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TowardLiberty
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Re: Limits to economic growth
Reply #10 - Apr 16th, 2015 at 5:19pm
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forgotten centrist wrote on Apr 16th, 2015 at 3:52pm:
But if people consume less, then aggregate demand falls, prices go down, and economic growth right alongside.  So cuts in consumption (in order to save) can actually lead to LESS real savings.

http://en.wikipedia.org/wiki/Paradox_of_thrift

Yes, in the short run, and particularly in recessionary periods, this can be a problem.

It is generally more of a problem when people to decide to hold cash rather than deposit the money in their savings account, for then the banking system as it is currently structured cannot find a way to channel these "savings" into other uses, higher up the production structure. In this fashion, money balances under a mattress, or in a checking account, do not flow into investment. And then agg spending falls.

This is definitely a real situation that economies face.

But in the long run, when the business cycle is ironed out and prices become unstuck, there is an identity between savings and investment. It's not an ex ante identity, because there will be plans undertaken that overshoot the savings available, and there will be plans undertaken that undershoot it (recession), but ex post, Say's law reasserts itself. That's why Keynes said "in the long run we're all dead," he knew that in the long run the classical view of the economy was fairly accurate.

So while it is true that not every pattern of saving necessarily leads to economic growth, it is also true that we cannot consume our way to higher living standards. We must save our way there, but do so in a way that does not disrupt the price system or necessitate "price level adjustments."

My recent studies have been oriented toward understanding what sort of banking system might repair this problem, and offset increases in the demand for money with targeted and timely increases in it's supply, but only just enough to offset.

As an aside, it seems this Keynesian story about the paradox of thrift is not at odds with Say's law at all. For the idea is that when firms see demand taper off for their supply, they have less money with which to pay labor, or to purchase inputs. In an economy with less activity, the economic value of the firm's supply falls, and since supply equals demand, given Say's law, demand must fall too. And then Say's law replicates this change throughout the economy, as the expenditure of one firm is the revenue of another.

So Say's law is integral to the Keynesian story, and necessary.

But this is not obvious if we think of Say's law as "supply creates it's own demand." A better formulation would be "supply equals demand."
« Last Edit: Apr 16th, 2015 at 5:50pm by TowardLiberty »  

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TowardLiberty
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Re: Limits to economic growth
Reply #11 - Apr 16th, 2015 at 5:32pm
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Frank1 wrote on Apr 16th, 2015 at 3:56pm:
Well, I suppose I could buy all kinds of stuff I will never use and store it in garages.  I could buy houses everywhere and never use them.

So, in that sense I suppose consumption is not a limit.  But, if we are talking about things we will actually use, that is "thoughtful and/or needful purchases" than there is definitely a limit to growth.


Perhaps. But to play devil's advocate, is not everything we buy something we feel we need, to one extent or another?

Of course we need some purchases more than others, and of course we expend more thought on some rather than others, but coming up with an objective boundary to separate the necessary from the unnecessary seems to be rather difficult, if not impossible, given the subjectivity of value.

It seems to me our incomes play a greater role restraining our consumption than our satiation does. Yes, we have every convenience but it does not seem to register as such. We tend to absorb the innovations and improvements as if we had them all along and proceed to fix our gaze on the next big thing.

Quote:
Not to do a disserve to the rest of your thoughtful reply, but the above is the part that struck me the most.

Not at all. Thanks for raising the discussion.
« Last Edit: Apr 16th, 2015 at 5:46pm by TowardLiberty »  

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