Economic Theory Discussion on Consumption, Savings, and Growth

consumption must exclude any schooling or nurture already counted in that investment. (Schooling counts as consumption.) Mill would have understood the human capital concept, defined by Sir William Petty nearly two centuries before, but economists only recently have begun to take it seriously. Mill’s meaning of the Y =C +I equation, and the one accepted everywhere in macroeconomics even today, leaves out the growth in human capital and includes all consumption. That equation, which | will try to prove correct if we make the two adjustments, shows that less consumption brings faster growth if output holds still. But nothing in the equation says it will. It says that less consumption means either more growth or less output. It doesn’t say which. John Maynard Keynes, probably the most famous and influential economist of the 20" century, put this fact of math a special way in his General Theory of 1936. In his analysis, saving through less consumption is either invested or not. Since output is consumption plus investment, saving uninvested is so much less output. I like to put the same idea with a range of degrees. All saving is invested, as I use the word, but finds different returns. Saving under the mattress is investment at zero return, and drops output just as Keynes said. Investment at the current average return keeps output unchanged. That’s what Keynes meant. But investment at lower returns lowers output, and conversely. Keynes’ version sees intended saving (consumption restraint) as either invested or not, and sees it as translated dollar for dollar into actual capital growth if it is. Mine allows any degree of capital growth below or above the actual cost of investment in consumption given up. This is a surprising concept, either in Keynes’ version or mine, because it seems to fight personal experience. Until the next raise or job change or layoff, our incomes seem to be known quantities. If we skip desert, and watch TV instead of going to the movies, we can put more in the bank. At least our incomes will not drop because we saved those costs. But it is different for all of us collectively. When the whole nation saves, and either does not invest or invests less productively, output drops. Keynes’ analysis says the same, but leaves out the “less productively”. Chapter 2: Fast Forward 1/06/16 3 HOUSE_OVERSIGHT_010943