Economics Questions

Re: On the propensity to consume

Smiling Dave — Fri, 26 Oct 2012 05:07:16 GMT

I'm sure you'll find the sources easily enough, FOTH.

Re: On the propensity to consume

Fool on the Hill — Fri, 26 Oct 2012 02:00:34 GMT

Let me summarize my understanding so far. Keynes said that in theory and in practice, the richer the country, the more there are hoarders. I pointed out that not only is nobody hoarding anything, quite the contrary, the country as a whole is living beyond its means,

Maybe I don't understand what you mean by hoarding. Keynes doesn't mention hoarding in that quote. He mentions saving. Are you saying that saving is the same thing as hoarding?

My impression of Keynes's theory was that during booms income is overinvested (a form of saving) and during slumps is overhoarded (a different form of saving). This is why I was confused when you brought up hoarding in relation to the propensity to consume.

What is the relevance of the fact that banks are lending less? We are in a prolonged recession, where the events leading up to it, as well as the continuation of it these last few years, show no evidence whatsoever of anyone hoarding anything. The average Joe, as well the US govt, are both living beyond their means and not hoarding anything,

If banks were backed by 100% reserves and those reserves remained constant but the banks lent less money, then would you agree that additional money is being hoarded?

Maybe you are referring to the fact that the Fed is printing more digital money and givng it to banks, which they relend to the Fed., not the private sector, and you consider that "lending less". But I don't see how what happens to newly printed money is relevant. Keynes was talking about the circulation of the existing money supply, claiming that some of it will be hoarded always.

Could you point me to where he claims that?

Certainly some money always has to be hoarded since businesses and individuals always need a quantity on hand to cover expenses. But I take it this isn't what you think Keynes means.

Maybe you mean that banks are lending less to small businesses, and consider the money unlent to be hoarded by the banks. But the banks themselves owe three dollars for very dollar they have in their vaults. In other words, the net result is still no hoarding whatsoever.

Who do they owe the money to?

Once we introduce fractional reserve banking into the picture, where banks lend ten times more than they get in deposits, then there is way more money lent than exists in the bank vaults. Loans would have to be reduced to less than one tenth of what they used to be for any hoarding to be happening by the banks, because only then would there be money somebody got from the producers that doesn't return to them

You previously indicated that storing money under the mattress was an example of hoarding. If I put $1 million under my mattress while the bank creates $10 million, does that mean the money under my mattress no longer constitutes hoarding?

Put it this way. If I borrow a hundred dollars and spend it all, and then decide not to spend my full paycheck, but put away five dollars, or repay part of my loan with those five dollars, there is no net hoarding, obviously. Even if I borrow a hundred dollars, spend it all, then use my next paycheck to repay the loan in full [which nobody is doing], there is still no hoarding going on.

There could be net savings though, which is what I thought Keynes was talking about.

Re: On the propensity to consume

Smiling Dave — Sun, 21 Oct 2012 14:14:51 GMT

Banks are lending less, aren't they?

Is this a new line of reasoning, or an elaboration of your earlier post? I don't see how all the pieces of your argument tie together.

Let me summarize my understanding so far. Keynes said that in theory and in practice, the richer the country, the more there are hoarders. I pointed out that not only is nobody hoarding anything, quite the contrary, the country as a whole is living beyond its means,

What is the relevance of the fact that banks are lending less? We are in a prolonged recession, where the events leading up to it, as well as the continuation of it these last few years, show no evidence whatsoever of anyone hoarding anything. The average Joe, as well the US govt, are both living beyond their means and not hoarding anything,

Maybe you are referring to the fact that the Fed is printing more digital money and givng it to banks, which they relend to the Fed., not the private sector, and you consider that "lending less". But I don't see how what happens to newly printed money is relevant. Keynes was talking about the circulation of the existing money supply, claiming that some of it will be hoarded always.

Maybe you mean that banks are lending less to small businesses, and consider the money unlent to be hoarded by the banks. But the banks themselves owe three dollars for very dollar they have in their vaults. In other words, the net result is still no hoarding whatsoever.

Once we introduce fractional reserve banking into the picture, where banks lend ten times more than they get in deposits, then there is way more money lent than exists in the bank vaults. Loans would have to be reduced to less than one tenth of what they used to be for any hoarding to be happening by the banks, because only then would there be money somebody got from the producers that doesn't return to them

Put it this way. If I borrow a hundred dollars and spend it all, and then decide not to spend my full paycheck, but put away five dollars, or repay part of my loan with those five dollars, there is no net hoarding, obviously. Even if I borrow a hundred dollars, spend it all, then use my next paycheck to repay the loan in full [which nobody is doing], there is still no hoarding going on.

Re: On the propensity to consume

Fool on the Hill — Sun, 21 Oct 2012 04:20:12 GMT

Banks are lending less, aren't they? If a smaller percentage of money in the bank is being lent out to people who will spend it, then more money is being hoarded, no?

Re: On the propensity to consume

Smiling Dave — Sat, 20 Oct 2012 05:30:17 GMT

My suspicion is that Keynes would consider income that goes towards paying off or servicing debt to be part of the savings portion.

My suspicion is that the butler did it, but where is my proof, or chain of reasoning?

Or have I overlooked something?

Yes. Keynes builds his case on how much money gets back to the producers, claiming that in a rich country it does not all get back, because a large part of it is hoarded. Whether it moves around as debt before it gets back to tthe producers doesn't change anything.

My case is very simple: Who, exactly, is doing the hoarding? Where is the mattress with the huge pile of money under it? The creditors aren't hoarding. The debtors aren't either. So who is?

Re: On the propensity to consume

Fool on the Hill — Sat, 20 Oct 2012 01:07:12 GMT

My suspicion is that Keynes would consider income that goes towards paying off or servicing debt to be part of the savings portion. So provided that any portion of an increase in one's income goes towards servicing debt instead of consumption, then Keynes claim would remain correct. Whether one goes in debt beyond one's income isn't really relevant since what the propensity to consume concerns is how one spends one's income.

And remember for every debt, there is a credit. It seems to me that if we hold income constant, then an increasing level of debt could mean that a greater proportion of income is going towards savings--i.e. the creditors are lending a greater portion of their income out and the debtors are devoting a greater portion of their income to debt servicing. Or have I overlooked something?

Re: On the propensity to consume

Smiling Dave — Sat, 13 Oct 2012 19:04:40 GMT

1. Not sure what you mean. Especially by modern discourse. My thinking is that if you are using a credit card, then you are paying very high interest on a loan, much higher than any use of your money will give you. Why are you doing this? Why are you not dipping into your savings? Only possible answer: You don't have any savings. But according to Keynes, you do, because you are not some peasent in a third world country. Contradiction. QED.

2. It may be decreasing a little bit, [my guess temporarily], but do you think it's ever going to be small or nonexistent? The folks I know for the most part are all in debt. Way beyond their means. And have little to no intentions and/or ability to change that. And even if half the population is paying and half is incurring, Keynes looks at the aggregate, right? And the net is over half a trillion bucks, closer to to a trillion. In short, that debt is not going away anytime soon, and it's an indication that the idea that people are hoarding money in huge quatities, enough to influence the whole economy, is ludicrous.

To flesh out the picture, check out my humble blog: http://smilingdavesblog.wordpress.com/2011/08/24/classic-keynes-and-why-the-credit-card-refutes-him/ The debt picture is much worse than my original post here.

3. Have we changed the subject to investment? Or are we still talking about the propensity to consume? Keynes in his book, Chapter 3 or so, laid it out like this: Company A makes stuff, incurring expenses. They get their money to keep on functioning by getting back all the money they spent, either by people buying thier product, or by people investing in their company. But since the folks who buy and invest, when they are rich, have a propensity to hoard their money to some extent, because you can only eat so many pizzas and only so many pizza shops are good investments, so you have nothing to do with your piles of excess money, you hoard it. [Which the existence of huge amounts of debt disproves, IMHO]. Have the "real' economist Keynesians come up with something new?

4. I think it's right on, topic, as the OP asked for empirical info on the propensity to consume, or its nonexistence. Well, here you have it.

5. Think of it as an elephant in the room. Mr USA is bragging to Mr Keynes about how much money he has salted away, hoarding like there is no tomorrow. His wife, the elephant, pipes in "If you have so much money hoarded away, why are you a trillion dollars in debt at ridiculously high interest?"

Re: On the propensity to consume

Neodoxy — Sat, 13 Oct 2012 18:38:12 GMT

"The data shows that our little recession has not been because of less spending, with people spending less than their income. Quite the opposite. They live beyond their means to the tune of close to a trillion bucks."

I don't necessarily disagree with your conclusion, but

1. Don't you think that simply looking at credit card debt is a little unsubstantial for the weight of the claim, at least in modern discourse?

2. As Andris pointed out doesn't that appear to be residual debt as much as anything else? It is decreasing over time, and there could be a variety of stuff going on there, I.E half of the population is paying their existing credit card debt, the other half is incurring it ETC.

3. Don't the "real" economist Keynesians these days argue that the problem is arising from a lack of investment spending? I could be wrong, I just know that I've seen that argued before

4. In the end isn't this rather off-topic in the discussion which is going on?

Re: On the propensity to consume

Groucho — Sat, 13 Oct 2012 11:30:53 GMT

Aristippus:

The cornerstone of Keynes' General Theory is the so-called 'fundamental psychological law' concerning the propensity to consume:

P. 96: "The fundamental psychological law, upon which we are entitled to
depend with great confidence both a priori from our knowledge of human
nature and from the detailed facts of experience, is that men are disposed,
as a rule and on the average, to increase their consumption as their income
increases, but not by as much as the increase in their income."

....

Keynes seems to assume that the margins between income and consumption either do or will remain fixed, but he has a very non-rigorous way of phrasing it. Regardless, it doesn't seem like a reasonable thing to accept a priori.

Re: On the propensity to consume

Andris Birkmanis — Sat, 13 Oct 2012 10:25:37 GMT

@SD: but the debt is decreasing (assuming the figures are cumulative, not incremental), which means at least some persons are paying back their debt, refusing to consume. The bastards are the cause of the recession!

Re: On the propensity to consume

Smiling Dave — Sat, 13 Oct 2012 10:05:19 GMT

Neo,

The data shows that our little recession has not been because of less spending, with people spending less than their income. Quite the opposite. They live beyond their means to the tune of closee to a trillion bucks.

Re: On the propensity to consume

Neodoxy — Sat, 13 Oct 2012 08:36:47 GMT

FOTH,

It would appear to be Jacobi... Or such is indicated by my in-depth 3 minute google image investigation.

Dave,

What do you think that the data shows?

Re: On the propensity to consume

Smiling Dave — Sat, 13 Oct 2012 04:46:11 GMT

To OP:

Quarterly Credit Card Debt in the United States Since 2010 (in billions):^[1]

Q2 2012: $799.5
Q1 2012: $790.3
Q4 2011: $834.4
Q3 2011: $799.5
Q2 2011: $794.3
Q1 2011: $786.0
Q4 2010: $833.1
Q3 2010: $819.2
Q2 2010: $830.5
Q1 2010: $843.1

Source:Wikipedia on credit card debt.

How does this fit in with Keynes? I say it refutes him.

Re: On the propensity to consume

Malachi — Sat, 13 Oct 2012 03:01:21 GMT

I think the first thing Keynes would probably point out about those statistics is that they completely ignore government spending.

perhaps government spending should have been included in the "general rule" elsewise what good is it? If I tell you theres a general rule that martians eat chicken salad on fridays, and then you show me statistics on martian eating habits, and they actually eat porterhouse steak on fridays, would you consider it a cop-out if I replied that they ate the steaks at restaurants and so it doesnt count?

Many people were in the military during these years and had their food, shelter, and healthcare provided for them by the government.

servicemembers pay for their food and shelter. They also oftentimes pay for their healthcare.

Re: On the propensity to consume

Fool on the Hill — Sat, 13 Oct 2012 02:28:33 GMT

I think the first thing Keynes would probably point out about those statistics is that they completely ignore government spending. If the UK were to privatize healthcare, the resulting decrease in taxation would mean an increase in disposable personal income. However, people would then have to purchase healthcare themselves. If the private healthcare costs more than the government healthcare that it replaces (which the Keynesian would assure you that it would), then consumers would indeed increase their consumption at a higher absolute level than their increase in income.

I haven't been able to find a detailed source for government spending for those years. The best I've found is this graph:

This seems to support my hypothesis that changes in government spending account for the supposed divergences in Keynes "psychological law" (I do find this term a bit strange). During 1944 and 1945, government spending is higher, which corresponds to the high rate of savings. Many people were in the military during these years and had their food, shelter, and healthcare provided for them by the government. They also received a salary, which given that their consumption goods were provided to them directly, they were free to invest a larger portion. The point where government spending reaches its lowest (looks like about 1947) is also when personal savings is lowest. And in or just before 1955 where income increases and savings decrease--which Hazlitt says is an "emphatic contradiction" of Keynes--government spending takes a sharp drop.

I doubt Keynes would be foolish enough to think that government spending has no affect on the propensity to consume. In fact, if it didn't, it would seem to undermine his prescriptive interventionist measures. Keynes is even explicit in the quote that he is talking about the "modern community" and not merely an aggregate of personal incomes. Surely government also takes in income and spends it on consumption.

What is your new avatar?

Immanuel Kant...I had thought. But now that I've Googled it, some sources say it's Kant and some say it's Friedrich Heinrich Jacobi. A mystery...