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Mandatory savings

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MadMiser posted on Thu, Aug 4 2011 11:42 AM

I wondered if anyone could address a question I have about the how the Austrian school treats forced savings. Savings is good, right? The more people save, the more economic growth there will be in the long term, and without savings there could be no growth at all. So, superficially at least, it would seem that by compelling people to save a greater portion of their incomes, to forgo consumption, a government could increase long term economic prosperity. Now, I understand in practice this rarely happens, and governments tend to decrease savings through instituting social security programs. But, Singapore is an example of a country with a mandatory savings program, with the State forcing people to save around 30% of their incomes, and its economy has been extremely successful, with the highest per capita rate of millionaires in the world, at 15.5% of households. It could be argued that this is due to the small state and relatively free (by international standards) market, but then Hong Kong has (as far as I'm aware) an almost equally free market, however has only 8.6% millionaire households per capita, a difference that could be attributed to Hong Kong's lower compulsory savings requirements (the exact % would be in here somewhere: http://www.mpfa.org.hk/eindex.asp if anyone's feeling adventurous :P).

So, my question is, what would be the Austrian response to the statist assertion that government intervention can increase long-term economic growth by compelling people to save more than they otherwise would? (Assume say a minarchist government with a monopoly on force, which jails people who fail to save the required percentage of their income but otherwise intervenes as little as possible in the economy.) If the natural rate of savings (defined as that which would occur absent State intervention) in the economy was 10%, and the intervention raised it to 30%, would that lead to a more prosperous economy in 100 years time than would exist otherwise?

I'll just qualify, I'm not actually advocating such government intervention, as I understand the Austrian tradition is based around principles of choice/liberty rather than totalitarian utilitarianism. I'll also add that I find it somewhat ironic that I've never seen this argument advocated by statists, since it seems like one of the few good arguments for how state intervention could indeed bring about a greater (utilitarian) good; I guess their Keynes-induced aversion to thrift precluded them from considering it?

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Forced saving (deflation) distorts the market no less than forced spending (inflation). Both alter the market interest rate and will cause economy-wide misallocation of resources. Of course, this is the weaker argument against forced saving. The strongest argument is that it's simply wrong to force people to do things they don't want to do unless you have a good justification for it (i.e. they committed a crime against you, etc.)

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Josh:

Neodoxy:
No I'm saying that it's up to the individual to decide which is more important and which overcomes which.

How can it be "up to the individual" if it is forced?

It's up to the individual to decide what he believes and supports. Praxeological refutations usually follow the premise that a thesis is refuted if the outcome is more unfavorable to the individual promoting the behavior than the alternative. This does not follow that prescription, it brings about the intended goal of an increase in the capital stock and profitable investment, but it does so at the expense of what I outlined above. Now EVERY INDIVIDUAL can choose if he supports manditory savings or not, this does not mean it will make a difference, I'm saying that your opinion as to whether it's "good" or "bad" from a societal perspective is up to the individual, it is not up to the individual as to whether or not he will or will not buy into the service.

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z1235:
Well I think fish-oil is helpful to your health, as well, so I do find the point relevant. Why not force everyone to gulp it up every morning?

That depends upon your values and the practical implications, not my opinion.

 

z1235:
No forced/coerced alternative could increase the satisfaction of an individual more than his uncoerced voluntary exchange/action, regardless of the time horizon. Value/satisfaction/wealth (both short-term and long-term predictions of same) are (1) subjective and (2) not amenable to aggregation/quantification by a (benevolent) dictator. You (the dictator) can not and will not make an individual subjectively better off (both short- and long-term) by forcing him to save more than what he would freely choose to save, nor by forcing more fish oil down his throat than he would freely choose to take. This is one of the foundation stones of Austrian Economics.

 

Because value is subjective you cannot say that what is eventually brought about in the end has less utility to the individual in the long term, you're quite right that this cannot be measured however. With this being said all generations in the future will be better off materially than they otherwise be all else equal and therefore the person valuing the two actions could consider the long run more important. As Mises made clear it does not matter if the actions are unfavorable to the people who it directly effects, what matters is if the outcome is favorable to the evaluator.  There is also no reason why long run improvement would not make someone better off subjectivley in the long run, for instance if an individual did not have the means to invest enough to procure this state off affairs and the individual preffered 3 years of 4X income and then progressing 6X income that continues to progress rather than 5 years of 5X income which progresses much more slowly.

If one believes people will be better off with long term growth and short term suffering this is the way to go, there's no way around it. You are right that it is arrogant, however.

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To address Smiling Dave's questions:
 
1. I'll take the Australian Superannuation scheme as an example. Employers are forced to pay 9% of wages into the employee's superannuation account, which the employee can invest in a privately managed superannuation fund of their choice (a superannuation fund is basically a low-risk mutual fund). They can also chose to self-manage their fund, investing mostly as they see fit. It's basically a private pension scheme, and people can access the money from age 55 onwards (moving up to age 60 over time). So to mikachusetts, they save until retirement. Doesn't matter if they spend all the money upon retirement, since it's still been invested for a significant period of time, generating growth.
 
2. It's valid from a totalitarian utilitarian perspective, in the sense of maximising overall human utility over an indefinite timespan. For this maximisation to happen, the time period over which humanity existed as a species would have to be extended as long as possible (if we became extinct, utility generation would stop, so the longer extinction is postponed, the greater the total utility). Imagine for instance a giant meteor is due to hit Earth in 2500, which would wipe out all human life as it did the dinosaurs. Assume also that with a great degree of savings and hence growth, we'd have colonised Mars by then, so a reasonable amount of humans would survive the attack, and be able to repopulate the species and continue generating utility. With lesser savings and growth, we wouldn't have settled Mars by then, so all of humanity would be wiped out, and utility generation would stop. Hence, over a very long timespan (say year zero to year one billion), overall utility with the greater savings and growth would be orders of magnitude more than with the lesser savings and growth. I know that sounds far-fetched, but the principle is valid: every year, there is the risk of an extinction level event on Earth. Therefore each unit of growth, in the sense that it brings the species closer to technology to ward off or escape such an extinction level event, decreases the risk of human extinction. Thus economic growth therefore increases overall potential utility on an indefinite timescale, by prolonging the existance of the human race. Hence from this perspective, compulsory savings would be desirable, as it increases growth, therefore decreasing the chance of extinction, so increasing the timespan over which human utility may be generated. Note that I'm not actually arguing this position, I'm just describing a framework from which compulsory savings could be argued for.
 
Since it's unlikely anyone actually supports such absolute utilitarianism, it's also possible to argue from a personal preferences perspective. Say you wanted to prolong your life indefinitely. The technology for that doesn't exist yet, but could be created sometime in future. The more economic growth there is, the sooner that technology will exist, and the greater the likelihood that it will exist in your lifetime. Hence it's in your interests that society has a high savings rate, and therefore higher growth, as you couldn't create that technology based on personal savings/investment alone, much as even the richest person in the world in 1920 couldn't have used their savings to create an IPod 4.0. Or another example: you have a loved one with motor neuron disease, and you want them to be cured. The higher economic growth is, the sooner a cure will be discovered, and the greater likelihood of it being discovered before your loved one dies. Hence, it'd be in your interest that society has a high savings rate, and the consequent higher growth.
 
3,4. I picked millionaires per capita as it is the statistic for which Singapore is the most ahead of any other nations, and hence makes the most impact. Singapore's also however got the third highest GDP per capita in the world in PPP terms, going by IMF figures, at US$56k (the US in comparison is at $47k), and over the past four years or so its total GDP has grown at an average of 6% per annum. 
 
5. I'd argue, although this is entirely just from experience, that people wouldn't see it as 'giving 30% away', rather they're 'saving 30% for retirement'. As to "They are doing great because of their free market, the freest in the world. If they have made a huge mistake, they are lucky it hasn't hobbled them completely, but let's not attribute their success to it." That's why I compared them to Hong Kong, which also has a very free market, and whilst prosperous is not as prosperous as Singapore. But I suppose Honk Kong's lesser prosperity could just as equally be argued to be due to its less-free market, than to its lower compulsory savings, so I withdraw that point.
 
 
To z1235 "Without any forced saving, there are probably more millionaires per capita in the top ten richest counties in the U.S. than in Singapore." Singapore generally has a freer market and less regulation than the US; it's rated no. 1 in the world for ease of doing business, the no. 1 best business envornment worldwide, and no. 1 most open economy for international trade and investment. It also has practically no social welfare, lower taxes (top income bracket is taxed at only 20%), and government spending as a % of GDP is much lower than America's. It's essentially the most libertarian country in the world, in terms of economic liberty, although obviously not remotely socially libertarian. So considering all this, even if Singapore lacked its compulsory savings scheme, what advantage does the US have over it in terms of producing millionaires?
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I'm not sure whether this subforum is here to argue the principles of libertarianism or the practicality of Austrian Economics, so I shall restrict myself to the latter.

What does "saving" 30% mean? If you say putting in banks, well, that is more of loaning, which is not exactly saving. It's investing, which is active use of the money. There is no guarantee that it will be 100% returned. Enforcing the law by describing all instances of "saving" is near impossible. Since money is really only a middleman, I may as well say that I am "saving" the money by buying cake and storing it inside of myself as fat. Anything can be "saving" or "investment." That's why centrally-mandated economic decisions are poor and only seek control for the government. All politicians who want to make the economy grow and the nation be better than others are living out their fantasies of being emperors who control mighty states at war. Government gives these people the sandbox to live out their fantasies.

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z1235 replied on Fri, Aug 5 2011 8:04 AM

Neodoxy:
That depends upon your values and the practical implications, not my opinion.

? It most definitely depends on your opinion (and not on my values) if I have no choice but to submit to your benevolent program. 

Because value is subjective you cannot say that what is eventually brought about in the end has less utility to the individual in the long term, you're quite right that this cannot be measured however.

?

With this being said all generations in the future will be better off materially than they otherwise be all else equal and therefore the person valuing the two actions could consider the long run more important.

As I wrote in a previous post in this thread:

"Imagine an eskimo village where each person catches 8 fish a week, eats a fish a day, and saves a fish a week for a rainy day. Then the wise chief descends upon the villagers and forces each to save FOUR fish a week (smoked and stashed into a storage igloo) for the "long-term". Imagine also that such policy was implemented for the next FOUR generations. You'd end up with four generations of emaciated but "rich" lucky survivors."

I am now certain that you don't know the meaning of "subjectivity of values". Person A can not "subjectively" value neither the short nor the long run in Person B's stead. Person B is the only one that can subjectively value anything concerning Person B. 

As Mises made clear it does not matter if the actions are unfavorable to the people who it directly effects, what matters is if the outcome is favorable to the evaluator.

Not the Mises I know. Source?

 

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z1235 replied on Fri, Aug 5 2011 8:25 AM

MadMiser:
Singapore generally has a freer market and less regulation than the US; it's rated no. 1 in the world for ease of doing business, the no. 1 best business envornment worldwide, and no. 1 most open economy for international trade and investment. It also has practically no social welfare, lower taxes (top income bracket is taxed at only 20%), and government spending as a % of GDP is much lower than America's. It's essentially the most libertarian country in the world, in terms of economic liberty, although obviously not remotely socially libertarian. So considering all this, even if Singapore lacked its compulsory savings scheme, what advantage does the US have over it in terms of producing millionaires?

My goal was not to compare rich US counties with Singapore along every possible parameter. I only wanted to show the weakness of any argument that (1) conveniently refers to data X (% of millionaires) and (2) implies its causation through its correlation with data Y (mandatory savings). 

 

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To Wheylous: In the case of Singapore, "saving 30%" means 30% of your wages go into a government-controlled investment fund, and you can only withdraw this money - and any interest gained - upon retirement (although in Singapore's system, a certain proportion is also set aside for healthcare, and another portion can be used for purchasing public housing - which is 85% of houses there). In a more general sense, "saving 30%" means 30% of your wages go into a fund that you can invest as you choose in the private market. This law is enforced in pretty much the same manner the minimum wage law is enforced. And you're right; there's no guarantee of getting 100% back, but this simply reflects the fact that there's no such thing as a risk-free investment: you can't generate growth if you don't take any risk. I know many people here who've had to postpone their retirement for three to five years due to losses their superannuation funds suffered in the GFC, but they're still better off than they would have been with no savings/investments at all.
 
To z1235: Ah, fair enough. I think it's still possible to make the argument for correlation theoretically, however. For example, someone earning US$60k per annum, mandatory savings of 30% of that ($20k), investing at a conservative 3% return, would be a millionaire in 30 years. In comparison, someone saving at a rate closer to the US average, say 10% of total income, and earning the same amount ($60k), would have to work 61 years to become a millionaire, meaning that unless they wanted to work into their eighties they'd be unlikely to ever amass a million dollars. So due to the mandatory savings in Singapore, anyone earning more than a certain amount would eventually become a millionaire by default: they couldn't stop it if they tried, short of quitting work or taking a lower-paying job. I suppose saying forced savings creates millionaires is really just a tautology, since even at 0% returns, in the case of 30% mandatory savings anyone who earned 3 million or more in their working life would be a millionaire upon retirement; as long as incomes were reasonably high, forced savings couldn't not create millionaires.By that logic, with the median wage of around $60k here, if people work 45 years (age 22-67), they make $2.7 million, so if the government forced people to save 37% of their income, and wages remained steady, then eventually at least 50% of the population would be millionaires upon retirement! Not that I'm advocating this, of course, just providing a theoretical example of how forced savings can create prosperity (whilst 'prosperity' may be a rather arbitrary term, I think most people would consider a country where nearly 50% of its people became millionaires to be more 'prosperous' than one where only 1% did). Hence my amusement that statists never put forth such a policy, since I'd think they'd jump at the chance to say something like "Thanks to me, half my country's people will become millionaires" :P

 

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z1235 replied on Fri, Aug 5 2011 10:20 AM

MadMiser:

whilst 'prosperity' may be a rather arbitrary term, I think most people would consider a country where nearly 50% of its people became millionaires to be more 'prosperous' than one where only 1% did

Then which eskimo village from my previous example would you think is more "prosperous" after FOUR generations: Village A, where everyone, each by their own free choice, ate seven fish a week and saved one fish a week, or Village B, where the benevolent Wise Chief forced everyone to save FOUR fish a week, leaving them to barely survive on a diet of four fish a week? That is, to the extent that there still exists a Village B to make the comparison.

In other words, who is more "prosperous": Person A who is alive, with a belly full, and $100 in his account, or Person B who is dead from starvation, with 3000oz of gold in his basement? I am using reductio ad absurdum to show the undeniable fallacy of your argument. 

On what basis does the Wise Chief in Singapore decide that saving 30% of my income for my retirement is subjectively more valuable to me than sending my two kids to Harvard, or paying for my wife's life-saving expensive surgery? How does he know what makes me more prosperous (i.e. what subjectively gives me more satisfaction over any time horizon)?

 

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To Z1235: Firstly, in that eskimo village, the fish were only saved, they weren't 'invested', in the sense that forgoing their consumption in the present didn't allow the eskimos greater consumption in future. The eskimos didn't use forgone consumption of the fish to create second and third order goods that could increase their future productivity at fish-obtaining. Savings and forgone consumption only contributes to prosperity when it is invested. Investment would be if the fishermen saved enough fish to last them a week, then decided to go a week without fishing, living on the fish they'd saved and using that time to build a giant net that would allow them to catch far more fish in future.

To z1235: Secondly, your reductio ad absurdum argument for why compulsary savings don't increase overall prosperity could be just as easily used as an argument for why voluntary savings don't increase overall prosperity, as Keynesians have shown. If the State was setting compulsory savings rates to maximise long-term prosperity, it'd have no more incentive to set the savings rate high enough that people starved than an individual concerned with long-term prosperity would have incentive to save so much that they starved.

To Z1235: Thirdly, the Wise Chief doesn't know 'what subjectively gives you more satisfaction over any time horizon'; I never suggested compulsory savings was valid from the viewpoint of maximising your individual satisfaction/utilility, only from the viewpoint of maximising the planner's satisfaction, or of maximising overall economic growth over time.

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30% of your wages go into a fund that you can invest as you choose in the private market

Again, buying cake is investment...

The problem is likely more difficult to answer than we think.

1) This is similar to a capitalistic system where people invest out of their own volition. However, here everyone, even the poor, must invest. Thus, the condition of the poor is likely made worse.

2) The investment of the well-off people could increase the standard of living for everyone.

3) This might result in a market with rapid boom-bust cycles.

4) This might shift consumption patterns. In this economy, many less immediately-consumable goods will likely be bought due to a lower amount of purchasing power. When people have large sums of money, they invest in larger holdings like houses or boats (correct me if I'm wrong).

And I'm forgetting some stuff I thought of under the shower :P

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Forced saving (deflation) distorts the market no less than forced spending (inflation). Both alter the market interest rate and will cause economy-wide misallocation of resources. Of course, this is the weaker argument against forced saving. The strongest argument is that it's simply wrong to force people to do things they don't want to do unless you have a good justification for it (i.e. they committed a crime against you, etc.)

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z1235 replied on Fri, Aug 5 2011 11:49 AM

MadMiser:

Z1235: Firstly, in that eskimo village, the fish were only saved, they weren't 'invested', in the sense that forgoing their consumption in the present didn't allow the eskimos greater consumption in future.

Of course, (the tough survivors in) Village B had tons of fish saved but the Wise Chief prevented such increased consumption by forcing them to save even more. It makes no difference whether they were "invested" or not. You are missing the point that, whether invested or not, the "optimal" amount of savings (postponed consumption for the sake of increased future consumption) can only be reached through voluntary exchange/action between free agents, and NOT through dictat from the Wise Chief, no matter how benevolent or wise he may be. Central planning doesn't work. It creates more misery and less satisfaction for ALL over ANY time-frame compared to an uncoerced (voluntary, free) market.

Secondly, your reductio ad absurdum argument for why compulsary savings don't increase overall prosperity could be just as easily used as an argument for why voluntary savings don't increase overall prosperity, as Keynesians have shown. If the State was setting compulsory savings rates to maximise long-term prosperity, it'd have no more incentive to set the savings rate high enough that people starved than an individual concerned with long-term prosperity would have incentive to save so much that they starved.

You have missed the boat on subjectivity of values. Even if the State (the Wise Chief, or wise Keynes) had everyone's best interests in mind, the outcome of their dictat would be inferior (if not disasterously so) to the outcome of an uncoerced (voluntary, free) market. Again, whether benevloent or not, central planning simply doesn't work. Have you heard of the Economic Calculation Problem?

Thirdly, the Wise Chief doesn't know 'what subjectively gives you more satisfaction over any time horizon'; I never suggested compulsory savings was valid from the viewpoint of maximising your individual satisfaction/utilility, only from the viewpoint of maximising the planner's satisfaction, or of maximising overall economic growth over time.

What other measure of satisfaction/utility/value exists apart from the individually subjective one? The whole point of this thread is that there is NONE.

 

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jay replied on Fri, Aug 5 2011 11:59 AM

If it works then why would it need to be forced?

Even a minarchist would have a problem with this.

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Correct me if I'm wrong, but regulation not = central planning.

When we talk about central planning we talk about total central planning with all decisions being made by one entity. Statists have gotten smarter and realized that total central planning is not feasible, so just decided to regulate the market. This is not a centrally-planned economy (though you could argue that if non-action is also a form of planning, then it is all planned, but I don't buy it in this case).

Also, Clayton, I agree with your "strongest" argument. I just didn't think that this was the correct subforum for it. Also, it sadly is not an argument that appeals to the public much.

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To Wheylous: I guess I should have specified that by 'private market' I meant 'private investment market', and anyone selling cake as an investment most likely wouldn't last long :P (Unless the demand for cake was somehow inelastic, and there was a massive cake shortage coming up; banana prices quadrupled here recently due to cyclone/storm damage, and if demand for bananas had been inelastic then they'd have been quite a profitable investment.)
1) I think the general consensus here would be that the condition of the poor would be made better by investing, not worse, if by 'condition' you mean lifetime income. But if by 'condition' you mean present consumption, then yes, they would indeed be made worse. Also, in the sense that the 'bad' condition of the poor is considered to be due to their high time-preference, forcing them to save would make that condition 'better'. 
2) Yep, that's would be the reasoning behind it, to increase the 'standard of living' for everyone (defined either as the planner's subjective evaluation of what they consider best for society, or overall growth in GDP terms).
3) Rapid boom-bust cycles are generally considered here to be due to inflationary action of the reserve bank; as far as I'm aware, there's no reason why a society with high savings due to legislation would be significantly more prone to boom-bust than a society with high savings due to naturally low time preferences. Also, savings mitigate the effect of boom-busts: growth based on saving is more stable than growth based on debt.
4) It would shift consumption patterns, and that would be the intention behind it. Shifting consumption from first order goods, to higher order goods that may be used to produce greater quantities of first order goods in future than would exist without those higher order goods.

 
To Clayton: Forced savings by deflation is not completely identical to forced savings by mandating people save a certain percentage of their wages. Deflation is a transfer of wealth from borrowers to savers, reducing incentive to borrow, whereas simply forcing people to save doesn't involve that transfer of wealth, and so doesn't induce this distortion. And you're right, it's wrong in the sense of forcing people to do things. But, as I said, since statists generally have no problem with such forceful intervention in other contexts, why aren't there a group of statists out there pushing for mandatory savings, since if they believe that the state can produce superior growth/GDP outcomes to the market and should be used towards that end, then forced savings would be the best way to go about it.

To Z1235: I should have made it clearer then: I wasn't discussing saving indefinitely without ever consuming, which is why I mentioned Singapore's savings scheme, which is essentially a pension scheme, as people are allowed to consume their savings when they retire. As to what you say about the 'optimal' amount of savings, what you describe is the amount 'optimal' to maximising the utility of all living humans. However, the example I gave of a perspective from which compulsory savings could be argued for, wasn't the perspective of maximising utility for all living humans, rather the perspective of maximising total utility: imagine utility can be measured in arbitrary units of utility, and the average human experiences X units of utility each year. The more humans existing at any one time, the greater the total value of utility (the sum of each human's individual utility), so in a world of N people, total utility would be NX per year. If this population remained stable for 100 years, then suddenly became extinct, total utility over that time would be 100NX. If it instead lasted 10,000 years, however, then total human utility over that time would be 10,000NX. Say however that the savings necessary for people to develop the technology necessary to prevent their extinction in 100 years would reduce their yearly utility by half, meaning their yearly utility was only NX/2. The people therefore have two options: live without the saving, and become extinct in 100 years, or live only half as happily with saving, and live 10,000 years. The former would generate 100NX total human utility before the race was wiped out, and the latter would generate 5,000NX total human utility. Therefore, a planner concerned with maximising overall utility over an indefinite timespan, would choose the latter: sacrificing the utility/satisfaction of the people currently living, in favour of the utility of the people who would live in future.
 
To Z1235:I understand the economic calculation problem, but again that concerns maximising the utility of those currently living, and doesn't account for those yet to be born. From the quantitative utilitarian perspective described above, planners could justify reducing the outcomes for those currently living in the name of better outcomes for those who'll be living in future. Not that I'm arguing they should, as I've said earlier, just describing a perspective that could be used to justify such intervention.
 
To Z1235:You said "What other measure of satisfaction/utility/value exists apart from the individually subjective one?" Each person has different subjective values. If someone thinks that a mandatory savings scheme, and the consequent higher growth, would benefit them somehow, do you not deny that it would be rational for them to pursue the implementation of such a scheme? It mightn't maximise your utility, but it would maximise theirs.

And to Jay: Why would it need to be forced if it works? It 'works' in the sense of increasing economic growth in GDP terms, but it doesn't 'work' in the sense of maximising people's subjective utility. If you told the population of say Greece: "alright, I want you all to save 30% of your income, as if you do our GDP will be 25% greater in forty years time than it would otherwise", do you think they'd do it? No, because they value present consumption over arbitrary future growth. 

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