From Richard Murphy:
My suggestion is that it is time to rethink the economics of saving. People don’t change their plans as to when they wish to consume, or not, because of financial inducement. When it comes to saving they do not consume now because they simply do not want to, knowing that they would prefer to do so at another time. And they draw upon their savings because the time has come when they wish to do so, and not for anything to do with the financial return on offer.
We do, in other words, save for almost entirely non financial reasons. And when we do so security ranks very high in most of our priorities because the social goal for saving dominates all else. And our consciences may play a part if, and only if, we are persuaded to save when not wholly understanding why, which is almost entirely true with regard to pensions.
This is anti-civilisational. Civilisation being that fact that what our forefathers learnt about the world can be studied, passed on through the medium of, those libraries. OK, perhaps a slightly odd definition but it is a useful one of a civilisation. That we don’t start with a new blank slate each generation, that we have found some truths and that the parentals pass these on to the anklebiters ad infinitum.
At which point the P³ is recapitulating the lifetime savings – lifetime income smoothing to be Friedman about it – hypothesis. An important corollary of which is that we do change our savings habits given financial inducements.
For example, German empirical work has shown that many savers increase their savings as interest rates decline. Or at least some do to some extent. The reason being that they are trying to smooth income over lifetimes and they know that there will be some retirement to come. So, if they can earn money on their money over the decades then they need to cut current consumption less in order to maintain consumption in retirement. When interest rates decline this goes into reverse. In order to maintain that retirement income they must save more now, cut current consumption more now.
We also have the other effect out there, that higher interest rates look like a good deal on our savings, we earn more from them, so we do more of it.
As with so much – income and substitution effects for example – near all of us do a bit of each at different income and interest rate levels. Some are near entirely driven by one or other extreme. The overall effect is not something to be discovered through logic alone nor speculation. Actual empirical research is required.
This is all something we know. It’s there in those libraries of the stored wisdom of our forefathers. Only those who have never bothered to crack upon a book upon the subject would not already know all of this. But then for Richard Murphy everything is that Blank Slate upon which he gets to write as he wishes, isn’t it?
But saving does matter. It does impact the economy . And I would suggest almost all economic theory on it is wrong, as is much financial advice. We save for specific reasons unrelated to return.
The economic theory is only wrong because Murphy doesn’t know any of it.