In Which Smiling Dave Continues his Campaign to get Vickrey’s Nobel Prize Transferred to Himself.
Vickrey goes for the jugular now, attacking one of the most fundamental tenets of Austrian Economics and common sense. He calls it a fallacy. You have the floor, Mr Vickrey:
Urging or providing incentives for individuals to try to save more is said to stimulate investment and economic growth.
Since this makes no sense at all to him, Vickrey does Austrians a kindness and inserts an assumption, which, though totally artificial and incorrect, will make some kind of sense of how Austrians came to such a fallacy:
This seems to derive from an assumption of an unchanged aggregate output so that what is not used for consumption will necessarily and automatically be devoted to capital formation.
In other words, the factories will keep on churning out products at the same rate as ever, even though people are no longer buying their stuff. Not only that, none of the saved money is hoarded, but either spent on consuming or is devoted to capital formation. Only with these two ridiculous assumptions can we think for a moment that saving stimulates investment, says Vickrey. But in the real world, things are different, he explains:
Again, actually the exact reverse is true. In a money economy, for most individuals a decision to try to save more means a decision to spend less…
So there will be hoarding in the real world, says Vickrey, and the disaster will follow:
…less spending by a saver means less income and less saving for the vendors and producers…
I mean, if the customers are hanging on to their money, it won’t ever get to the vendors and producers. It can’t be in two places at once, right?
and aggregate saving is not increased, but diminished …
You’d think that if people start saving more money, there will be more saved money. But no, says Vickrey, there will be less! And why is that?
…as vendors in turn reduce their purchases, national income is reduced…
All that saved money means less money to the vendors, which means less money to their suppliers, which means any money that is saved means someone, the fellow who used to get the saved money, will go hungry. It’s simple math, says Vickrey. One dollar not spent means one dollar less income to someone, in fact to a long chain of someones. That selfish fellow who spent one dollar less is causing everyone to go broke.
…and with it national saving.
Sure the one guy who started this horrific domino effect gets to save a dollar, but that will result in a whole slew of people who depended on his purchases going broke. One person saves; ten or twenty or more go broke or get fired. You don’t expect them to save anything, do you?
A given individual may indeed succeed in increasing his own saving, but only at the expense of reducing the income and saving of others by even more.
I bet you didn’t realize how selfish you are, ruining the economy because you wanted to save your money for when you retire or some silly reason like that.
In fact, it makes one wonder about Social Security, come to think of it. All that money, billions and billions of dollars, just sitting there waiting for people to spend in their old age as opposed to right now, thus wreaking havoc on an unsuspecting economy. No wonder we are in a depression. Surely Vickrey must have been a firebrand all his life, lashing out with all his Nobel Prize prestige against Social Security. What’s that? He didn’t say a word? Not in 84 years? Odd.
At any rate, Vickrey now paints a very clear, if depressing, picture for us. Some people will starve right away:
Where the saving consists of reduced spending on nonstorable services, such as a haircut, the effect on the vendor’s income and saving is immediate and obvious.
Others may fool themselves into thinking they are getting richer, until they find out they are getting poorer:
Where a storable commodity is involved, there may be an immediate temporary investment in inventory, but this will soon disappear as the vendor cuts back on orders from his suppliers to return the inventory to a normal level, eventually leading to a cutback of production, employment, and income.
You had one job, says Vickrey, to get a haircut. And look how you messed up everything. Production, employment, income, all devastated because of your selfish saving.
The penitent reader may try to have the best of both worlds, by putting his money in a bank. That way, he gets to save it, and yet the money will lent out by the bank to businesses. It’s what banks do, right?
Wrong, say Vickrey.
Saving does not create “loanable funds” out of thin air.
That dollar you put in the bank is not a dollar at all, but thin air, at least in the grand scheme of things. Vickrey explains why.
There is no presumption that the additional bank balance of the saver will increase the ability of his bank to extend credit by more than the credit supplying ability of the vendor’s bank will be reduced.
Sure, your bank got an extra dollar, but twenty or more other banks lost a dollar. Remember all those widows and orphans and barbers who were relying on your money, your one measly dollar, for their daily bread? Remember how they had to dig into their bank account to keep on surviving? Not only have you killed them, but have killed the entire banking industry as well, you selfish old goat.
Besides, continues Vickrey, we know very well what you will do with your wicked saved money. You aren’t going to invest it. Businessmen, meaning that long twenty link chain of barbers and businessmen and vendors who will not get your dollar anymore, are the ones who would have invested it. Not you:
If anything, the vendor is more likely to be active in equities markets or to use credit enhanced by the sale to invest in his business, than a saver responding to inducements such as IRA’s, exemption or deferral of taxes on pension fund accruals, and the like, so that the net effect of the saving inducement is to reduce the overall extension of bank loans.
Not only that, Vickrey explains, but your saving means businesses suffer, remember? Do you think the banks will want to lend money to struggling businesses?
Attempted saving, with corresponding reduction in spending, does nothing to enhance the willingness of banks and other lenders to finance adequately promising investment projects.
Summing it all up, Vickrey explains that as long as there is one iota of unused resources on this planet, one unemployed person, one factory producing at less than full speed ahead, saving money will not lead to more investing. That’s laughable, he says. In fact, you’ve got it all backwards, he says. Capital formation leads to savings, not the other way around. Don’t put the cart before the horse:
With unemployed resources available, saving is neither a prerequisite nor a stimulus to, but a consequence of capital formation, as the income generated by capital formation provides a source of additional savings.
And just at the wrong moment, again, Devil’s Advocate shows up.
DA: He sure zinged you this time, Dave. Everything he says makes a ton of sense.
SD: He didn’t win a Nobel prize for nothing.
DA: So you finally admit you are wrong. Never thought I’d see the day.
SD: Oh, no, I’m not wrong. He won a Nobel Prize for sounding like he makes sense. But in reality he makes no sense at all.
DA: Ha! I suppose you have a refutation in your magic bag, Felix the Cat?
SD: It so happens that I do. But the blog is already long. Tune in next time.