"Spending doesn't create growth. Saving does."

[LovePrevails]

I have heard this in the past from libertarians (as far back as I was a liberal)

 

and Stef has glanced over it a few times

 

but I don't feel I fully understand the concept even though I seem to ahve an excellent grasp of economics in other areas.

 

Can you guys fully explain this to me in as many facets as you can think of so I can really understand and internalize the concepts.

[ribuck]

If you save, it has two effects.

 

In the short term, your saving provides capital to those who can use it productively (e.g. to build a factory). Those borrowers will pay you some interest in return. In the long term, you will eventually spend your savings (perhaps to buy the future products of the factory).

 

If your society already has enough capital items (factories, roads, etc) then you won't be offered any interest for saving your money, so you'll perhaps spend it sooner. It's a beautiful automatically-adjusting mechanism, regulated by market-determined interest rates. If people mess with interest rates (e.g. by quantitative easing), you lose the feedback mechanism.

[Alan C.]

Improving the standard of living (ie. wealth creation, innovation, labor-saving devices, abundance) is a process of recursive transformation requiring higher order goods (aka capital goods). Higher order goods can only exist if a person produces and saves (defers consumption), because if a person consumes everything that he produces then his standard of living will either (at best) remain static or (at worst) decline.

 

Consider higher and lower order goods in the context of wood; it can either be used to build a shelter or burned for heat.

 

Higher order goods permit mass production of lower order goods (aka consumption goods).

 

Politicians and their media flacks simply look at numbers on a spreadsheet and conclude that a higher GDP indicates human flourishing. They're wrong. It's possible for GDP to go up while people become increasingly impoverished and for GDP to go down while people become increasingly prosperous.

[NotDarkYet]

Is this a false dichotomy?

[Rollout]

Starting with Crusoe it's easier to imagine. I'm going only from memory so this won't be as accurate as it should be. A single person on an island by himself with no money or goods. He is able to catch only enough fish per day to keep himself alive and no more. He decides to build a net to catch more fish. This net will increase his productivity (he hopes), giving him time in the day for things other than fishing. In order to produce this net he must stop fishing for that time, and therefore reduce his consumption. He will be hungry for a day because he will be without fish. He made a sacrifice of reduced current consumption for increased future consumption. So after his net is made, he is now able to feed himself and also have extra fish. This is the start of savings. These extra fish can now be used as a buffer. If he saves a week's worth of fish, he can perhaps build a boat to go to areas of higher fish populations. So then he has increased his capital stock from a net to a net plus a boat. This was only possible by the extra savings allowed by the net. If he simply consumed the extra fish he would never have the time necessary to make the boat. This process of deferred consumption and savings to enable the production of capital goods is what grows an economy.

[ribuck]

Anyway, the GDP statistic is a useless statistic for many reasons.

 

1. The GDP statistic is an aggregate figure, but what's relevant to a person is their own well-being. If the GDP rises 5%, but all of the growth and a bit more goes to the richest 20% while the rest have negative growth, then most people are worse off despite a rise in GDP.

 

2. GDP takes no account of lifestyle choices. If everyone builds a nice house, it bumps up the GDP figures. The next year, everyone decides to take it a bit easier and relax and enjoy their nice new houses, but this shrinks the GDP statistic even though everyone is better off than ever before.

 

3. GDP does not correlate with quality of life. If GDP increases but there is more stress and pollution or more industrial accidents, the quality of life has reduced despite the increase in GDP.

 

4. GDP takes no account of barter. If Sue and Jane go out on alternate Fridays and pay each other to babysit their children, it boosts the GDP statistics. But if Sue and Jane look after each other's children for free on a reciprocal basis, the GDP shows a lower figure, despite the outcome being identical for Sue and Jane.

 

5. GDP includes government expenditure. So if GDP rises, but taxes rise and the government spends the money on stuff we didn't want, it boosts the GDP figures even though people were better off before the boost.

 

6. GDP statistics are adjusted for inflation by a figure known as the "GDP deflator", which is DIFFERENT from other measures of inflation. So you can't even meaningfully compare GDP figures from year to year.

 

7. GDP statistics take time to prepare, by which time they're out of date. Then, as new facts and figures come to light, the GDP statistics are regularly adjusted. By the time the statistic is stable, it's way out of date.

 

GDP statistics are so worthless that they shouldn't even be calculated.

[LovePrevails]

thanks for all these great answers! very educational

[ErinGo]

I found a link to what Rollout was trying to help you visualize. It's a comic book, so that's pretty fun (and visual)

 

http://freedom-school.com/money/how-an-economy-grows.pdf

 

It's "How an Economy Grows and Why it Doesn't" by Irwin Schiff

[Wesley]

I found a link to what Rollout was trying to help you visualize. It's a comic book, so that's pretty fun (and visual) http://freedom-school.com/money/how-an-economy-grows.pdfIt's "How an Economy Grows and Why it Doesn't" by Irwin Schiff

Ah! I remember listening to someone reading through this book on YouTube. It is actually pretty good in explaining this concept.

 

Edit:

 

Here it is:

[Naer]

Sending is like taking a chit. It just comes out

[aeonicentity]

I don't think it boils down simply. Spending is good. Without it an economy of savers would never produce anything, and we'd all be sitting on resources like Smaug, and we'd all sit around and do nothing. While spending stimulates an economy, the false idea is that spending money you don't already have will stimulate the economy even more!

 

Debt is actually an economic slow down. What you're doing is tieing up a small portion of your capital in a long-term agreement. The only time this makes sense is when you'll come out on the other end with an asset which will continue to make money after the debt has passed (I.E. a house, machinery, or a necessary vehicle). So when politicians say we need to 'stimulate the economy' they don't understand that debt isn't stimulating (unless you get off on being subservient to Chinese people, double entandre intended.) We have a large percentage of our GDP tied up in debt and debt related expenditures all on the false premise that this will some how make our economy 'better'.

 

Of course, in the short term the economy looks better if you measure by GDP, because GDP considers government spending to be part of its estimate. It doesn't adjust for the fact that the government is spending money that doesn't actually exist, but rather money which it thinks will exist in the future. Since there is no actual gurantee that this money WILL exist in the future, the constant lending and borrowing that runs our economy will eventually falter, as the reality that we're not actually spending that money wisely sinks in.

[ewl]

It depends what you are doing with your savings.

 

If by saving, you are investing the money in stocks or bonds, you are contributing to the economy while you accumulate enough value to trade for something that you want or need in the future.

 

Otherwise, stuffing money in a mattress just means you are deferring growth to the future.  It could be because you need a "buffer" to ride out economic turmoil, or that you're saving up for a downpayment on a home.

 

In either of these cases, growing comes from trading something you value less compared to something you value more.

 

Suppose you can do the Scrooge McDuck thing and not spend anything you save, in which case there is no growth.

 

Edit: Now that I think about it, the act of saving itself is not growing.  It's the spending that comes on the back-end.  It's the spending of my money sitting in a savings or investing account that the bank or investment broker does.  It's the spending that comes in the future when I transact to buy that house, or whatever.