[splintercell]

I just want to point out that what it explains relies upon the Keynesian or Saltwater School of Economics. The assumption being "Spending drives the economy", the Chicago, Austrian and other free market schools of economics believe that "Savings drive the economy".

Based on this distinction lies the distinction between the policy proposals advocated by Liberals and Conservatives, Democrats and Republicans. Irrespective of which of the above statements "Savings drive the economy" vs "Spending drives the economy" sounds right to you, it's important for people to understand that this distinction exists on a fundamental level in economics (and in today's political climate, even more important than holding an opinion on which two statements are right, it's important to understand that the difference exists).

[warrenm]

The savings vs spending views were demonstrated beautifully in the 80s and 90s with the Asian crash: east Asian nations, as a whole, are savers, whereas western nations, as a whole, are spenders.

But due to international demand - especially on Japanese production) - in the 80s and early 90s, those nations didn't spend on infrastructural improvements (factories running at 95-100% capacity (sometimes bursting even higher), so when they inevitably had to spend on capital improvement (expansion, new tooling, etc), they had to take production lines offline, which led to production drops, which led to their economy crashing.

"Spend" and "save" (where "save" is a mix of capital investment and so-call "rainy day funds", and "spend" is consumerism) are far too often viewed as independent factors, when they rely on each other being in balance to keep the economy working well.

When an economy spends everything it has (or more - which happens with credit that is too easy to come by), and forgets to plan ahead, it crashes in predictable cycles.

When an economy saves "too much", it never grows (or crashes due to having too much capital investment and not enough demand).

The US' coming out of the Great Depression - largely due to WWII production - was a giant case study on this: factories, production lines, and employable people were massively under utilized, so when demand was created (by gearing up for war), all those people and production factors were "available" to be used. In other words, they had been "saved" (from the economy's point of view) for a decade instead of "spent" (again, from the economy's point of view).

This is part of why there is a "healthy unemployment" value that economists toss around ... generally in the range of 4-6%. Those "saved" resources (human capital, in this case) are available to be "spent" when needed.

If you run at an unemployment level (regardless of whether that "employment" is production capacity, personnel, funding, etc), that is too low OR too high, you run into boom-bust cycles.

That's what central banks try to regulate (albeit not very well, when viewed in the long term).

[pjc50]

> This is part of why there is a "healthy unemployment" value that economists toss around ... generally in the range of 4-6%. Those "saved" resources (human capital, in this case) are available to be "spent" when needed.

> If you run at an unemployment level (regardless of whether that "employment" is production capacity, personnel, funding, etc), that is too low OR too high, you run into boom-bust cycles.

I don't think this is a good summary of the theory - it's recognised that reaching the limits of capacity causes inflation, but no mainstream economist would refer to unemployment as a form of saving. Labour is a "wasting" good; you either spend a day or waste a day, you can't save up time while unemployed and spend it later.

Economists prefer a minimum level of unemployment because it effectively prevents labour organisation being used to drive up wages.

[warrenm]

>you either spend a day or waste a day, you can't save up time while unemployed and spend it later

Except human capital is, from the economy's point of view, like money in your bank account: if you have none to spare, you cannot absorb increases in demand (to personalize it, say you have $100 per month for gasoline - if the price doubles, you can buy half as much for the same money .. you have no cushion to absorb that change).

Just about every economist I've read over the last 20+ years (ranging from the 1700s to now) agrees there, more or less - regardless of the school they adhere to: if you're operating with no margin of error, you experience the booms and busts less well than if you have a margin.

Unemployment is a form of margin in this context. Say there's 100,000 employable people, but 5,000 of them are unemployed. When demand for labor spikes by anything less than 6%, there is an "instant" buffer to bring onboard while new employable labor is "spun-up" (via training, growing old enough to work, etc).

>Economists prefer a minimum level of unemployment because it effectively prevents labour organisation being used to drive up wages.

Pretty sure you have that backwards: the lower the unemployment, the more wages are likely to rise. If your unemployment is too high, wages will fall (or remain stagnant).

[stinkytaco]

I think this argument ignores other large factors in both of those cycles, namely demographics. Japan went into a demographic spiral with an aging workforce and not enough labor capacity to replace them. Decreased demand, as well as the factors you discuss, made outsourcing more appealing. The opposite is true post WWII. There was heavy investment in production infrastructure due to the war, but we're also looking at one of the few times in human history where labor was more in demand than capital. Add to this the rapid advance in technology which allowed goods -- and labor -- to spread more widely, or to even eliminate human labor, and you have a complicated soup of problems.

I don't think either the Keynesians or the Austrians can really claim a victory in those examples because external factors played a large role.

[monksy]

Wouldn't a low unemployment level be good as that the workers are currently developing/using their skills? Wouldn't that be a positive net effect on society as that there are less individuals who need social services and causing crime due to boredom?

[RobertoG]

On society maybe, but lower unemployment creates competition for labour and that create more profits going to labour instead of capital.

[warrenm]

It's "good" in that fewer societal services may be needed.

It's "bad" because there's no buffer to absorb increase in demand of production and service creation

[Fredej]

Thank you for the clarification.

Does a similar video exist from the "Savings drive the economy" point of view?

[splintercell]

I couldn't find a video that well done, but there are videos explaining this stuff. One of this is Austrian Business Cycle Theory where you can look it up.

https://www.youtube.com/watch?v=te-xwqKApAE

But as I said, everybody has an opinion on "savings vs spending" (just look at the responses to my original comment), and it's such a clear classification that at that end of the day you can divide every individual on one or the other side of this debate.

Savings vs Spending is actually more accurately defined under "Say's Law". Whether you believe Say's law to be true or not. Keep in mind, pro-spending side defines Say's law different than pro-savings side (it's like pro-choice vs pro-life).

The economic ideas which fall under "Savings drives the economic growth" are:

Free Market policies, deregulation, privatization, reduced govt spending, (most) Republican/Conservative economic policies, anti-war, lower taxation, global trade, anti-protectionism, "Work and jobs will always exist".

The economic ideas which fall under "Spending drives the economic growth" are:

Increased govt spending (includes war spending), regulated markets, nationalized industries, UBI, Welfare, "machines will do everything one day", higher taxation, (most) Democratic/Liberal economic policies, higher spending on education, universal healthcare, infrastructure spending.

Funniest part about economics is that if you try to look at "evidence" then you'd find both the side being able to present the same events as an evidence of their theory being right. New Deal is simultaneously an example of how govt spending got us out of recession and how it dragged the recession to 10+ years.

[didgeoridoo]

Google "Austrian business cycle theory" for lots of material on the idea that boom & bust is caused by over/under-investment as a result of monetary policy distorting the "price of money" by manipulating interest rates. I haven't looked too deeply into whether it's a useful or explanatory theory, but that is what they believe.

[_joel]

I'd lookup Hayek, who has a different take on it compared to Keynes

[wavefunction]

Hayek, Friedman and Keynes provide a good starting point for three main strains of modern economic thought.

While Friedman is often portrayed as a 'synthesis' or mid-point between the philosophies of Keynes or Hayek on a linear plot, I found him to be closer to Hayek philosophically.

[owebmaster]

Probably not because that never happened.

[didgeoridoo]

Where do you think the money for business investments and commercial loans comes from? And do you think that either of these has anything to do with economic growth?

[owebmaster]

They ALL comes from governmental mechanism and spending.

[kspaans]

If savings are put into banks or investments, is there even a significant difference between saving and spending (for the whole economy)?

[stinkytaco]

In my opinion "spending vs. savings" is not the best way to put it. It would be better phrased as "debt vs. savings", or maybe even "growth vs. stability". I don't think even an Austrian School economist would argue that spending doesn't drive an economy -- that's what an economy is -- but rather that spending driven by debt is problematic. The argument is that more debt in an economy creates inflation by definition and destabilizes the market. They will cite countries that have less debt (among businesses and individuals) tend to have more stable economies and higher exports. Of course, this is partially because they are selling to countries with higher debt, so I don't think it's as simple as either.

EDIT: Also important to point out that Austrian school economics are against manipulation of monetary policy. They argue that interest rates, credit and savings ought to be driven by market factors rather than the government. It's not so much "debt is bad", but rather "artificially driving up debt by manipulating monetary policy is bad".

[padobson]

It's more like investment vs. consumption.

Keynesians would say the government should employ policies to increase overall consumption in the economy (aggregate demand).

Austians would say government shouldn't do either, but rather allow the free market to find the correct balance between consumption and investment. They are particularly against monetary policy because it increases overall investment in an economy (aggregate supply). The problem is that artificially high rates of investment inevitably lead to businesses offering goods and services that cannot be sold profitably (malinvestment).

That's why Austrians believe that artificially low interest rates cause business cycles.

[dragonwriter]

> If savings are put into banks or investments, is there even a significant difference between saving and spending (for the whole economy)?

There's a difference in the velocity of money in the domestic economy; it’s not fundamentally tied to savings vs. spending, but is correlated to it.

[RobertoG]

The idea that banks lend savings is wrong.

A bank is not constrained by savings to lean. When a bank lean money is creating that money as a liability for the borrower and a asset for itself.