Joan Robinson devotes
entire chapters to describing the causes and likely consequences of changes in
investment and changes in thriftiness. Summarize her main points in at most two
pages. Why is this discussion so important for her?
The course which it is best for everyone to pursue in
his own interests is rarely the same as the course best calculated to promote
the interests of society as a whole, and if our economic system appears
sometimes fantastic or even insane—as when foodstuffs are destroyed while men
go hungry—we must remember that it is not surprising that the interaction of
free individual decisions should lead so often to irrational, clumsy and
bewildering results (Robinson I).
Keynes was a good
aphorist. I like to think that the group he ran with in Bloomsbury must have
had some good influence on him as some of his turns of phrases and metaphors stick
in the systems as we move along, where people can cite the Keynesian beauty
contest and make a joke about how in the long run we are all dead then someone
literate enough will smile and nod at your reference. But he also had the happy
accident of influencing Robinson, who was a clearer writer as an explainer of
ideas than her antecedent was (see above her rejection of an invisible hand).
I’m going to turn
around the question though and answer the second part of the question first. It
is through the changes in investment and the changes in thriftiness which are
what determines the output of the economy. In my original answer I referenced
these two as the “deep parameters” we spoke about in class. When we draw a
mathematical model of these or a picture of the circular flow, it shows an
illustration of the ideas that she hits upon in or common mathematical language
but in words.
In the simple
model, savings is equal to investment, but Robinson makes a point to state that
“saving is not the same thing as investment” (5) so that the act of saving does
not lead directly to investment. Instead the decision to invest and the
decision to save are separated.
In chapter II,
Robinson looks at these two decisions separately. She describes a situation
where an entrepreneur wants to grow their plant while the propensity to save
stays the same. In this case, the income will grow, and wages go up meaning
more money is spent in absolute terms while the same rate of saving will create
a larger pile of savings. This then
rises to the point where in the aggregate new savings equals the level of the
new investment.
But it does not go
in reverse. New savings without being driven by new investments causes trouble
in our circular flow. What happens if more people save without a change in the
level of investment means that activity in consumption will fall off because
there are only two things one can do with their money: spend it or save it. If
more of your original income is saved in the economy, then there is less
spending. And since “one man’s expenditure is other men’s income, and when one
man spends less other men spend less” (7) then you have the Keynesian paradox
of thrift happen. More people want to spend less money and save more money, but
in the whole, everyone having this feeling is a net bad for the economy.
If, all things
being equal, investment is good for the economy’s output and savings detracts
from it, then as policy we want to drive investment and discourage thriftiness.
How do we do that? One way of doing that is to keep the interest rate down. Low
interest rates make perspective investments much more profitable and being the
reason to invest, we want to keep those perspective profits up (15). What we
really need is a world where “population is increasing, new inventions are
constantly being made, and new territories opened up to trade, the demand for
capital goods is constantly expanding” (16), then we will be just fine. But the
world is not always so. Constant expansion is not the name of the game.
Sometimes people do fall for the paradox of thrift and want to hold their money
in. They do this for various reasons. Thriftiness may come aligned with changes
in trade, either up in down. The stock prices in the news may cause someone to
pull back or let loose depending on the news of the day (22). Other outside
influences come into play as well, such as the state running a deficit which is
thrift of another kind (22). Also seen is greater thrift in unequal societies
(23), as well as moral stances socially (24).
We must remember
that from a policy standpoint the more important aspect is to drive investment
either through private industry with various mechanisms or with the purse of
the state. It is this new consumption introduced into the system that creates
employment and output. We want to do what we can to not have the savings rate
increase and take the wind out of the sails of the economy, but it is with new
investment that the tiller of the economy is steered.
References
Robinson, J.
(1969). Introduction to the theory of employment. London.
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