Nick Rowe on saving

Carleton economist Nick Rowe wants to abolish “saving”. He means the concept, not the activity. He develops a tiny macro model that is convincing, even to a microeconomist like myself.

Let’s take a very simple macro model with no exports, imports, government spending, or taxes. There are four goods: a flow of newly-produced consumption goods C; a flow of newly-produced investment goods I; a stock of antique furniture A; and a stock of money M. ….

Saving isn’t a thing, it’s a non-thing. It’s a residual. It’s defined negatively, as not consuming part of your income. So when an individual increases his saving, for a given income, all we know for sure is that he is reducing his consumption. He must be increasing something else, but we don’t know what it is he is increasing. We know (in this model) that he must be: buying more investment; buying more antiques; or hoarding more money. But we don’t know which. And it really matters which. As I shall show. ….

“What is the effect of an increase in desired saving by all individuals?”

What a badly-posed question. We know they all want to buy less consumption goods, but what of those three possible things do they want to do more of? The question does not say. So lets take all three in turn.

1. Investment. Demand for newly-produced consumption goods falls and demand for newly-produced investment goods rises by an equal amount. …. No recession.

2. Antique furniture. Demand for newly-produced consumption goods falls, and demand for a flow of antique furniture increases by an equal amount. What happens? …. [There is a fixed supply of antique furniture, so individuals will have to change their plans and buy more consumption goods (no recession), buy more investment goods (no recession), or hoard money (recession).] ….

3. Money. ….  Money is the medium of exchange in this economy. That makes it very different from antiques. If you want to increase your stock of antiques, you must persuade someone else to sell some of his. It’s not something you can do by yourself. If you want to increase your stock of money, you just buy less. Nobody can stop you buying less. There’s a recession.

Nick Rowe, Why “saving” should be abolished, Worthwhile Canadian Initiative, 11 January 2012.

This abbreviated version does not do justice to Nick’s reasoning. Click on the link above for more.

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