Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
USDT Ponzi Scheme FINAL WARNING To EXIT Before Tether Collapses Crypto Exchange Markets - 22nd Jun 21
Stock Market Correction Starting - 22nd Jun 21
This Green SuperFuel Could Change Everything For the $14 Trillion Shipping Industry - 22nd Jun 21
Virgin Media Fibre Broadband Installation - What to Expect, Quality of Wiring, Service etc. - 21st Jun 21
Feel the Inflationary Heartbeat - 21st Jun 21
The Green Superfuel That Could Disrupt Global Energy Markers - 21st Jun 21
How Binance SCAMs Crypto Traders with UP DOWN Coins, Futures, Options and Leverage - Don't Get Bogdanoffed! - 20th Jun 21
Smart Money Accumulating Physical Silver Ahead Of New Basel III Regulations And Price Explosion To $44 - 20th Jun 21
Rambling Fed Triggers Gold/Silver Correction: Are Investors Being Duped? - 20th Jun 21
Gold: The Fed Wreaked Havoc on the Precious Metals - 20th Jun 21
Investing in the Tulip Crypto Mania 2021 - 19th Jun 21
Here’s Why Historic US Housing Market Boom Can Continue - 19th Jun 21
Cryptos: What the "Bizarre" World of Non-Fungible Tokens May Be Signaling - 19th Jun 21
Hyperinflationary Expectations: Reflections on Cryptocurrency and the Markets - 19th Jun 21
Gold Prices Investors beat Central Banks and Jewelry, as having the most Impact - 18th Jun 21
Has the Dust Settled After Fed Day? Not Just Yet - 18th Jun 21
Gold Asks: Will the Economic Boom Continue? - 18th Jun 21
STABLE COINS PONZI Crypto SCAM WARNING! Iron Titan CRASH to ZERO! Exit USDT While You Can! - 18th Jun 21
FOMC Surprise Takeaways - 18th Jun 21
Youtube Upload Stuck at 0% QUICK FIXES Solutions Tutorial - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations Video - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations and Trend Analysis into Market Correction - 17th Jun 21
Stocks, Gold, Silver Markets Inflation Tipping Point - 17th Jun 21
Letting Yourself Relax with Activities That You Might Not Have Considered - 17th Jun 21
The Federal Reserve and Inflation - 16th Jun 21
Inflation Soars 5%! Will Gold Skyrocket? - 16th Jun 21
Stock Market Sentiment Speaks: Inflation Is For Fools - 16th Jun 21
Four News Events That Could Drive Gold Bullion Demand - 16th Jun 21
5 ways that crypto is changing the face of online casinos - 16th Jun 21
Transitory Inflation Debate - 15th Jun 21
USDX: The Cleanest Shirt Among the Dirty Laundry - 15th Jun 21
Inflation and Stock Market SPX Record Highs. PPI, FOMC Meeting in Focus - 15th Jun 21
Stock Market SPX 4310 Right Around the Corner! - 15th Jun 21
AI Stocks Strength vs Weakness - Why Selling Google or Facebook is a Big Mistake! - 14th Jun 21
The Bitcoin Crime Wave Hits - 14th Jun 21
Gold Time for Consolidation and Lower Volatility - 14th Jun 21
More Banks & Investors Are NOT Believing Fed Propaganda - 14th Jun 21
Market Inflation Bets – Squaring or Not - 14th Jun 21
Is Gold Really an Inflation Hedge? - 14th Jun 21
The FED Holds the Market. How Long Will It Last? - 14th Jun 21
Coinbase vs Binance for Bitcoin, Ethereum Crypto Trading & Investing During Bear Market 2021 - 11th Jun 21
Gold Price $4000 – Insurance, A Hedge, An Investment - 11th Jun 21
What Drives Gold Prices? (Don't Say "the Fed!") - 11th Jun 21
Why You Need to Buy and Hold Gold Now - 11th Jun 21
Big Pharma Is Back! Biotech Skyrockets On Biogen’s New Alzheimer Drug Approval - 11th Jun 21
Top 5 AI Tech Stocks Trend Analysis, Buying Levels, Ratings and Valuations - 10th Jun 21
Gold’s Inflation Utility - 10th Jun 21
The Fuel Of The Future That’s 9 Times More Efficient Than Lithium - 10th Jun 21
Challenges facing the law industry in 2021 - 10th Jun 21
SELL USDT Tether Before Ponzi Scheme Implodes Triggering 90% Bitcoin CRASH in Cryptos Lehman Bros - 9th Jun 21
Stock Market Sentiment Speaks: Prepare For Volatility - 9th Jun 21
Gold Mining Stocks: Which Door Will Investors Choose? - 9th Jun 21
Fed ‘Taper’ Talk Is Back: Will a Tantrum Follow? - 9th Jun 21
Scientists Discover New Renewable Fuel 3 Times More Powerful Than Gasoline - 9th Jun 21
How do I Choose an Online Trading Broker? - 9th Jun 21
Fed’s Tools are Broken - 8th Jun 21
Stock Market Approaching an Intermediate peak! - 8th Jun 21
Could This Household Chemical Become The Superfuel Of The Future? - 8th Jun 21
The Return of Inflation. Can Gold Withstand the Dark Side? - 7th Jun 21
Why "Trouble is Brewing" for the U.S. Housing Market - 7th Jun 21
Stock Market Volatility Crash Course (VIX vs VVIX) – Learn How to Profit From Volatility - 7th Jun 21
Computer Vision Is Like Investing in the Internet in the ‘90s - 7th Jun 21
MAPLINS - Sheffield Down Memory Lane, Before the Shop Closed its Doors for the Last Time - 7th Jun 21
Wire Brush vs Block Paving Driveway Weeds - How Much Work, Nest Way to Kill Weeds? - 7th Jun 21
When Markets Get Scared and Reverse - 7th Jun 21
Is A New Superfuel About To Take Over Energy Markets? - 7th Jun 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

No Economic Growth Without Savings

Economics / Recession Jan 22, 2008 - 07:34 PM GMT

By: Gerard_Jackson

Economics To say that the economics profession is schizophrenic about economic growth and savings would be a mild understatement. The economic commentariat tell us that consumption drives the economy and that consumer spending must be maintained if the economy is to avoid recession. They then tell us that we need to save more if we are to raise living standards. It completely eludes them that they stating a contradiction in terms.

Kenneth Davidson of The Age is a particularly ludicrous example of the kind of thing I am referring to. In order strengthen his vulgar Keynesianism he once referred to the so-called findings of a 1993 World Bank study called The East Asian Miracle: Economic Growth and Public Policy which claimed that though income and savings were highly correlated, income rises often preceded rises in savings. From this the authors drew the absurd conclusion that growth might drive saving rather than the reverse.

Missing from Davidson's brilliant views on savings and growth were their definitions. Savings are usually defined as an act of not consuming. This is only partly correct. The full definition is that savings is a process by which present goods are transformed into future goods, i.e., capital goods, that produce a greater flow of consumer goods at some further point in time. In short, present goods in the form of money are used to direct resources from consumption (the production of consumer goods) into the production of capital goods. From this we (with the evident exception of Davidson) can deduce that growth is the accumulation of capital goods.

Nevertheless, even this somewhat more realistic definition is misleading because it can convey the impression that growth is nothing more than the simple accumulation of capital goods. This is the kind of theoretical trap that greens and neoclassical economists fall into, even though in practise the latter recognise the heterogeneous nature of capital goods. Capital, as Austrian school economists point out, is a heterogeneous structure consisting of complex stages of production. As more and more stages of production (roundabout methods) are added to the structure it becomes even more complex and productive.

Now what is being suggested is that this structure can grow faster than savings. But how can that be when it equals savings? Put another way: it is being stated that growth can occur without any sacrifice of consumption. In case you did not know, this is called magic pudding economics .

It is ridiculous that it still has to be stressed that you cannot add to the capital structure without sacrificing consumption. (To argue otherwise would be to claim that we can, for example, grow wheat without planting seed corn). Conversely, to dissave means withdrawing resources from the structure thus reducing its productivity. Wicksell explained that when savings take place

[n]o drag on prices need then arise. The commodities of which the saver forgoes the consumption will not, in a properly ordered system, be produced at all, since the units of labour and natural resources which would have been employed in their production will now be employed in preparations for future production. Apart from some inevitable economic friction everything else will remain unchanged at the moment of saving, but production will have become more capitalistic, i.e. directed more towards the future, and consequently, as a rule, more fruitful. (Knut Wicksell Lectures on Political Economy, Vol. II: Money , George Routledge & Sons LTD., 1935, pp. 11-12).

We can therefore conclude that saving really is a virtue and that those who save indirectly raise the living standards of their fellow citizens. Hahn (a reformed proto-Keynesian) pointed out that the saver

... improves his own welfare because saving implies the transfer of means for consumption from the present, where his earnings are ample, into the future where his earnings may become scarce through old age and sickness. Furthermore, saving will increase his means through the interest he receives. (Albert Hahn, The Economics of Illusion , Squier Publishing Co., Inc, 1949, p. 94).

However, by using credit expansion the impression can be given that an economy has grown faster than it has saved. By this process businesses can direct resources away from consumption to investment, giving the impression that investment now exceeds savings. This is called inflation. It should be noted that the apparent discrepancy between investment and savings is really a monetary illusion, the product of a monetary disturbance. In real terms investment still, as it must always do, equals savings, even if they are forced savings.

Davidson has made the absurd class-war accusation that Treasury 'ideology' held back savings by restraining growth because it put the "interests of rentiers (people who save) ahead of real entrepreneurs" who make real investments that create jobs. What he means by this Keynesian ideological claptrap is that the Treasury should be forced to lower interest rates to stimulate investment. But this is the very policy that gave us the 1980s boom followed by "the depression we had to have". In other words, what Davidson called for was more inflation followed by another recession. (This is precisely what the Howard Government gave us. The irony here is that it will be a Labor Government that will suffer the political consequences of the Howard boom).

Of course, Davidson defended his absurdities by asserting that the 1930s depression was caused by neoclassical economic policies that also led to World War II. This is complete and utter drivel. Moreover, it should be noted that he ignored the role that tariffs played in wrecking international trade, deepening the depression and aggravating international relations. Did he do this because he supports tariffs?

That the Great Depression was caused by free-market economic policies is a myth. Unfortunately, it is a myth that Australia's so-called rightwing refuses to question.

By Gerard Jackson

Gerard Jackson is Brookes' economics editor.

Copyright © 2008 Gerard Jackson

Gerard Jackson Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in