Economics Questions

Re: Savings vs Consumption

laminustacitus — Fri, 24 Jul 2009 18:24:28 GMT

Wilmot of Rochester:

Esuric:

Markets don't fail, people fail.

I disagree, markets do fail. If markets were perfect - didn't fail - then there would be no reason for entrepreneurship and there would also be no possibility for genuine competition and branding because the market would be horizontally flat.

I may be wrong, but I think that Esuric is speaking of the long-term sucess of the markets, while Wilmot is speaking of the possibility of short-term "market-failures" from the perspective of a group of individuals that creates an incentive from entrepreneurs to invest resources to satiate their demands, and to nudge the market once again into the direction of long-term equilibrium, which I would deem to be the "infallibiity" point. It would seem that by differentiating, and dehomogenizing the long-term, and short-term that these two seemingly at-odds theories can be brought together to explain the market process even better.

Nevertheless, I do believe that Wilmot's own analysis is still better when we accept the fact that the economy never actually reaches equilibirum, and because of that fact subjective "market-failures" will always spur on entrepreneurship.

Re: Savings vs Consumption

twistedbydsign99 — Fri, 24 Jul 2009 17:59:41 GMT

Wilmot of Rochester:

Esuric:

Markets don't fail, people fail.

I disagree, markets do fail. If markets were perfect - didn't fail - then there would be no reason for entrepreneurship and there would also be no possibility for genuine competition and branding because the market would be horizontally flat.

Maybe this is another distinction between LvMI and GMU though.

I will define markets as a collection of people and therefore attribute failure to it while at the same time disagree with you saying that people fail, I WIN!!!

Re: Savings vs Consumption

Wilmot of Rochester — Fri, 24 Jul 2009 07:42:24 GMT

Esuric:

Markets don't fail, people fail.

I disagree, markets do fail. If markets were perfect - didn't fail - then there would be no reason for entrepreneurship and there would also be no possibility for genuine competition and branding because the market would be horizontally flat.

Maybe this is another distinction between LvMI and GMU though.

Re: Savings vs Consumption

Esuric — Fri, 24 Jul 2009 02:48:29 GMT

Wilmot of Rochester:

I simply disagree with this on a fundamental level. Yes, theoretically, sometimes markets fail, but this is essentially why we need markets because they're based on the basic presumption that entrepreneurs work to fix problems for a profit.

How do you fix market failure? More markets.

Markets don't fail, people fail. When an entrepreneur makes a mistake, or mal-invests his capital, the market learns, and his capital is then freed up for other uses. Mistakes are an integral part of the capitalist system.

Re: Savings vs Consumption

Wilmot of Rochester — Fri, 24 Jul 2009 02:15:13 GMT

AustrianSchool44:

The Austrian School philosophy on the growth of an economy centers around savings not consumption. Only with certain assumptions does this view hold.

"Is savings bad for the economy" by Frank Shostak. The crux of the article highlights that savings, not consumption, is the basis for economic prosperity. In order for this to be true, you would have to assume that your dollars "saved" would be transferred to an entrepreneur/business etc. who would use that dollar to increase their productive capacity or increase their production. What becomes painfully evident from the current financial mess is that banks, as well as other institutions, make foolish bets with invested dollars- which in no way is beneficial to our economy. My point is that some types of consumption (ex: buying a computer) has the ability to increase ones productivity, whereas, some types of savings aren't always beneficial. Wouldn't the savings as a driver for economic prosperity be completely determined on how the savings is reallocated?

You're assuming the opposite of rational expectations theory, which is that entrepreneurs are largely stupid - or at least foolish.

I simply disagree with this on a fundamental level. Yes, theoretically, sometimes markets fail, but this is essentially why we need markets because they're based on the basic presumption that entrepreneurs work to fix problems for a profit.

How do you fix market failure? More markets.

Re: Savings vs Consumption

DD5 — Thu, 23 Jul 2009 19:20:52 GMT

AustrianSchool44:

lol I've certainly done my research, I have an Economics degree from the Harvard of the west and have been published numerous of times.

Capital theory! You have been deprived in Harvard of one of the most important elements of the market economy. Without Capital theory, you can't see how the economy works. It's like having a huge blind spot in your vision.

Re: Savings vs Consumption

DD5 — Thu, 23 Jul 2009 19:12:19 GMT

AustrianSchool44:

So then savings aren't necessarily the epicenter of economic prosperity. Improving ones productive capacity doesn't necessarily imply "savings". Savings are usless if squandered.

Yes, but the inherent feature Capitalism, profit & loss, makes sure that such savings are not squandered. Capital (savings) is allocated to those businesses that best serve the consumer. It makes sure that on net, the gain always exceeds the cost, thus, the emergence of the process of wealth creation.

When this market process is not working, look for the culprit that hampers it!

Re: Savings vs Consumption

ladyattis — Thu, 23 Jul 2009 18:43:38 GMT

krazy kaju:

You've got your definitions mixed up. Buying a computer is not "consumption." Using a computer is. Buying a car is not "consumption." Using a car is. Buying spinning jennies (a little dated, I know) for your factory is not "consumption." Using them is. Buying things which increase productivity are investments, not consumption. Your investments can turn out to be profitable or not at all. Saving in and of itself is not what creates economic growth. Saving makes investment possible, since you need to save money before you invest it. Of course saving can be misallocated, but that is the entire point of the market. A free market guides savings to be allocated in the most profitable ventures that create the most economic growth. Only government tampering can disrupt this process.

Good summary.

Re: Savings vs Consumption

krazy kaju — Thu, 23 Jul 2009 18:34:39 GMT

You've got your definitions mixed up. Buying a computer is not "consumption." Using a computer is. Buying a car is not "consumption." Using a car is. Buying spinning jennies (a little dated, I know) for your factory is not "consumption." Using them is. Buying things which increase productivity are investments, not consumption. Your investments can turn out to be profitable or not at all. Saving in and of itself is not what creates economic growth. Saving makes investment possible, since you need to save money before you invest it. Of course saving can be misallocated, but that is the entire point of the market. A free market guides savings to be allocated in the most profitable ventures that create the most economic growth. Only government tampering can disrupt this process.

Re: Savings vs Consumption

ladyattis — Thu, 23 Jul 2009 18:05:02 GMT

To the original poster,

What I see as a problem with your misunderstanding of the nature of savings is that you haven't pointed out the important concern of time preference in relation to a person's act of saving. In this case, an act of saving is an act predicated on an assumed future consumption of what is saved, whether by that person who is saving or by others (as an investment, gift, etc). As such, the idea that savings drives the economy is indeed overly simplified, until you add time preference, which defines the nature of the act of saving, and even hints at the nature of value scales for people as individuals or as members of a firm (venture capital fund or other fancy titles for a group/firm of investors). In this context, savings is merely the act by which a person is conceiving a future where what is saved can be used for a given end since the current state of affairs cannot allow for the given end to be enacted (external and internal factors are included in this concern). Ultimately, this frames the distinction between the Austrian school's consideration of investment versus that of other schools (such as the classical Keynesian conception of spending as the economic driving force).

Re: Savings vs Consumption

Taras Smereka — Thu, 23 Jul 2009 17:54:22 GMT

If it is making you more productive in some way it is considered investment for that purpose.

Re: Savings vs Consumption

Esuric — Thu, 23 Jul 2009 16:58:02 GMT

AustrianSchool44:

lol I've certainly done my research, I have an Economics degree from the Harvard of the west and have been published numerous of times.

Ouch, seems like a lot of money wasted

Re: Savings vs Consumption

AustrianSchool44 — Thu, 23 Jul 2009 16:52:26 GMT

but then again, Krugman has been published more than all of us put together- which implies the obvious...

Re: Savings vs Consumption

AustrianSchool44 — Thu, 23 Jul 2009 16:47:52 GMT

lol I've certainly done my research, I have an Economics degree from the Harvard of the west and have been published numerous of times.

Re: Savings vs Consumption

bearing01 — Thu, 23 Jul 2009 16:44:56 GMT

>>This includes but is not limited to only "savings".

Could you expand this concept?

If we decide to drive our tractors to the drive-in movie or have fun playing with it on the weekend then it is recreational. Because you're wearing out the tires or engine then you can consider that a level of "consumption", but it's still a tractor.

We can have higher levels of consumption while having higher levels of production. If the level of production is compounded then we can continue to compound savings and production while having a level of consumption that also tracks this compound growth. Therefore, consumption can go up. It's like skimming more and more cream off the top of a vat that is increasing in size as you add more milk. You're still skimming the same percentage off the total size of the vat. Since the vat is growing you're getting more and more cream. But it's still a constant level of consumption with respect to production or growth.