One of my pet theories is that it is impossible for everyone (or even just a large fraction) to save at the same time, and if an attempt is made to do so then it will end in tears. I have written a small piece on the idea here.
Am I on to something? Did I make any mistakes?
Has anyone seen an analysis of any similar scenario?
Why would the people want Jewels when they hear Apples are going to be scarce in the future?
Wouldn’t it make more sense to try and get as much apples before they become scarce, thereby driving the (jewel)price for apples up and rationing the apples according to their diminished future supply?
“Why would the people want Jewels when they hear Apples are going to be scarce in the future?”
Hmmm.. perhaps I should re-phrase the story in terms of a foodstuff that grows and is harvested on a continuous basis rather than annually. But anyway the apples can not be stored because they will rot. You can not “save” using the apples themselves.
But you do agree that in an economy with only product X and product Y, news of lower than expected future outputs of X will constitute increased demand for X, and not increased demand for Y with the purpose of trading the Y’s for X’s when they become scarce (=Expensive).
I get your point that you cannot save with certain goods because of their tencency to rot, however I do not think this changes the principle. It is also possible to buy Forward apples (contracts agreeing upon the future delivery of apples)
Fascinating scenario.
A few random comments:
Had they not saved jewels, what would they have done with them instead?
The price of apples went up because of a bad crop, not because of savings.
The reason saving is good is because the saved money is one way or another [say by being put in a bank] given to an entrepeneur as a loan which he can invest in increasing the ability to produce, making everyone wealthier. In your scenario the saved jewels are not used at all. So that the jewels and apples world is too simplistic to capture the usefulness of savings.
“But you do agree that in an economy with only product X and product Y, news of lower than expected future outputs of X will constitute increased demand for X”. Absolutely not. If there is no current shortage, but en expected future shortage, and the product is not storable, then people will set about looking for mechanisms to be able to get X in the future, but not now.
“I get your point that you cannot save with certain goods” - actually its a majority of goods. Just try saving for your retirement by collecting stuff you’re going to need to keep you going for the last few decades of your life. Step 1. Hire a large warehouse. 2. Employ security. 3. start filling it up with tinned food, and a selection of furniture, fridges, hoovers, washing machines, a couple of televisions etc… its gonna be very clumsy and expensive.
“It is also possible to buy Forward apples”, that’s gonna be higely expensive after the forecast - you’ll be paying two apples now for one apple in the future. But I guess that at least you won’t be disapointed. You must also be careful that if the trader you do the deal with gets his sums right or he might go bust before being able to deliver in the future.
Yes. The same mistake you always make when you post your other pet theories here. It ignores everything about how an economy works.
“1. Had they not saved jewels, what would they have done with them instead?”
People liked owning the jewels for their own sake. They are pretty, and a good status symbol… you wear them on nights out.
“2. The price of apples went up because of a bad crop, not because of savings.”
Agreed. Even if there had been no warning given the price would have gone up anyway… but the whole point of my little story is to analyse what happens with savings when you are given advance warning of some hard times ahead.
“invest in increasing the ability to produce”
Agreed - this is a simplified scenario just to capture the essence of the types of phenomina that may happen. I am applying the principle that we need to start with the simplest possible model and add in the important complications once the workings of the simpler model are all sorted out. I don’t want to miss the wood for the trees.
In your blog post you state “[t]here is no money, only barter.” That’s fine, jewels for apples; although apples seem to be a strictly economic good in that they satisfy a requirement (nurishment) and are now forecast to be in limited supply, while jewels seem to be a non-economic good–they are a fancy bauble that people wear, or trade them for apples “if they have plenty to spare”, which seems to imply that their supply is not limited. I’m a bit confused on that. So, how does one set a jewels-to-apples exchange rate?
Another question: How do people buy more jewels if there is no money? You state that it is a barter economy, and that jewels are only swapped for apples if one had enough to spare. How do they purchase jewels? Do they trade apples for jewels?
Reading your blog a second time as I am thinking about this reply: What is the status of apples prior to the forecasted shortfall? Are apples plentiful enough that people can get as many as they like with exchange? Are apples, prior to the forecasted shortfall, similar to water or air? Freely available because the quantity available is greater than any that could be demanded? (This question again comes from your statement that trade only occurs if one has more jewels than one needs for wearing.)
“while jewels seem to be a non-economic good–they are a fancy bauble that people wear, or trade them for apples “if they have plenty to spare”, which seems to imply that their supply is not limited. I’m a bit confused on that.”
Maybe my wording is ambiguous… I meant they may buy jewels with apples if they had plenty of apples to spare. The supply of jewels is fixed.
“Do they trade apples for jewels?”
Yes.
“What is the status of apples prior to the forecasted shortfall?”
There is just about enough - i.e. people are generally in a state half way between “I’m stuffed, I couldn’t eat another apple” and “I’m hungry”.
I know the thesis is wrong without having to read anything.
Clayton -
What are you saying? Are you claiming that my thesis supports the paradox of thrift?.. and therefore I must have made a mistake in my reasoning? Please tell me what mistake I made.
FYI: I have modified the story slightly to fix some of the issues/ambiguities brought up in this forum.
are you trying to show that it is impossible for everyone to increase their savings at the same time? if so, i think that argument is correct, but i am not sure it comes through in your example.
think about it this way. in your example, jewels are the only means of saving for the future and are in fixed supply. thus, the only way to increase one’s savings is to buy more jewels. if we assume the “jewel market” was in equilibrium at the start of the scenario (demand = supply), then the only way to increase one’s saving (buy more jewels) is if someone else is willing to decrease their savings (sell jewels).
that aside, i think there may be other problems with your example. for example, i am not sure why the number of apples per jewel would actually rise after the news was released.
Hm… I think I’ve heard this argument before…
Suppose that there is only one person in the world. Now tell me that everyone can’t save at once.
“are you trying to show that it is impossible for everyone to increase their savings at the same time?”
Yes exactly.
" if so, i think that argument is correct,"
Good.
“but i am not sure it comes through in your example.”
ok… can you think of another way to illustrate this point?
With regard the other points you make… Ok. if, at the moment the prediction was made everyone was absolutely 100% insistent on maintaining their existing supply of jewels. Then absolutely none would be exchanged for any amount of apples and the thought experiment would fall apart. Maybe I should modify the story somewhat - maybe I should add a note that the harvests are not going to be so bad that some people will starve to death… its not an end-of-the-world scenario. There are likely to be a range of degrees of pessimism caused by the prediction, a few people may even be completely skeptical and not belive the prediction at all. Some current jewel owners may take the opportunity to have a feast of apples during the period where so many people are keen to to get jewels. The prediction simply causes a bias making jewels more desirable relative to apples before the bad harvests strike. This is why the apples per jewel exchange rate will rise.
“Suppose that there is only one person in the world. Now tell me that everyone can’t save at once.”
Well in the aplle and jewel world it is blindingly obvious that there is nothing the guy will be able to do to avoid being hungry during the bad weather.
Consider what most savings are in the real world… people may save for their retirements. They spend decades “saving” then later they may spend decades “consuming their savings” but its not the same stuff. Most of the stuff you consume in the last years of your life did not even exist at the time you were doing the saving. Most will be manufactured/grown after the day you retired. This should give you a clue to what most savings are. Most savings are an agreement between willing parties. The deal being “I’ll give you some of the stuff I manufacture now in return for stuff you manufacture in the future”. You need two willing parties for this to happen. This is all fine when the desire to save is roughly in balance with the desire to borrow (the other side of the saving deal). But things may go awry when there is a strong imbalance - as caused by the “bad times ahead” prediction in the story.
The first thing to understand is that scarcity exists; that is, individuals are never entirely satisfied; there is never a point where individuals want for nothing. But, individuals may have an elevated demand for future goods relative to goods in the present; the reasons for this (retirement, sending the newborn child to college one day, the expectation of superior future goods, ect) are entirely immaterial to the economist.
Next, when you save you are sacrificing present consumption in favor of future consumption. To consume in the present means to consume finished products. Thus savings necessarily means a lower demand for finished, i.e., consumer goods. But those resources that you have not consumed do not simply lie idle, nor will entrepreneurs continue to produce products that are demanded less (consumer goods) relative to other products (future goods) by the same degree. The saved resources are, therefore, transferred to other economic employments, namely to branches of production that do not produce the finished products, but rather produce the inputs that eventually go into the finished products. This is done via the financial system (financial intermediaries), and they are able to do this because savings takes the form of money, which, by definition, is perfectly liquid. But money is not savings; it only allows individuals (entrepreneurs) to exchange for resources that have not been consumed.
Thus, to save means to donate resources, which you could have consumed, to other economic employments. In return, you earn interest (because all individuals prefer current consumption to future consumption, all other things equal). Those recourses, which you have devoted to other productive endeavors, increase the supply of capital which increases the marginal productivity of labor (wages) and total production (wealth).
It is true that a 100% savings rate would collapse the economy, the same way that a 100% consumption rate would eventually end civilization, but such a condition, though conceivable, is impossible. If Robinson Crusoe saves everything he finds/produces, then he will die of starvation; if he consumes everything, then he will live in material depravation.
Your example only demonstrates the effects of extreme alterations in demand conditions within an economic system consisting of only two goods (where one good is the only good that can sustain life and is extremely perishable). It says nothing about the tenability or economic importance of savings. It’s a meaningless hallucination that yields absurd conclusions (first explicitly expressed by Silvio Gessell). But your argument is a very crude (if that) version of the Keynesian argument which also resembles a similar argument made by Wicksell; both have been thoroughly refuted.