From Cambridge to Eternity: “Marginal Propensity to Consume 03”
To anyone in right mind,
savings are never for the purpose of throwing or giving things good and utile
away. More specifically, we are “rational” (Gregory Mankiw) and
“self-interested” (Adam Smith). Therefore, savings must be for our own benefit, or utility (M∙U in
dimensions) of some kind.
Why we save. We save first
and foremost because we are presupposed to decline and eventually fade away. In
other words, we in earlier cycles of life shall save for the declining up to
the eventuality. There are some other reasons as well (see
below).
When we save. We can save
only in those cycles of life when the hard-earned incomes outweigh demand for
consumption.
Where we save. Some
macroeconomists seem to think we save “liquidity” for the
future under the mattress or somewhere else. That might be true in “Failed
Nations” (to this tomorrow). Generally speaking, however, we in ordinary
nations do not save incomes in money, preferably or otherwise, but in physical
or financial assets. After all, saving is never in “liquidity” but it is in
assets.
In
short, saving equals investment. By the way, in early cycles we invest “big
money” in the human asset, but that in the unanimous name of
“consumption.”
How much we save. Approximately
saying, there are five motives for saving-cum-investment. First, we have to
survive in the eventual decline when the human power of earning incomes, or
creative efficiency (M∙U∙T-1), notably diminishes. Second, we have a
dream of better future, for which more efficiencies, mostly from physical
assets, are of necessity.
Third,
we have what is called “precautionary motive.” We never know when’ll be the
eventuality. As such, we save more to a statistically significant extent than
we need. Four, we have to make up for wears and tears in physical
assets. Again, such recoupment for the human asset is called
“consumption.”
Time value of money. Finally,
when the expected rate of return to
an asset is higher than the “time value of money” as in Finance, we save
from consumption to a certain degree and invest the saved in that asset. The
flip side is of course vice versa.
As
this particular motive is more or less universal, the economy-wide rate of
return will be fluctuating around the aggregate rate of return, say, 2% PA, as time value of the
commonwealth. This implies that as far as the physical asset is concerned, the
economy will grow at that pace. “The human factor,” as it were, is always and
everywhere additional and complementary to the national wealth to the economic
growth.
The Average Propensity to Consume. In modern
times when the population growth is more or less negligible, individual saving cycles
nearly wash out. If so, the aggregate time value of money of 2% PA holds an important
key to the division between consumption and investment out of the gross national
income of monetary value.
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