Abolish Savings? Are These Economists Bonkers?

moneybox146x150Over the last couple of years I have come to the conclusion that economics, as it is taught and practised by most academics, is a load of nonsense. This article by Canadian professor Nick Rowe, in which he argues that “saving” should be abolished, is a classic example of taking an interesting idea and strangling it to death by intellectual contortion.

If you have enough spare time on your hands to actually read the article you’ll find that it’s not too hard to follow because he’s only using basic arithmetic to make his point instead of the usual mathematical gymnastics, but the ensuing discussion is where we see the discipline of economics disappearing up its own backside.

Economists are clever people. If they would only concentrate on finding practical solutions to real problems and present them in ways that the rest of us can understand, then they might perform a very useful service to society, like plumbers and cleaners.

The idea of abolishing savings is an interesting starting point for understanding what’s wrong with our economy and how we could make it work better. Professor Rowe uses his little model to “prove” that hoarding money is a necessary condition of a recession (which is so obvious that you wonder why he felt the need to prove it) but he fails to explore beyond his “proof” to see how the concept fits into the real world and what we could usefully learn from it.

From an individual perspective hoarding money is a very sensible thing. We all need a financial buffer to help with our cashflow, to have by us for an emergency, or to pay for something big like a car or a holiday. The professor’s not going to make many friends if he abolishes this sort of saving.

However, if we keep stashing our money away the size of our hoard, at some point, becomes disproportionate to our needs. The limit will depend on individual circumstances. It might be £10,000 in some cases and £100,000 in others, but there most definitely is a limit beyond which hoarded money becomes utterly useless, doing nothing except making us think that we are rich.

And here we get to the crux of the issue. We have come to believe that money equals wealth. If we want to be wealthy we try to capture and hoard as much money as we can. But money is nothing more than bits of paper with writing on it, or numbers in a computer, or lumps of embossed metal. We can’t eat or drink it. It won’t protect us from the elements, transport us where we want to go, educate or entertain us.

Money has no value until the moment that it’s spent on something that we need or desire. Money in the bank is not wealth. It’s nothing more than an unreliable promise of indeterminate value at some point in an unpredictable future. All money in the bank is stagnant, slowly rotting. Money that’s banked and never spent is completely inert, of no practical use to anyone.

On a personal level hoarding money without the expectation of spending it in the near future is idiotic. On a macroeconomic level, as the professor says, hoarding money is what gums up our economy and causes recession.

For an economy to prosper money has to be available and mobile: it has to be spent, not hoarded. For an individual to feel safe they have to have a big enough hoard of money to see them through the troughs of their personal cashflow, but anything more is waste, offering nothing but an illusion of wealth.

It’s that simple. Why do economists have to make everything so complicated?

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