Saving and spending are two areas of economic activity that have been hotly debated for decades in academic as well as economic policy making circles. Is it better to save money or to spend it and “boost” the economy. The statists and pro government elites always discuss this and they of course support spending. You don’t go into debt $16,787,451,118,147 by saving, that is for sure (This figure is for November 2014).1
Aggregate Demand and Keynesian Theories
The idea of spending as a way to stimulate or boost economic activity really became popular through the economist John Maynard Keynes, and today, with people like Paul Krugman. “Keynes showed that the fact that spending equals income, or equivalently that saving equals investment, does not imply that there’s always enough spending to fully employ the economy’s resources, that there’s always enough investment to make use of the saving the economy would have had it were at full employment.”2 In a nut shell, the modern mainstream economists concern themselves with “aggregate demand” and spending. Keynes ideas can be expressed in an equation which goes as follows:
AD = C + I + G + NX
“AD” is Aggregate Demand, “C” is consumption, “I” is Investment, “G” is Government Spending, and “NX” is net exports.3
As you can see, these graphs and theories with mathematics create very intellectual sounding arguments that all argue that it is spending that increases economic growth (be it from the individual or government). The problem is that these formulas are not concerned with how government spends money or how the individual spends money. What I mean by this, is whether or not capital is flowing towards useful and profitable ends. Human action is completely ignored. Ludwig Von Mises, who really started to explain how human action factored into economics, argued that all economic activity is due to individuals working to end perceived uneasiness.4 This means economic calculation is impossible without the individuals all acting towards their various ends. This is how market prices and interest rates are created (market prices and interest rates can also only come about and be useful when the means of production is privately owned and dispersed among many rather than concentrated by a few).
The Keynesian models neglect this basic fact about how commodities and resources are economized making their models absolutely useless for understanding the real world. Sure, within their model, increasing AD is as simple as increasing “C”, “I”, or “G”. But this is easy when you can disregard the subjective valuations made by individuals in a market setting in the real world. In the end however, these economists that work for government are not trying to perform true unbiased science. They want to prove their own bias. Namely, that spending makes everything better. Government and bureaucrats see these simple equations and rub their grimy hands together with glee. If we just allow them to spend more, then we all benefit. Of course, those in power, like the equation itself, are not concerned with where spending goes, only that it happens. This is how economies are ruined.
The Case For Saving
“But today the ancient virtue of thrift, as well as its defense by the classical economists, is once more under attack, for allegedly new reasons, while the opposite doctrine of spending is in fashion.”5
Spending is indeed in fashion. Cutting any sort of government spending is called “draconian” and immediately dismissed as an option. This of course makes someone in my position (one who wishes to abolish government all together) look insane. Saving has it’s purpose though. Krugman argues that there is not always enough investments and savings in order to reach the “full employment” he designs. Therefore government must increase spending in order to get the spark going in the economy. People like him equate the economy to an engine that has died, spending is the spark to get it started once again. Unfortunately, the economy is not an engine but composed of people competing and cooperating in order to achieve their own personal and individual ends. The economy is organic. Not only that but these economists never stop to consider that there may be a reason that resources and labor are not being employed in production. It is not being employed because it has been subjectively judged by individuals performing personal economic calculations to not be profitable.
To illustrate the usefulness of saving, lets us use the example Hazlitt takes from Bastiat. That of two brothers who have inherited an income. Let us update the example. Let us say that two brothers have inherited an income of 10 million dollars a year. Like Hazlitt we will ignore income tax and the question of whether these brothers work or not.
The first brother, James, is a crazy spender. He is a disciple of the spending school of thought. If saving is a sin, then spending is a virtue. He buys sports cars and boats. He buys his girlfriend of the week rich jewelry and gifts. He goes on lavish and expensive vacations. He tips very generously. He spends and spends and spends. Certainly, his spending is creating employment for everyone. Let us compare him to his penny pinching brother Jason.
Jason is much less popular than his brother James. Jason is not seen buying jewelry by the truckloads nor is he seen picking up everyone’s drink tab at the night club. Where James is digging into the 10 million and then some, Jason lives modestly by only spending $2.5 million a year and saving and investing the rest. To everyone, it might as well seem as though Jason doesn’t even have the $7.5 million extra. But what is Jason doing with that extra money? Well, lets say with $500,000 he gives to charity by supporting families in need. These families in turn spend that money on essentials like groceries and other such items. The rest of the $7 million he saves and invests in business ventures and ideas. He supplies the capital to inventors and innovators in various industries creating jobs left and right through his prudent decision making. Of course you don’t see this sort of spending so easily as you do with James. But at the end of the day, who is creating long lasting opportunity within their communities? Certainly not James.
Years go by and James is broke. He no longer can support his lavish vacations, super model girlfriends and generous tips. He is no longer seen in the night clubs and he is no longer spending frivolous amounts money on luxuries. In fact, Jason has taken to supporting James with a much smaller income than James originally received. Jason has continued to exercise the same spending habits and has increased his income exponentially. He has also created more jobs and innovation in the market through his investments. Savings has a purpose and it is important.5
But Wait, Didn’t You Just Describe Trickle Down Economics?
Nope. Trickle down economics, first of all, is not really a thing as statist like to advocate it. In reality, if anyone is advocating for trickle down economics, it’s those that advocate for government spending. How does government spending work? Well it involves the government stealing money from the individual through taxes and inflation and giving it to its rich friends in industry. The rich friends then use the money to create jobs and supposedly boost our economy. That sounds an awful lot like trickle down economics. What I am advocating for is the right of the individual to do with their property as see fit. Saving and investing is part of that.
Saving and Spending
Spending has its purpose. When the individual judges that losing money in order to gain a product or service is more beneficial, saving is not the correct choice. When spending money appears to be detrimental towards easing perceived uneasiness, saving is the answer. When millions of individuals act in this way, based on their subjective valuations, we get a sustainable marketplace. Unfortunately, this is not the kind of market we have now. Government is spending and inflating currency. This creates distortions in the market which inevitably affect savings and investments because government does not always direct capital to the most efficient parts of the economy. Saving is an important economic action and the hatred towards it should make you very worried.
1. “US Total National Debt.” The Concord Coalition. N.p., n.d. Web. 01 Dec. 2014. <http://www.concordcoalition.org/us-total-national-debt?gclid=Cj0KEQiAwPCjBRDZp9LWno3p7rEBEiQAGj3KJlxUZH91-JE4BKvwWq1YlDx3Xz0ULoafOBdjytmqQEoaAr238P8HAQ>.
2. Krugman, Paul. “Saving, Investment, Keynes, Evolution.” Paul Krugman Saving Investment Keynes Evolution Comments. NY times, 30 Jan. 2009. Web. 01 Dec. 2014. <http://krugman.blogs.nytimes.com/2009/01/30/saving-investment-keynes-evolution/>.
3. “Macroeconomics Tutor.” 1. Aggregate Demand –. N.p., n.d. Web. 01 Dec. 2014. <http://macrotutor.weebly.com/1-aggregate-demand.html>.
4. Mises, Ludwig Von, and Bettina Bien. Greaves. Human Action. a Treatise on Economics. Indianapolis: Liberty Fund, 2007. Print.
5. Hazlitt, Henry. Economics in One Lesson. London: n.p., 1952. Print.