Saving Money and Economic Growth

Saving Money and Economic Growth

A school of thought exists which maintains that the banking system's ability to create money out of nothing and to charge interest for it is the primary cause of the growth disease, and that eliminating this institution would go a long way toward creating an economic system which could function well without growth. While I agree that reform of the banking system and elimination of the interest mechanism are necessary prerequisites to the creation of a sustainable economic system, such changes in and of themselves are not sufficient to bring to an end to the emphasis on continuous growth. Another fundamental force exists which drives continuous expansion of economic output and would continue to do even in the absence of the interest mechanism.

This force which drives increasing economic production is the desire of individuals and families to store up value which can be used to support themselves in their old age or in times of hardship. This claim may appear very strange to some people. What more conservative and common sense action could exist than saving money? How can such an action carry destructive consequences with it? The problem with the idea of storing up value is that society as a whole is unable to do so. Ideally the money I earn represents the value of the goods and services that I have produced (or at least it represents my proportional contribution to the production of goods and service I have produced in cooperation with other people). I can then take this money and trade it for the goods and services that other people have produced. When I save money I decline to consume the full value of goods and services which are equivalent to the goods and services I have produced. If society as a whole were saving in this sense an economic recession would immediately follow. Factories would close down and people would lose their jobs. If I decline to consume the full economic output to which my current production entitles me then someone else must jump into the breach and buy this output in my place in order to keep the economy healthy. These alternate consumers might be past savers who are now using the consumption rights which they formerly declined to use, or they might be businesses upgrading their capital stocks, but society as whole cannot store up value. This is a truth of elementary economics. Here for example is a passage from Kenneth E. Boulding's book Economic Analysis (Chapter 13: The Theory of Money):

There is no difficulty at all in the operation of hoarding as far as a single individual is concerned, and many people have been misled by this fact into thinking that a society might likewise "hoard." But if the quantity of money in a closed society is fixed, it is impossible for the society to hoard by the process of not spending as much as it gets, for what it gets is what it spends. If the total number of dollars in the pockets of the people is fixed and cannot be increased in any way, the only way in which I can get dollars into my pocket is to get them out of the pockets of other people.

I personally prefer to think in terms of the physical production of goods and services rather than in terms of money, since greater conceptual clarity is almost always obtained in this way. But the principle which Boulding describes is the same as that which I have described above.

Because one person's savings are another person's consumption, the collective effort of many individuals to store up as much value as possible is really an effort to expand economic production as much as possible. The only way to end the growth producing tendency of the desire to save money is to make the future material security of the individual largely independent of such savings. The only real store of economic value is a healthy economic community of skilled workers supported by a sustainable resource base. We need a system of universal social security which ensures that willing, able workers who support the community during their most productive years will in turn be supported by that community when their productivity declines, independently of how much money they have saved. Earning a living needs to be about earning a living and not about storing up value, except insofar as helping to maintain the community in a healthy state creates lasting value from which all of its members may benefit.

I know that many people will reject such an idea as "communism" or "socialism", but if we cannot find a way to cooperate with each other and trust each other for mutual support, then I see no way to bring an end to the destruction of the commons which is brought about by the pursuit of merely private, individual security.

May 21, 2008