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davidtrump

Savings, investment and unemployment

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In his 1879 book Progress and Poverty, Henry George argued that a majority of wealth created in a "free market" economy was appropriated by land owners and monopolists through economic rents, and that concentration of such unearned wealth was the root cause of poverty. "Behind the abstraction known as 'the market' lurks a set of institutions designed to maximize the wealth and power of the most privileged group of people in the world—the creditor-rentier class of the first world and their junior partners in the third". Schweickart claimed that private savings are not only unnecessary for economic growth, they are often harmful to the overall economy.

In an advanced industrial society, business credit is necessary for a healthy economy. A business that wants to expand production needs to command the labor of others, and money is the default mechanism for exercising this authority. It is often cheaper for a business to borrow capital from a bank than to stockpile cash.

If private savings are loaned out to entrepreneurs who use them to buy raw materials and hire workers, then aggregate demand is not reduced. However, when private savings are not reinvested, the whole economy suffers recession, unemployment, and disappearance of savings  which characterize deficiency of effective demand.

In this view, unemployment is not an aberration, indicating any sort of systemic malfunction. Rather, unemployment is a necessary structural feature of capitalism, intended to discipline the workforce. If unemployment is too low, workers make wage demands that either cut into profits to an extent that jeopardizes future investment, or are passed on to consumers, thus generating inflationary instability. Schweickart suggested, "Capitalism cannot be a full-employment economy, except in the very short term. For unemployment is the "invisible hand"—carrying a stick—that keeps the workforce in line." In this view, Adam Smith's "invisible hand" does not seem reliable to guide economic forces on a large scale.

Assuming business credit could come from public sources rather than from private savers, Schweickart and other analysts consider interest payments to private savers both undeserved and unnecessary for economic growth. Moreover, the personal decision to save rather than consume decreases aggregate demand, increases the likelihood of unemployment, and exacerbates the tendency toward economic stagnation. Since wealthy people tend to save more than poor people, the propensity of an economy to slump because of excess saving becomes ever more acute as a society becomes more affluent. Richard Wilkinson and Kate Pickett suggested that health and social problems are significantly worse in more unequal wealthy nations. They argue that there are "pernicious effects that inequality has on societies: eroding trust, increasing anxiety and illness, (and) encouraging excessive consumption".

wikipedia.org

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