Procrustean Art of Backtracking: “Upward-Sloping Saving”

 

When we purchase pieces of paper representing partial ownership of Nvidia, we must sacrifice the interest rate on “savings” or pay the interest rate on “borrowings.” So the following is popular narratives in macroeconomics as regards the shape of investment curve in the “loanable funds” market:

Investment depends on the … interest rate because the interest rate is the cost of borrowing. The investment function slopes downward: when the interest rises, fewer investment projects are profitable. (N. Gregory Mankiw, Macroeconomics)

On the other hand of the so-called “market” is the saving function. When we save money with the bank, or lend money to the bank, we can expect the benefit of the interest rate thereon. Macroeconomists would explain:

Saving depends on the interest rate because the interest rate is the benefit of lending. The saving function slopes upward: when the interest rises, more saving projects are profitable.

 

Armed with the two hands of investment and saving, we are ready to clap: there we have the interest rate. And, the opportunity as well!

             Beautifully performed, a great job!

             The school work done, “Don’t worry be happy!”

 

Only concerns of paranoia: With slopes defined, where are the curves located?

             “The curves are everywhere except for in the diagram.”

To be fair, in the diagram of the market for “loanable funds,” we need information not only about the slope but also the location. We have both in the classical framework of market: the diminishing (slope) marginal benefit (location) vs. the increasing (slope) marginal cost (location).

             In the first place, the demand and the supply of funds must be defined with no regard to the interest rate. Down with loanable funds! Half the knowledge is more dangerous than ignorance (半識者 憂患 in Korean Chinese expression)! 

Bobby McFerrin - Don't Worry Be Happy