The following is from Dean Baker, the, er, Dean of left-wing economists, at his Center for Economic and Policy Research blog. Now this guy is quoted more often than Paul Krugman, and in the New York Times to boot. But the wonderful thing is that he agrees completely with Mr. Boudreaux, the theologian over at Cafe Hayek–of course saving and investment decline proportionally as an economy matures, what, don’t you know anything about economic theory, or history? “This [rise of consumption] doesn’t change the fact that it is investment, not consumption, that provides the basis for productivity gains which will make the country wealthier in the future.” Memo to Livingston: Stop trespassing where you’re an amateur without access to the right numbers. Jeez, wouldja just get out of our way?
To which I say: try harder, Dean. Try thinking, for a change, in a way not dictated by your training, your degree, and your professional dignity. To begin with, I’m focused on the atophy of net private investment. That’s the fundamental economic change inscribed in the 20th century, as first noted by Simon Kuznets, then measured and pondered by the Nobel Prize-winning likes of Robert Solow, but also economists such as Moses Abramovitz, Solomon Fabricant, Anatol Murad, Harold Vatter, Kenneth Kurihara, B.F. Massell, and many, many others.
It is meaningless to say that “investment, not consumption, provides the basis for productivity gains.” First, government spending is now counted in the National Income and Product Accounts as investment, and so is “residential investment”–and neither requires, or even allows, the profit motive that drives business. The latter is consumer spending, the former is typically spending on R & D, services, or human capital (when it is not military spending, a form of capital consumption). Second, there is now a substantial body of literature showing that private investment follows the consumer demand curve, not the other way around. Without rising consumption, no “investment” from any quarter–not from government, not from home buyers, not from all those start-ups that want to sell you the latest electronic device and its killer apps. Third,since the 1920s, the mere replacement and maintenance of the existing capital stock has been sufficient to improve labor productivity and increase output–so yes, gross investment has been more or less steady, but net private investment has meanwhile declined precipitously (20% between 1900 and 1930, steeper declines thereafter, and this while labor productivity and industrial output increased spectacularly).
But hey, you read the Dean for yourself and you decide. What I want you to notice, baby, is the consensus on the significance of private investment that unites Baker and Boudreaux, allowing Keynes and Hayek to kiss and make up after all these years. I also want you to notice that the most radical implication of my argument goes missing in the “technicalities.” I’m saying we don’t need capitalists to collect our savings and allocate resources–to determine our economic future. We can do without the profit motive, or rather we can revise it to include social goals that reach beyond the highest return to investors. That’s the forest these people can’t see. It will remain a trackless wilderness until they stop counting the trees.
DEAN BAKER, co-director of the Center for Eonomic and Policy Research.
Wednesday, 26 October 2011 08:17
I’m not ordinarily one to complain that a person is not an economist, but when one writes on economics, it does help to have some familiarity with the topic. That does not seem to be the case with the NYT column by James Livingston touting the merits of more consumption.
While part of the story sounds very good — reverse the upward redistribution from wages to profits — some of the rest does not make sense. Yes, consumption has grown more than investment over the last century. That happens in every country as it develops. When it is poor, there is a real focus on building up the capital stock to get richer, which means that investment will be a very high share of GDP.
In China investment accounts for close to 50 percent of GDP now, compared to around 20 percent in the U.S. However, as China moves from a rapidly developing country into being a wealthy country, its consumption share of income will almost certainly rise, as was the case with the U.S. and other wealthy countries. This doesn’t change the fact that it is investment, not consumption, that provide the basis for productivity gains which will make the country wealthier in the future.
Also Livingstone tells us that we should not worry about the large trade deficit because many of the goods we import are made by U.S. owned companies. I understand how this helps the shareholders in these companies, but I can’t see what this does for the rest of us
The basic accounting identity here is inescapable. If we have a large trade deficit then must have either large budget deficits or negative private saving or some combination of the two. Over the long-run, that is not a pretty picture.
Oh, and about that trade deficit thing. It has no bearing on the argument whatsoever. The hub of a centrifugal world trading system has to run a trade deficit, as the UK did in the 19th century. No way around it. We can offset it–if we choose–by inducing the repatriation of profits, but then we’ll have to pay close attention to their distribution.