Fallacies of financial fundamentalism

6 Feb, 2019 at 16:43 | Posted in Economics | 3 Comments

Fallacy 2
Urging or providing incentives for individuals to try to save more is said to stimulate investment and economic growth.

Again, actually the exact reverse is true. In a money economy, for most individuals a decision to try to save more means a decision to spend less; less spending by a saver means less income and less saving for the vendors and producers, and aggregate saving is not increased, but diminished as vendors in turn reduce their purchases, national income is reduced and with it national saving. A given individual may indeed succeed in increasing his own saving, but only at the expense of reducing the income and saving of others by even more …

Saving does not create “loanable funds” out of thin air. There is no presumption that the additional bank balance of the saver will increase the ability of his bank to extend credit by more than the credit supplying ability of the vendor’s bank will be reduced … Attempted saving, with corresponding reduction in spending, does nothing to enhance the willingness of banks and other lenders to finance adequately promising investment projects. With unemployed resources available, saving is neither a prerequisite nor a stimulus to, but a consequence of capital formation, as the income generated by capital formation provides a source of additional savings.

Fallacy 3
Government borrowing is supposed to “crowd out” private investment.

The current reality is that on the contrary, the expenditure of the borrowed funds (unlike the expenditure of tax revenues) will generate added disposable income, enhance the demand for the products of private industry, and make private investment more profitable. As long as there are plenty of idle resources lying around, and monetary authorities behave sensibly, (instead of trying to counter the supposedly inflationary effect of the deficit) those with a prospect for profitable investment can be enabled to obtain financing. Under these circumstances, each additional dollar of deficit will in the medium long run induce two or more additional dollars of private investment. The capital created is an increment to someone’s wealth and ipso facto someone’s saving. “Supply creates its own demand” fails as soon as some of the income generated by the supply is saved, but investment does create its own saving, and more. Any crowding out that may occur is the result, not of underlying economic reality, but of inappropriate restrictive reactions on the part of a monetary authority in response to the deficit.

William Vickrey Fifteen Fatal Fallacies of Financial Fundamentalism

3 Comments

  1. Government should not try to increase demand, nor exhort people to work at meaningless jobs (like economist).

    Comment by Robert Mitchell— 7 Feb, 2019 #

  2. Fallacy 2 depends on one’s initial assumptions. That is, if it is assumed that government keeps demand at the full employment level, which is certainly what governments TRY TO do nowadays, than a rise in the saving (of money) with a view to lending that money out rather than just hoard it under a mattress or similar, would indeed result in more “loanable funds”.

    Same goes for fallacy 3: it depends on the initial assumptions. As the quote from Vickrey says, assuming inadequate demand, then having government borrow and spend will be entirely beneficial. On the other hand, if government is already keeping demand at the full employment level, then more government borrowing will raise interest rates, which will reduce private sector borrowing and investment.

    Comment by ralph47— 7 Feb, 2019 #

    • which is certainly what governments TRY TO do nowadays

      do they actually try? While they are supposed to, the US has not done much of this since at least 1976

      Comment by billcinsd— 8 Feb, 2019 #


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