Marginal Propensity to Consume 06: “Irrational Expectations”
Exogenous to “Failed Nations,” we in
aggregate save only for the purpose
of enhancing creative efficiencies in the coming years. Again, with population
growth on hold, the problem of individual life cycle is irrelevant to the aggregate
economic cycle.
Necessity of GDP Growth. On
the demand side, there are largely two drives for the national income per annum per capita to grow over the years expected to arrive. First, we have a dream of better future owing to ever-effective individual demand for
utilities. If history is any guide, human desires do not recognize the limit.
Second,
we wish to outlive the individual
wealth, which might be called “precautionary motive.” This leads to positive
bequests of wealth in aggregate or in terms of average per capita on the way of crossing the River. The collective “bequests”
in everyday language are an inevitable consequence of “uncertainties” when the eventual
moment on the River of no return will be.
Imperfectly Rational.
Yes, expectations are supposedly "rational" in macroeconomics. A thorn: We are imperfectly
“rational” in the first person and simply irrational
in the second or third person. The head, “‘m rational”; the tail, “you guys
are irrational.” No to mention, the “coin” (in the orthodox sense) is “fair” no
matter who the tossing person, me, you, her or him; no matter whether the
tossing is from the right or the left hand.
If
everyone were "Lucasian rational," there wouldn’t be precautionary saving in forms of investing in assets, physical or
human. Voila, the imperfection in
rationality is one of the drivers that keep us getting wealthier. After all, physical
frictions keep our life physically feasible, much like thorns do to roses. Oh
wait, “uncertainties” in plain English, or “risks” in Finance jargon, end up helping
promote our quality of life over the run
of time, if not of distance. Is it not what we learn from Economics and Finance, if not from
macroeconomics?
A
conventional wisdom in the West: Be irrational and “Go West, young man!”
Another in the East: “Pure water never fosters fish.” We’d better not try to be
perfect. Incidentally, there is an episode or an apocrypha that a lawyer of
summa-cum-laude from the Princeton Law School was fired by her clients because
she always tried to be perfect in writing legal documents. It’s the time
duration, stupid!
“See,
I Told You So.”
Fallacy of Composition, Conversed. Demand
of the individual household for “real
products” is always and everywhere “effective.” As such, the super-popular “ineffective
aggregate demand” must be an
arch-typical case of “fallacy of composition” Paul Samuelson talks about (Economics, 1948).
Sufficiency for GDP Growth. The
rest of us are very much well aware what the sufficient condition for real “macroeconomic” growth. Guess what
out of the gross national income (Y in
monetary) such a condition is: Consumption (C),
“leisure,” “indolence,” “fiscal spending for the purpose of spending” (G) or the
gross national saving (S in monetary)?
Honey, now I regret pointing
fingers at the “S” also called “thrift.”
Such blaming must have been paradoxical at best, misleading at least, or something
else at worst.
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