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Thursday, January 27, 2005

The Fallacies of Underconsumptionism

I just contributed this to the Von Mises Institute website in reply to an article about underconsumption being impossible (Keynsian economists say that printing more money is required to bring an economy back into balance when underconsumption takes place). (Original article available by clicking the title here).

I didn't quite agree with it but thought that by treating cash as goods it works very well. I am rather pleased with this so I am putting it here.

The common argument against this is that people may refuse to spend their money & that an increased savings rate is a sign of underconsumption.

However if we treat money, gold, government bonds, share certificates, bank books, sacks of paper under the bed etc as goods then it is impossible for there to be underconsumption because you have to spend your earnings on money.

Treating cash as goods may seem strange but take it one further point up the chain & it works. The profits from "manufacturing" cash goes to the government & we know they will consume it. Gold goes to the expense in getting it out of the ground - which would look to a Martian like waste. Share certificates' receipts go to companies which either use by investing it profitably or the shares lose value. Theoretically if everybody consumed to a significant extent by increasing their hoard of "money" the value of it would increasebut in practice I think you could rely on government to print more to maintain a balance - this deflation is effectively what happens when people invest in old masters, of which the supply cannot easily increase.

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