I came up with the situation of an economy of farmers and blacksmiths. Let’s say that one of the blacksmiths becomes skilled enough so that he can produce himself what previously all of the blacksmiths produced. He increases his output and so the cost of the tools for the farmers goes down. Eventually all of the others will go out of business because he is just so much more efficient. He gets all of their wages; in essence excess food. However, he doesn’t need all of that food for himself. Instead, he’ll use that extra food to satisfy a desire. This is where the previously employed blacksmiths come in. They will come in to satisfy those desires. In the same manner that the blacksmith became the only blacksmith, the most efficient in a trade will outproduce the others and force the others into other trades where they may excel. This process repeats over and over and never ends. Everyone is wealthier and society is better off.
This part can be used as an argument against equal pay and for outsourcing of labor (to increase competition).
So then let’s say that the blacksmith, instead of spending all of the extra food he’s getting, decides to save it. First off, we can make the assumption that he won’t save all of it unless he expects a famine next year. This is a non-issue in present times. So he’ll save some of his food in case he gets sick and cannot make tools. What does this do? Well the previous blacksmiths will still enter new trades, but the saved money can be loaned to these blacksmiths. Maybe they want to build a house and so won’t expect a profit until they sell the house. The saved food will be necessary to sustain them while they build the house.
This shows that savings is necessary for increases in production. Without that food the previous blacksmiths won’t be able to build the house. They would starve while building the house without that food.
I’m thinking that this theoretical framework can be used to explain other phenomenon. What do you think?