Abstract
As we have seen, decisions to save out of current income are additions to the pool of fluid capital, while decisions to consume or invest in produced means of production are subtractions. The economic drivers in an economy have been seen as owners/operators of productive capacity deciding how much of that capacity to utilize, entrepreneurs deciding how much to invest in new capacity, and households deciding how much of their income to consume. In general, this book has not been about the motivations that cause these decisions to occur, but rather about the implications of the decisions for changes in the pool of fluid capital and attendant effects upon interest rates and the general price level.
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Notes
- 1.
I am ignoring retirement saving which occurs through private or public group pension plans.
- 2.
Financed in this context means goods released by the positive saving elsewhere in the economy.
- 3.
In a Newsweek article in 1967, Paul Samuelson wrote: “The beauty about social insurance is that is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in.” This beneficence is possible, Samuelson goes on to say, because “the national product is growing at compound interest and can be expected to do so for as far ahead as the eye cannot see. … A growing nation is the greatest Ponzi game ever contrived.” [zQuoted also in The New York Times Magazine, August 27, 1995, p. 56.] Samuelson’s contention that the national product will continue to grow exponentially obviously requires that savings be productively invested. See Appendix D for a proposal for reforming Social Security that, among other things, makes the program self-financing.
- 4.
A problem at the micro level in analyzing position goods is an interdependency of tastes and preferences. Collectibles, which are obvious instances of position goods, provide an excellent general example. For many collectibles, a (potential) collectible will have value for a particular “collector” only if it is thought that there is at least one other “collector” who wants the good as well. In short, unavailability for others who want is what drives the desire to have!
- 5.
A van Gogh can bring $82 million in today’s world, not because it is intrinsically worth (whatever that might mean) this amount, but because the world pool of fluid capital is sufficiently large to support such a value. Let there be a worldwide famine (or earthquakes which completely level Japan, the United States, and Western Europe), and the price of the van Gogh would plummet. On the other hand, let there be strong economic growth in the world for the next 20 years, and a painting (though not necessarily the van Gogh) 20 years from now could easily bring upwards of a billion of today’s dollars!
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- 7.
An important implication of this section is that necessities (income elasticities less than one) in a high-income economy can be luxuries (income elasticities greater than one) in a low-income economy. A television set is a necessity for a household in the United States, but not in Indonesia. Consequently, what are mature markets in rich countries can be important growth markets in poor countries. Recognition of this disparateness in income elasticities has been a major factor in many of the “Asian miracles” in the 1980s and 1990s. For an entertaining account of such income elasticity “arbitrage,” see Thurow (1999, Chap. 3).
References
Hirsch, F. (1976), Social Limits to Growth, Twentieth Century Fund, Harvard University Press, Cambridge.
Scitovsky, T. (1976), The Joyless Economy, Oxford University Press, Oxford.
Stigler, G.J. and Becker, G.S. (1977), “De Gustibus Non Est Disputandum,” American Economic Review, Vol. 67, No. 2, pp. 76–90.
Taylor, L.D. (1987), “Opponent Processes and the Dynamics of Consumption,” in Economic Psychology: Intersections in Theory and Application, ed. by A.J. MacFadyen and H.W. MacFadyen, North Holland Publishing Co, Amsterdam.
Taylor, L.D. (1988), “A Model of Consumption Based on Psychological Opponent Processes,” in Psychological Foundations of Economic Behavior, ed. by P. Albanese, Praeger, New York.
Thurow, L.C. (1999), Building Wealth: The New Rules for Individuals, Companies, and Nations in a Knowledge-Based Economy, Harper-Collins, New York.
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Taylor, L.D. (2010). Questions Related to Consumption and Saving. In: Capital, Accumulation, and Money. Springer, Boston, MA. https://doi.org/10.1007/978-0-387-98169-7_12
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