|
Ariste and Mondor; Crusoe II and Crusoe III
A dozen years pass. Given his spendthrift habits, it comes as little surprise to learn that Mondor severely depletes the capital that generates his income. What once generated $1,000,000 per annum now generates “only” $400,000. Yet Mondor’s expenditures increase rather than decrease. For a time he is able to prolong the inevitable. He borrows against his depleting capital and later “refinances” in order to “extract equity” from his heavily mortgaged home. But the depletion of his inheritance deprives him of the means to maintain his extravagant and self-indulgent spending habits. Lacking the means to generate an income sufficient to finance the status to which his ego demands, he declares bankruptcy. He is no longer seen in the nightclubs and at the fashionable shops; and the locals from whom he formerly bought lavishly, when they recollect him, refer to him as something of a fool.
In sharp contrast, Ariste, who continues about the same ratio of spending to saving, not only provides more jobs than ever (because his income, through investment, has grown): through this regimen of saving and investment he has helped to provide better-paying and more productive jobs. His capital (in both his country of origin and Queensland) is greater, and for this reason so too is his income. Yet given his frugal ways he spends a progressively smaller proportion of his income and thereby saves and invests a progressively greater portion. As time passes, then, Ariste has become wealthier and his wealth – the capital base which generates income independent of his labour – has added to Queensland’s productive capacity and thereby benefited its residents. Some residents begin to recognise this contribution; and his stature, whilst still low-key, rises. Ariste thus resembles Crusoe II and Mondor resembles Crusoe III (see The Robinson Crusoe Ethic Versus the Distemper of Our Times), and the brothers’ divergent fates resemble those of the two generations of Crusoes.
A General Result
Let us describe, as did Henry Hazlitt (The Failure of the New Economics: An Analysis of the Keynesian Fallacies, Foundation for Economic Education, 1959, 1994, ISBN: 1572460016; and Economics in One Lesson, Laissez Faire Books Fiftieth Anniversary Edition, 1946, 1996, ISBN: 0930073207), a nation of Aristes and Crusoe IIs. Let us say that each year its residents save and invest an amount equal to 20% of what they produce in that year. (There presently exists no such Western country; but in parts of Asia this assumption does not stretch reality unduly.) Given this annual saving and investment, the total annual production of the country will increase each year. To make this point most clearly let us ignore the booms, slumps and other fluctuations which would almost certainly occur within a 10-year interval. Let us say, somewhat arbitrarily but still realistically, that this annual increase in production is 2.5 percentage points. For the sake of simplicity, let us also make the point in terms of percentage points instead of a compounded average. The results for a ten-year period are set out in Table 1:
Table 1: Saving Begets Wealth
Year Total |
Production |
Production of Consumer Goods |
Production of
Capital Goods |
| 1 |
100.0 |
80 |
20.0 |
| 2 |
102.5 |
82 |
20.5 |
| 3 |
105.0 |
84 |
21.0 |
| 4 |
107.5 |
86 |
21.5 |
| 5 |
110.0 |
88 |
22.0 |
| 6 |
112.5 |
90 |
22.5 |
| 7 |
115.0 |
92 |
23.0 |
| 8 |
117.5 |
94 |
23.5 |
| 9 |
120.0 |
96 |
24.0 |
| 10 |
122.5 |
98 |
24.5 |
Note from the table that total production increases each year because of the saving, and that production would not have increased without it. (It is no doubt possible – indeed, it is likely – that improvements and new inventions which are manifested in new machinery that replaces old, and other capital goods of a value no greater than the old, would increase the productivity of the capital in the country. But this increase would be a marginal increment, would amount to relatively little and in any case assumes sufficient prior saving and investment to create to pre-existing machinery). The saving has been used year after year to increase the quantity or to improve the quality of existing machinery, and so to increase quantity and quality of the nation’s output of goods and services. Accordingly, each year there is a larger and larger “cake.” Critically, however, each year not all of the currently produced cake (and, from year to year, growing cake) is consumed. At the same time, however, each year a larger and larger cake is in fact consumed: indeed, by the tenth year, the size of the cake consumed by consumers alone is equal to that consumed by consumers and producers in the first year. Moreover, the capital equipment, i.e., the ability to produce goods, is 25% greater in Year 10 than in Year 1. Like that of Ariste, in other words, the incomes of those who save and invest productively increases over time. By refraining from consuming today they can consume more tomorrow and into the indefinite future.
A Sombre Implication
Hazlitt’s scenario clarifies several other important points. The fact that 20% of individuals’ annual incomes is saved does not upset or constrain the consumers’ goods industries. If they sold only the 80 units they produced in the first year (and there was no rise in prices caused by unsatisfied demand) they would certainly not be foolish enough to build their production plans on the assumption that they were going to sell 100 units in the second year. The consumers’ goods industries, in other words, are already geared to the assumption that the past situation in regard to the rate of savings will continue. Only an unexpected, sudden and substantial increase in savings would unsettle them and leave them with unsold goods.
Conversely, just such a discombobulation would be caused by a sudden and substantial decrease in savings. If money that would previously have been used for savings were thrown into the purchase of consumer goods, it would not increase employment but merely lead to an increase in the price of consumption goods and to a decrease in the price of capital goods. Its first effect on net balance would be to force shifts in employment and temporarily to decrease employment by its effect on the capital goods industries. And its long-run effect would be to reduce production below the level that would otherwise have been achieved. That, in a nutshell, together with an utter misconception of the role of saving, investment and consumption, helps to explain why current economic conditions are fooling so many so egregiously.
 
Designed & maintained by
Artist Web Design
©1999-2008 All Rights Reserved |
