvious that what we need is "a surge in public spending," and to quit worrying about the deficit.
If you think Krugman's recommendations defy common sense, you would be right. They also fly in face of good economics. What Krugman, and his influential predecessor John Maynard Keynes, fail to understand is the difference between real savings and the artificial "savings" of credit and money created out of thin air. Their convoluted arguments in defense of increased deficit spending crumple into nonsense once you grasp the real meaning and role of savings.
Savings consists of production which is not immediately consumed. Savings is the excess wealth we have already created, which can then provide for our immediate needs while we expend time and resources to produce an even greater amount of wealth in the future. Without savings to sustain us, no investment in the future is possible. We can not sustain ourselves on paper, so printing money only creates the illusion of wealth. Reality eventually catches up, and all the plans that were constructed on that illusion come crashing down. Sound familiar?
I recently stumbled across an example of real savings in an unexpected source: Up from Slavery, the autobiography of Booker T. Washington. Washington, an American statesman and former slave, tells the remarkable story of his struggle to better the lives of blacks in America following the Civil War. To provide them with the knowledge and skills needed for self-improvement, he built from almost nothing the Tuskegee Normal and Industrial Institute. As an essential part of the educational program, students and faculty at the school built and operated all of the facilities themselves. School farms provided a substantial part of their food. Even so, the impoverished condition of his students required constant fund raising in order to purchase materials they could not supply themselves. Occasionally, Washington was able to secure a sizable donation of $1000, but the bulk of contributions were small--$10 or $25, or even less. The following encounter is one of many similar vignettes which poignantly illustrates the real meaning of savings.
I recall one old coloured woman, who was about seventy years of age, who came to see me when we were raising money to pay for the farm. She hobbled into the room where I was, leaning on a cane. She was clad in rags; but they were clean. She said: “Mr.Washin’ton, God knows I spent de bes’ days of my life in slavery. God knows I’s ignorant an’ poor; but,” she added, “I knows what you an’ Miss Davidson is tryin’ to do. I know you is tryin’ to make better men an’ better women for de coloured race. I ain’t got no money, but I wants you to take dese six eggs, what I’s been savin’ up, an’ I wants you to put dese six eggs into de eddication of dese boys an’gals.”
Six eggs. Six eggs were the sum total of her excess production, not immediately consumed, and thus available for "investment." Those six eggs were eggs that Washington and his students would not have to produce themselves, thus freeing their time for activities aimed at the future, a future of increased prosperity through the improved productivity their education would make possible.
We have moved beyond a barter economy but the fundamental nature of savings has not changed. Before we can invest in the future, we must first produce the wealth to meet our immediate needs. Production beyond immediate consumption is what we call savings. Only with this excess can we afford the luxury of production aimed at future goods. Only with our immediate needs provided for do we dare take risks on new, and hopefully improved, methods and products. With this excess, our savings, we can accumulate the capital required to increase productivity.
We now trade in money rather than eggs, but to serve its proper function, money must remain directly and irrevocably linked to real, existing wealth. To inject into the economy paper money not backed by real goods disrupts our ability to calculate how much we can afford to invest in the future. Because of its historical connection to real wealth, paper money is treated as equivalent to real wealth (but it is not.) Personal and business plans are made on the assumption that those paper dollars will provide for our immediate needs while we spend our efforts and resources on projects which will not come to fruition until a future date. But, if Washington's benefactor had given him six pieces of paper, and he made plans as though it were six eggs, when dinnertime came around, he would go hungry.
Now it is our dinnertime and we are realizing we are out of eggs. Common sense tells us we need to restock our egg supply rather than exchange them for less immediate needs, or before taking risks on a future supply of eggs. Krugman, and his followers in Congress, want us to continue to pretend our larder is full. Paper money and credit creation help with that deception. By ignoring the true meaning of savings, it is possible to construct a host of sophisticated arguments which make it appear as though the answer is more spending, and more debt. But it all falls apart if you start with the fact that real money means real goods, and anything else is a paper fantasy that won't feed you come dinnertime.
As Ayn Rand and Leondard Peikoff have explained, in the latter's book Ominous Parallels and elsewhere, ideas cause history. Ideas not drawn logically from facts of reality cause individuals to act in ways that defy reality. Close attention to the words of such individuals as Krugman reveal the approaching collision between their ideas and facts of reality.
Sometimes in reading the news I sense that individuals such as Krugman are actors who have memorized their lines--but have shown up at the wrong play. They can't ad lib based on what they see on stage because they don't see.
And those of us not out of eggs are either being derided for an excess of eggs or being told we should give our eggs to those who live for the instant of their immediate whim.
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