During the Great War, even the mighty English bourgeoisie learned that 'forced saving'- i.e. not being able to consume because of rationing- was what happened when you hadn't saved enough in the past. Britain had underspent on Defence and thus had to fight two very costly world wars which wiped out the inherited wealth of the 'idle tenth' of the population.
Sadly, Economists didn't get the memo. Saving means not spending. But one reason you might have to decrease spending is if your Income falls. There is no magical mechanism by which all Savings are turned into Investment or by which economic activity is always maintained at an optimum level. If everybody tries to save more, aggregate demand may fall such that Income falls so both spending and saving falls. Equally, if everybody tries to provide for their old age by having lots of babies, there may be a Malthusian famine such that everybody is worse off.
A separate point has to do with assets which are 'investments' from one point of view- e.g. houses which are expected to go up in value- and 'consumption' from another point of view- e.g. the benefit gained by living in a well situated and well maintained house. If there is a speculative bubble, then many will find their 'investment' was actually a costly lesson in prudence.
It is strange that Post-Keynesian Economists still consider Frank Ramsey's 'mathematical theory of savings' paper to be seminal.
It begins thus-
THE first problem I propose to tackle is this: how much of its income should a nation save?
How long is a piece of string? The answer is it depends. Nations, like everybody else, should only save if they can't beg, steal or borrow at a lower rate than the expected yield on their investments, Sadly, it is when a Nation most needs to beg, borrow or steal that it finds itself doing 'forced' saving or dissaving. A Malthusian famine is an extreme case of 'dissaving'.
To answer this a simple rule is obtained valid under conditions of surprising generality; the rule, which will be further elucidated later, runs as follows.
The only rule is 'act according to what would be the best possible rule unless acting according to no fucking rule would be better yet.' It is meaningless. It's like saying 'why waste money on cars and trains and planes? Just develop the ability to teleport. Better yet, pervade the Universe as an omniscient God.
Ramsey's more sensible brother didn't bother with Russell & Witlesstein & Welfare fucking Econ. He became Archbishop of Canterbury and lived a long, very productive, life. Believing in God releases one from the stupid, loveless, Hell of Logicism.
The rate of saving multiplied by the marginal utility of money
Ramsey thinks the Social Welfare function has a well ordered domain. This means we can identify the last dollar being held for precautionary, transactional or speculative reasons. The Chancellor of the Exchequer can phone this guy and say 'how much extra utility are you getting by holding an extra quid?' Sadly, it is impossible to identify this person and how much he or she benefits by having an extra pound in his pocket rather than spending or investing it.
should always be equal to the amount by which the total net rate of enjoyment of utility falls short of the maximum possible rate of enjoyment.
But that maximum is unknowable. Suppose it weren't. Then somebody would know what everybody else should do- what job they should have, what they should buy with their wages, etc. In such a society, there would be no need for language, education, indeed, communication, or human interaction, of any sort. A Central Planning authority would coordinate all actions. Any Society without such an authority would face continuous exit because people could raise their level of enjoyment by moving to the planned community.
Consider what the M.U of money would be in a world where the utility maximizing solution were common knowledge. In that case, any idle balance can be allocated on a just in time basis to raise total utility. So there will be no idle balances. The MU of money would be zero. There would be no precautionary, transactional, or speculative demand for money. We only keep cash balances because of Knightian Uncertainty. If it didn't exist, there would be no transaction costs. There is just a Transportation problem whose solution is known by magic. Everybody is a windowless monad in Liebnizian pre-established harmony. All apparent waste or inefficiency is just a reflection of a hidden cost or bottleneck or is an example of God's mysterious economy.
In order to justify this rule it is, of course, necessary to make various simplifying assumptions:
assume all people are actually imaginary porpoises who aren't porpoises. It follows from the fact that they cause cats to sodomize dogs that any fucking theorem whatsoever can be proved. This is ex falso quodlibet. Getting rid of God means getting to be stupider than shit.
we have to suppose that our community goes on for ever without changing either in numbers or in its capacity for enjoyment or in its aversion to labour;
so, Ramsey has to suppose that Darwin was wrong. There is no such thing as evolution. But, in that case, there is no such thing as economics because there is no scarcity, no competition, there is just a steady state which endures for ever.
that enjoyments and sacrifices at different times can be calculated independently and added;
we get enjoyment from 'sacrifices'. You feel good knowing you have money in the bank and that you sacrificed your present desire to buy cocaine and hire hookers so as to invest in a tech start-up which people say is going to revolutionize AI.
and that no new inventions or improvements in organisation are introduced save such as can be regarded as conditioned solely by the accumulation of wealth.'
Why would there be 'accumulation of wealth'? It is sufficient to just cover depreciation. Suppose a society meeting Ramsey's conditions has 'accumulation of wealth' in a particular time period. Then, the question arises why it didn't happen in the previous period? Either tastes have changed, which violates the assumption, or disutility of work has changed, which is also a violation. Now suppose there is a constant 'accumulation'. But this means Total Utility goes to infinity. So these immortals enjoy an eternity of utter bliss. Where have we heard of such a thing before? This is the Paradise of the Theists. It turns out it was Frank, not his brother, the Archbishop, whose logic required Heaven. The Church is content to say Faith is founded on a Mystery. Russell and Ramsey's Logicism is founded on Magic.
One point should perhaps be emphasised more particularly; it is assumed that we do not discount later enjoyments in comparison with earlier ones,
which is why Ramsey didn't take a leak when he needed to pee. Instead he drank some more water and waited till his bladder was ready to burst.
a practice which is ethically indefensible
how dare you 'discount' the pleasure from waiting till your bladder is ready to burst before taking a leak? Don't you know it is ethically indefensible? What are you- a fucking Nazi?
and arises merely from the weakness of the imagination;
Imagine how much you'd enjoy taking a leak if you held it in all day. Why not try for all week?
we shall, however, in Section II include such a rate of discount in some of our investigations
Which is fine if riskless assets bear a positive real interest rate. Otherwise this is an arbitrary or meaningless assertion. The fact is, as Ramsey's generation knew very well, all sorts of 'riskless assets'- e.g. Tzarist bonds- turned out to be not worth the paper they were printed on.
We also ignore altogether distributional considerations, assuming, in fact, that the way in which consumption and labour are distributed between the members of the community depends solely on their total amounts, so that total satisfaction is a function of these total amounts only.
This assumes that the solution to Society's transportation or coordination problem is computable and can be 'common knowledge'. In other words, this is a type of economics which assumes that magic has already solved all the problems of economics.
Besides this, we neglect the differences between different kinds of goods and different kinds of labour, and suppose them to be expressed in terms of fixed standards, so that we can speak simply of quantities of capital, consumption and labour without discussing their particular forms.
The problem here is that even in a one person 'Robinson Crusoe' economy there will be a whole bunch of discount rates, some positive, some negative, for various activities. In a market economy, we can, through the fiction of a the return on a riskless assets- e.g. Consols- say that risk or uncertainty of various sorts explains the spread. But this is because we are assuming frictionless arbitrage. In a Command Economy, it may well happen that the discount rate is negative in that the Dictator wants to starve the population so as to acquire more weapons and Gulags. But this is a purely arbitrary matter.
Foreign trade, borrowing and lending need not be excluded, provided we assume that foreign nations are in a stable state, so that the possibilities of dealing with them can be included on the constant conditions of production. We do, however, reject the possibility of a state of progressive indebtedness to foreigners continuing for ever.
Why? People may want to store their savings in our country and ultimately to emigrate to our country so as to enjoy the fruits of their thrift.
Lastly, we have to assume that the community will always be governed by the same motives as regards accumulation, so that there is no chance of our savings being selfishly consumed by a subsequent generation; and that no misfortunes will occur to sweep away accumulations at any point in the relevant future.
Why stop there? Why not assume everybody fits into the same pair of underpants?
Let us then denote by x(t) and a(t) the total rates of consumption and labour of our community, and by c(t) its capital at time t.
Sadly we don't know what is consumption and what is capital. If expenditure of time and money on a thing or activity results in higher Income, we say 'that was an investment'. But some 'investments' which fail have to be written off as the consumption of a bitter but salutary lesson.
Its income is taken to be a general function of the amounts of labour and capital, and will be called f(a,c); we then have, since savings plus consumption must equal income, dc + x =f(a,c).
What about borrowing from abroad? In any case, 'saving' here includes 'forced saving'- i.e. not being able to buy stuff- as well as theft or confiscation. This would show up as 'dissaving'.
(1) Now let us denote by U(x) the total rate of utility of a rate of consumption x, and by V(a) the total rate of disutility of a rate of labour a; and the corresponding marginal rates we will call u(x) and v(a); so that u(X) dU(x) dx dV(a) da
Why not denote the total rate of utility as the vagina of a porpoise? There may be a male porpoise which would want to find it. Otherwise, who would bother?
We suppose, as usual, that u(x) is never increasing and v(a) never decreasing.
So no 'increasing returns' and no 'income effect' causing a backward bending labour supply curve.
We have now to introduce a concept of great importance in our argument. Suppose we have a given capital c, and are going neither to increase nor decrease it.
In which case there is no Knightian Uncertainty- i.e. all future states of the world and their probability are known in advance- and so the rate of depreciation can be calculated without error.
Then U(x) - V(a) denotes our net enjoyment per unit of time, and we shall make this a maximum, subject to the condition that our expenditure x is equal to what we can produce with labour a and capital c.
Sadly, 'disutility' is a function of opportunity cost and changes when new states of the world become feasible. To give an example, I may be very happy to work ten hours a day for a wage of 100 pounds an hour. I find out that I can get 150 pounds an hour working 8 hours a day for some other employer. Suddenly I feel very unhappy in my job. My 'disutility' from work has increased. Equally, if I get a pay cut but lots of others are thrown out of work, my disutility from work has decreased. I feel lucky to still have a job albeit on a lower rate of pay.
The resulting rate of enjoyment U(x) - V(a) will be a function of c,
No. Disutility is a function of what is now feasible. If this changes opportunity cost changes. This has nothing to do with what capital already exists.
and will, up to a point, increase as c increases, since with more capital we can obtain more enjoyment. This increase of the rate of enjoyment with the amount of capital may, however, stop for either of two reasons. It might, in the first place, happen that a further increment of capital would not enable us to increase either our income or our leisure;
in which case the 'opportunity cost' of that increment has changed.
or, secondly, we might have reached the maximum conceivable rate of enjoyment, and so have no use for more income or leisure.
In which case there is no disutility- i.e. no opportunity cost. This can only happen if there is 'modal collapse' i.e. the world can only exist in one particular state. This is a fatalist doctrine. God is the only efficient cause. Things can't be otherwise than He ordained. You may as well blissfully contemplate the glories of the Lord abnegating all other volition.
In either case a certain finite capital would give us the greatest rate of enjoyment economically obtainable, whether or not this was the greatest rate conceivable.
Because Ramsey's universe is fatalist. The universe can't be other than it is. You may conceive of how much better your life would be if you weren't a slave being whipped on the plantation. Give up such thoughts! What you can conceive- viz. a life of freedom- is not possible in this world because God wants you to be a slave.
Religion is less fatalistic. It admits that people can have better lives once they are able to conceive of a Just and Loving God- one who, like an affectionate parent, wishes His creatures to exert themselves to make life better for even the least amongst them.
On the other hand, the rate of enjoyment may never stop increasing as capital increases. There are then two logical possibilities: either the rate of enjoyment will increase to infinity, or it will approach asymptotically to a certain finite limit. The first of these we shall dismiss on the ground that economic causes alone could never give us more than a certain finite rate of enjoyment (called above the maximum conceivable rate).
Could Ramsey have conceived of the felicity I would enjoy, a hundred years later, by having access to Wikipedia? He himself would have achieved so much more had he been born even twenty years later because Doctors would have been able to prevent his untimely death.
There remains the second case, in which the rate of enjoyment approaches a finite limit, which may or may not be equal to the maximum conceivable rate. This limit we shall call the maximum obtainable rate of enjoyment, although it cannot, strictly speaking, be obtained, but only approached indefinitely.
Ramsey is assuming the range of the SWF is well ordered. The truth is I don't know what is my maximum obtainable rate of enjoyment just from my own dinner tonight. There may be different menu choices even from my favorite restaurant which would give me more pleasure than the items I usually order. Equally, some obscure biological processes in my body may change the utility I get from a particular meal.
What we have in the several cases called the maximum obtainable rate of enjoyment or utility we shall call for short Bliss or B. And in all cases we can see that the community must save enough either to reach Bliss after a finite time, or at least to approximate to it indefinitely.
If there is a Bliss point and this can become common knowledge then Society's coordination problem is solved. Yet no two people, or the same person at different times, can agree on how to rank social outcomes let alone find the 'supremum'. The 'well ordering' assumption is mere magical thinking.
For in this way alone is it possible to make the amount by which enjoyment falls short of bliss summed throughout time a finite quantity; so that if it should be possible to reach bliss or approach it indefinitely, this will be infinitely more desirable than any other course of action. And it is bound to be possible, since by' setting aside a small sum each year we can in time increase our capital to any desired extent.' Enough must therefore be saved to reach or approach bliss some time,
thrift is itself a theodicy- albeit one without God. By saving money we approach bliss. This justifies the ways of man to the indifferent universe.
but this does not mean that our whole income should be saved. The more we save the sooner we shall reach bliss, but the less enjoyment we shall have now, and we have to set the one against the other. Mr. Keynes has shown me that the rule governing the amount to be saved can be determined at once from these considerations.
Mr. Keynes would gain fame for recognizing, a few years later, that there was no magical method by which savings would equal investment. There could be a liquidity trap. People could hoard money. Aggregate Demand could collapse. People would tighten their belts and save at a higher rate for precautionary reasons. This would create a vicious circle- 'the paradox of thrift'.
To be fair, Ramsey was moving in a Pragmatic direction. Had he lived, he might have killed off the Cambridge Anal-tickle school of psilosophy. What is strange is that economists continued to go down the blind alley he had inaugurated in his thoughtless youth.
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