Why do people gamble rather than invest
European debt crisis
Till van Treeck
Till van Treeck is Professor of Social Economics at the University of Duisburg-Essen. He studied politics and economics in Lille, Münster and Leeds. His work focuses on income distribution from a macroeconomic perspective, economic policy and (socio) economic education.
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The introduction to the online dossier "European Debt Crisis" sharpens the dispute about saving Europe to the core question: "Save or invest?" to. However, the experts questioned rightly emphasize in their interview contributions that there is no fundamental contradiction in this. As will be shown below, the national accounts (VGR) even lead to the result that at the macroeconomic level the savings must always be exactly the same as the investments. However, it is controversial how it can be achieved that savings and investment increase, and what role the state and the private sector should play in this.
Saving and investing in the overall economic cycle
The easiest way to show the connection between saving and investing is to assume for a moment the thought experiment of a closed economy (excluding exports and imports). This is, so to speak, the general case of the world economy, which does not have any foreign trade with other planets.
The demand side of GDP is then:
GDP = consumption (private and state) + investment (private and state).
As you can see, the external contribution has now disappeared, since there is no other country with which the closed economy does trade. At the same time, according to the national accounts distribution calculation, GDP is equal to macroeconomic income, which in turn consists of profits and wages. Since the state claims part of the profits and wages for itself through taxes and duties and at the same time pays transfers to private households (e.g. unemployment benefits, child benefits, pensions) and subsidies to private companies, the distribution side of GDP can also be written as follows:
GDP = disposable income (private and public).
Demand-side GDP must always be equal to distribution-side GDP. It follows from this that macroeconomic incomes must correspond to private and government spending on consumption and investment. The part of the disposable income that does not go into consumption must therefore be equal to the investment:
Available income (private and state) - Consumption (private and state) = investment (private and state).
Income that is not spent on consumption is also called savings, so it follows:
Savings (private and state) = investments (private and state).
We have formally derived the formula that is important for macroeconomics: savings = investment. But what exactly does this formula mean? Basically, by "saving" we usually mean that we increase our net assets (assets minus debts). So by the end of the period we are looking at, we have more assets or fewer debts than we did at the beginning. Economists fundamentally differentiate between financial assets and real assets. Financial assets include, for example, the cash that I keep in my wallet or under my pillow, money that I have in my bank account, loans that I grant to others, or shares. Real assets are, for example, houses or production facilities that belong to me. If I save now, I basically have two options: I can expand my real assets by saving part of my income and buying a new house as a private household or a new machine or better software as an entrepreneur. The formation of real assets is also known as investment, and in this case the formula: savings = investment is immediately understandable. On the other hand, I could also increase my net financial assets by simply not spending part of my income that I receive in the period under review on goods and services, but rather, for example, giving someone a loan or repaying a loan. If I increase my net financial wealth, it means that I will have a financial surplus: my spending on goods and services is less than my disposable income. However, this is only possible if there is a funding deficit elsewhere in the economy, i.e. if the net financial assets are falling (for example because someone is also in debt with me or I am repaying part of a loan that was previously received). If we therefore consider the entire world as a huge, closed economy, it necessarily follows that all changes in financial assets (= financial balances) always add up to exactly zero! For a closed economy as a whole, investments are the only way to save.
Save and invest in various schools of thought
Put simply, he argues Keynesianismthat saving in the sense of the accumulation of financial assets may be an individual virtue, but from a macroeconomic point of view it can lead to catastrophe. If households and companies want to build up additional net financial wealth but do not want to invest, they destroy the incomes of companies and employees who can sell correspondingly few goods and services by withholding expenditure on goods and services. According to this perspective, companies that cannot sell their goods and employees who become unemployed are likely to restrict their spending on investment and consumption even further, so that the economy can spiral downwards. As a result, the income of the economy falls, so that the originally planned savings in the form of financial assets cannot be realized. This relationship is known as Keynesian paradox of savings: Macroeconomic savings fall because macroeconomic incomes fall because too many households and companies want to increase their financial assets instead of asking for goods and services. From this Keynesian point of view, a way out of this situation is offered by higher spending surpluses (= budget deficits) of the state, which increase the income of private individuals and thus enable them to generate the desired net financial wealth (= financial surpluses).
To keynesian From a perspective, the (private and state) demand for goods and services is always at the beginning of the consideration. If this is high, then production and macroeconomic incomes will also be high, which then also enables high savings to be made. This is how it should be understood when Ulrike Herrmann argues in her interview that saving in the sense of government spending cuts cannot work as a crisis management strategy. According to this point of view, a low state demand (whether for consumption or investment) leads to a lower GDP and thus to a lower macroeconomic income. And when incomes fall, so do overall economic savings. This is a variant of the Keynesian paradox of savings: Although or precisely because the state cuts its expenditure with the aim of increasing its savings, overall economic savings fall because the lack of demand for goods and services also reduces production and income.
In a similar way, Thomas Fricke argues in his interview that excessive government spending cuts cause the economy to collapse and people have no more money to spend. Therefore, according to this demand-oriented, Keynesian-inspired perspective, one should "put money into the machine" in the short term, i.e. spend more (for consumption and investment) and not be thrifty. Over time, this should lead to "more saving" and "more investing" because incomes and economic output increase overall.
In a typical neoclassical In this scenario, this Keynesian spending policy is doomed to failure, because here GDP cannot easily rise if demand is expanded. The reason are problems on the supply side: For example, the unemployed may not have the necessary qualifications to expand production. If, at the same time, minimum wages are so high and the unions are so powerful that companies have to pay high wages, this can, according to the neoclassical perspective, lead to unemployment and limit GDP on the supply side. In such a scenario, if investment is to increase, consumption must decrease. In other words, savings must be made so that more can be invested. As a result, government and private spending come into competition on the demand side: If government savings fall because the government consumes more (e.g. spends more money on civil servants' salaries or social transfers), either government investments (e.g. in research or transport infrastructure) fall or private spending on consumption or investment. In this sense, Alexander Criticus, for example, in his contribution to the debate does not primarily criticize the "high government spending" in Greece, but rather that "the money [...] was not (was) invested productively". If, from a neoclassical perspective, higher investments are required, a shift on the demand side of the economy away from (state) consumer spending towards (state and private) investment spending is therefore usually required.
The Neoclassical also assumes that the private sector (households and companies) does not want to create any financial surpluses (= net financial assets) in the long term. It is possible that private households would like to build up surpluses (e.g. for old-age provision), but these are then available to private companies to take out loans and invest. From a neoclassical perspective, the financial market will, in the medium term, ensure that private companies borrow money, for example in the form of loans, and use them to finance real economic investments. So if the state foregoes funding deficits, private spending can rise because more savings are available with which private companies can finance their investments.
If GDP is to increase in the longer term, it has to more neoclassical Can be set on the supply side. Michael Hüther, for example, argues in his interview that state budgets must be put in order in the short term and structural reforms must be undertaken, including on the labor market, in order to regain the confidence of private companies. In this scenario, this would lead to more innovative strength and therefore to higher productivity and lower unemployment on the supply side of the economy - and ultimately to higher GDP. On the demand side, there would then be scope for higher savings and higher investments.
Didactic application on the topic
For numerical illustration: Saving and investing in the closed economy
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