How Your Savings Plan Fuels an Arms Race on Wall Street

Finding productive places to invest our money

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By Joanna Masel 

Policy makers are keen to encourage people to save more money for retirement, e.g. via tax incentives. This is great advice for individuals; the more money an individual saves, the more comfortable their retirement. But is it also a good idea for society as a whole? What happens when everybody tries to save money at the same time?

To answer this, we need to understand the distinction between relative and absolute competitions. Think about a running race. An absolute competition pits each runner against the clock. In an evolutionary contest, where anyone who finishes the race in less than a certain time is allowed to have children, those with stumpy legs and flat feet will be replaced by the children of the fast runners. In future generations, the average person runs faster.

In contrast, in a relative competition, where competitors race in pairs against one another instead of against the clock, rules of fair play do not apply. One competitor is super fast. Unfortunately, he gets tackled from behind. In the ensuing brawl, he receives a solid blow to the head and passes out. The slower guy then wins. In each generation, the competition gets tougher, but not necessarily because the new generation runs faster. Strictly speaking, this relative competition does not favor being fast. What it favors is crossing the finish line before your competitor. Running fast is one way of crossing the finish line first. But evolution is a creative process, and there are many different ways of achieving the same goal. It is hard to predict which of the many solutions will triumph, and not all of the solutions are ones that we like.

If saving for retirement is an absolute contest, then policy makers are doing the right thing when they encourage people to save for retirement. But if saving for retirement is a relative contest, the incentives we give for retirement plans may achieve nothing, or even worse, do economic harm.

In the real world, it’s sometimes hard to figure out which competitions are relative and which are absolute. But the mathematics behind the two are different, and so are their outcomes. During my training in evolutionary biology, I learned to use a standard mathematical model in which competition was relative. In contrast, economists learn standard mathematical models that are based on absolute competitions. These default assumptions, built into the curriculum, can shape the way someone approaches a problem for the rest of their career.

As a result, economists are biased towards assuming that competitions increase prosperity. Evolutionary biologists like me are trained to have the opposite bias, instead assuming that competitions are zero-sum. In both cases, the truth is probably somewhere in between, but how we are trained affects which situations we see as “normal” and which as “special”, and which sort of mistakes we are most likely to make.

My recent book argues that saving for retirement has become a relative contest, but that economists dangerously mistake it for an absolute one. If all that is saved is “money”, or more broadly, financial assets, then we have a problem. Financial assets are pieces of paper, or scores kept in a computer. You can’t eat financial assets. If all we save is financial assets, we might as well simply burn money today, and then print it again in the future. Financial assets are only valuable because you can exchange them for useful things like food and shelter, or for desirable things like a luxury holiday. Useful and desirable things are wealth, whether or not you used financial assets to buy them. Saving means forgoing the consumption of goods and services today. Investment means converting this sacrifice into the creation of future wealth. Saving and investment are not the same thing, and investing is the part that matters.

If additional retirement savings are automatically invested in the creation of wealth that will make all of our retirements more comfortable, then saving is the good sort of contest, an absolute one. But if society’s total amount of wealth is less flexible, then savers are in a mostly relative competition, an arms race to stake a claim to a larger percentage share of that fixed amount of wealth.

As Keynes pointed out, “no one can save without acquiring an asset, whether it be cash or a debt or capital-goods[1]. Every time paycheck diversions into a retirement plan are used to buy stock, somebody else sells the stock in exchange for dollars. The retirement plan forces the employee to forgo consumption today in order to buy the stock, but that other person may well cancel out this choice, “dis-saving” by selling the stock to pay for everyday consumption. When the seller is simply rebalancing their portfolio, and uses the cash to buy a different stock instead, then that second stock also has a seller. Somewhere down the line, some seller, not the saver, makes the decision to either spend the money creating new wealth that did not exist before, or to spend it on current consumption.

If you add up all the savings in the world, and subtract the amount of dis-saving, the difference must come out exactly equal to the total amount of true investment. This is why people tend to equate saving with investment. But this equality doesn’t come about because individual decisions to save rather than consume cause someone, somewhere, to decide to invest. Each person and institution decides how to spend their money, whether on consumption or on investment. If they do not spend all their money, they save. If they consume more than they have, they dis-save. The reason that net savings and investments balance out is because all asset transactions have two parties, where each saver/buyer must be paired with either a dis-saver or an investor. Without two parties, the transaction can’t take place. When workers pre-commit a percentage of each paycheck to retirement savings accounts, they are forced to buy bonds or stocks or other assets even at high prices representing low returns, without being able to control whether their savings are ultimately used for consumption or for investment.

If we want to build an economy where there is more investment in the future, the best way to do that is simply to invest more, not to all save more and hope that investment will follow through the magic of efficient capital markets. We bathe in a sea of rhetoric about how we should all be saving more; this advice is misguided. There are plenty of savings in the system already; our problem today is to find good places to invest all that saved money. If we can find enough opportunities for investment, this will convert saving for retirement from a relative arms race to absolute race towards prosperity for all.

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So what investments do provide for the future, and which options are achievable? For example, we certainly can’t store food, nursing and medical care for the baby boomers’ retirement. So as a society, we need to invest in things that will make food and care easier to provide in the future than they are today.

The first step is to finding useful opportunities for investment is to stop thinking about “saving money”, and start thinking about ways to spend money to create wealth. Money is an illusion, with no true value. If I waved a magic wand and doubled everybody’s money, nobody would be any wealthier. They would have more money, but the price of everything might also double. This criticism of money extends to other financial assets such as bonds and stocks.

Money is obviously useful as a means of exchange, and as a unit of account. Money can even store value over short periods of time. But the longer the delay between earning money and spending, the more problematic money becomes as a store of value. This problem could become catastrophic with the retirement of the baby boomers. The baby boomers are all saving at the same time, and later, they will all want to spend at the same time. This affects prices in the stock market, in the housing market, and in markets for all kinds of assets in which baby boomers think they have “invested” their money. Right now, lots of baby boomers, and the pension funds that are supposed to support them, are making a last-ditch attempt to save. This is increasing demand for financial assets such as stocks, and driving their prices up. When the baby boomers need to pay nursing home fees later, they will sell those assets. When many of them do this at the same time, it will steadily, over the course of several retirement decades, drive the price of assets down.

The baby boomers saved money. But they didn’t save food, and they didn’t save medical and nursing care. They saved money, and handed it over to the stock market, and asked the companies there to spend more money investing in the future. But do the baby boomer savings, when they are spent buying stocks, cause companies to invest more in the future?

Most savings are used to buy existing financial assets. By inflating asset prices, this decreases future returns. According to conventional economic reasoning, returns won’t keep dropping forever. Eventually the low cost of borrowing will cause new borrowers will appear. These borrowers will create new return-generating assets, creating somewhere useful for new savings to go. These borrowers have investment plans that only work if they can get financial capital cheaply enough.

But how cheap does financial capital need to be before enough new people venture into the market, borrowing the money in order to spend it on real capital assets that create something of value for the future? The price of capital has been incredibly low for some years. For safe investments, it has been barely above zero, sometimes even negative in inflation-adjusted terms. Why is there so much supply of financial capital willing to settle for very low returns? And why is there so little demand for financial capital even at low interest rates?

On the supply side, baby boomers have been saving money for their retirement. Companies and governments have also been saving money for the baby boomers’ retirement, via their pension plans. China has been saving money and lending it to America. And as societies become less equal, more money ends up in the hands of the rich, who are more likely to save it than are the poor. The oversupply of financial capital is almost a perfect storm. It would be even worse if everybody saved “enough” money for their retirement, the way pundits urge us to. We don’t need more savings: we need more productive places to invest all the money that is already available. Lots of savings would be great if there were lots of good places to invest it. We already have lots of savings, but where should they go?

On the demand side, we do not see businesses full of great expansion ideas, eagerly seeking to borrow the capital to make them a reality, if only that capital were offered to them at a slightly lower interest rate. Instead, many companies today are already sitting on huge sums of cash, profits from their sales, money that they don’t know what to do with. Capital markets are broken; even at rock-bottom interest rates, there are too few people who want to take society’s savings and spend them in a productive way.

If we want to store value for our retirement, or for some other purpose, we can’t just hand money over to a mutual fund and ask its managers to harness “the market” to store it for us. Individually and collectively, we all need to take more responsibility not just for saving, but also for investing. For every lender, there is a borrower. Who do we want to lend money to? Who will make best use of it, and then pay us back? In my book, I present some of my own ideas, but in the end, we all need to stop delegating the job of investing to the magic of capital markets, and instead start taking both individual and collective responsibility for making investment happen. Until that happens, we should challenge the conventional wisdom of urging more retirement savings, and encouraging them with tax incentives; maybe all we are doing is fueling an arms race that benefits only the fees of arms dealers, namely the financial industry.

[1] John Maynard Keynes (1936), The General Theory of Employment, Interest and Money, p.81.

2016 March 10

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  • This article is cogent up until the sentence “If we want to build an economy where there is more investment in the
    future, the best way to do that is simply to invest more, not to all
    save more and hope that investment will follow through the magic of
    efficient capital markets.”

    That sentence and the remainder of the article seem to reflect a lack of understanding about how capital markets function. (Or perhaps just an oversimplification.) When there is more savings, the cost of capital to entrepreneurs goes down leading to more, but less useful investment. For example, when investors demand a return of 4% rather than 5% projects that return 4.5% get done in addition to those with an expected return of 6%. That isn’t magic, its just the (simplified of course) way capital markets work. You never run our of projects.

    It is true that as more money is saved the returns go down through the mechanism of the price of investment capital described above. If they go down too far, people will choose to consume now rather than saving– and that’s ok too.

    It may be the case that there may be too few profitable projects to allow people to retire comfortably by saving an amount that previously would have been sufficient. Unfortunately, its not likely the individual will do better than capital markets in finding more, better investment opportunities.

    The other wrinkle not discussed is that much current saving goes to purchase government debt, which mostly results in more consumption rather than investment. So instead of your savings giving you a claim on a productive asset, your savings have given you a claim on the governments power to tax or print money to pay you. I suspect this wasn’t mentioned because it is not essential to the story being told. That’s probably correct, but it seemed worth mentioning.

    • Jan de Jonge

      Mabel writes: “many companies today are already sitting on huge sums of cash, profits from their sales, money that they don’t know what to do with. Capital markets are broken; even at rock-bottom interest rates, there are too few people who want to take society’s savings and spend them in a productive way”. I think this is correct. Thus, even when the rent goes down it does not attract more investment. How else would you explain negative rents, if not as incentives to banks to lend more? But banks complain that firms do not invest and thus do not lend money. What needs to be done when firms don’t invest is that governments do it. More and more economists think that this is needed to prevent a new recession.

      • There are a bunch of issues bundled in that paragraph. A few responses:

        — Companies sitting on cash have it invested in the short term debt market. There are a host of reasons that influence that decision including US laws that incentivize keeping cash overseas and a desire for more liquidity.

        — It is manifestly false that NO ONE wants to make investments.

        — Banks are sitting on large amounts of reserves because the Fed started paying interest on them– an implicit subsidy to banks.

        — Governments are pretty bad at most types of investments. Absent a good market failure story, if others are not making an investment it is probably a bad one for the government to make.

        • Joanna Masel

          The argument doesn’t require it to be true that no one wants to make investments, merely that lowering interest rates increases consumption by a comparable amount or more than it increases investment. Given low interest rates, I don’t think the various nudges would be sufficient to incentivize the current huge piles of short-term debt and other cash-like instruments, were really good investment opportunities a viable alternative. And I would argue that there is no shortage of good market failure stories, including the three I gave above as good targets for government investment.

          • It’s not clear what you mean by lowering rates. If it is lower rates driven by an abundance of savings then by definition that has not increased consumption as we are dealing in aggregates. If it is target short term rates set by central banks, that is another much more complicated line of inquiry, and not (I thought) the subject of your article.

          • Joanna Masel

            You are correct, the latter is not the subject of the article. My point is that low rates, driven by an abundance of savings, may primarily drive consumption in others rather than investment. In this case the abundance of savings and the new consumption cancel on another out – there is no net increase in consumption, but little decrease either, with the abundance in savings having failed to promote investment, as it had been intended to do.

          • I think aggregates and the behavior of certain groups of individuals are being confused in your above response in way in which they did not appear to be confused in the article. If aggregate savings are increasing then by definition the entire increase is going to investment. If a group (Group A) is saving more, it can certainly be the case that another Group B is borrowing that some or all of that amount for consumption.
            In the latter case there all you really know is that Group A and Group B have different time preferences with respect to present vs future consumption.

          • Joanna Masel

            Imagine Group A to be people who are institutionally nudged or forced to increase their allocation of income to their locked retirement accounts, the policy I am here criticizing, while possessing no other assets. Imagine Group B to be people with more flexible and diverse assets. Interest rates fall because of Group A’s behavior and the paucity of available marginal investments, ie asset prices rise. Group B will now notice that their assets are now worth a lot more on paper, more than they thought they needed for retirement. This prompts them to cash out, eg as described by the housing bubble rhetoric about using inflated house prices as an ATM via home equity loans, and so Group B increase consumption to offset Group A. I’m not convinced that fixed time preferences are the best way to model the behavior of either Group A or Group B in this scenario.

          • Housing is a particularly tricky example because it is mix of investment and consumption, but I think your example applies to stock just as well, if not better. I share your intuition that for some people it makes more sense to invest in their human capital than retirement (ideally you want to design any nudges so that they really are just nudges). Absent a good story about market distortions, I still think the scenario is explained by different preferences of the individuals in Group A and Group B.

          • Joanna Masel

            Sure, but there are good stories about market distortions: not only are retirement accounts are tax-deferred (a small but real distortion), and nudged via opt-out policies (just a nudge as you advocate), but many employers offer matching funds (a huge distortion) and in some countries contributions are mandatory.

          • It would be nice to focus on eliminating those distortions, although I think there would be some disagreement about what constitute distortions in world of second best. For example there is a good argument that ALL investments should be tax deferred so as not to artificially discourage saving. With respect to matching funds, a bigger distortion in the US is that plans have to pay larger amounts to employees in profit sharing plans in order to avoid having top-heavy plans. Inevitably this reduces cash payments to those same employees by some amount.

          • Joanna Masel

            The simplest way to eliminate distortions is to eliminate tax-deferral (low interest rates indicate no shortage of savings right now), mandatory contributions, and employer-matching schemes. Nudges like opt-out non-tax-deferred retirement accounts can of course stay. The consequent drop in savings, as people realize that these accounts aren’t a great deal, but fail to fully pursue alternative savings mechanisms, might of course deflate current asset bubbles, but they have to deflate some time.

        • Jan de Jonge

          I can assure you that in the EU the situation is as described by Joanna Masel. The ECB has lowered the rate from -0,3 t0 -0,4 and increased the buying of bonds from 60 to 80 Milliards euro.
          Concerning government investment I quote Marianne Mazzucato ” The history of new sectors teaches us that private investments tend to wait for the early high-risk investments to be made first by the State. Indeed, it has often been State spending that has absorbed most of the real risk and uncertainty in the emergence of new sectors, as well as in particular areas of old sectors (e.g. radical new medicines today).” (from “The Entrepreneurial State”, an excerpt was placed in Evonomics). From personal experience, I can assure that when you depart from JFK Airport to Schiphol in the Netherlands you arrive in a quite another world. The underground in New York looks a l bit as the underground looked in the former east-European countries. Thus also in the public (/private) sector there is a lot that can to be done.

    • Joanna Masel

      Just an oversimplification relative to what is in the full book. Yes, that is the way capital markets are supposed to work. But when there is a sufficiently severe shortage of marginal investments (which I argue that there is), an individual’s decision to save may cause consumption elsewhere rather than investment elsewhere. You may think that’s OK, but it’s not an economy with much more investment. I argue that if individuals decide to shun capital markets, they will try a lot harder to discover/create their own investments, at a personal or local level, at or above marginal return rates, solving the underlying problem. The second possible solution is for government to do more investment, eg in physical infrastructure, in certain kinds of cost-cutting medical research, or in avoiding the worst climate change scenarios.

      • It is certainly possible that there are profitable projects to be had that other entrepreneurs have missed, just as there are some advantages to home grown vegetables versus those grown by a professional, but this seems unlikely to a large part of investments.

        I also agree with your examples of potentially useful government investment. It would be nice if those sorts of investments were subject to the same sort of market discipline as most private investments– but that is very hard to accomplish.

        • Joanna Masel

          The book (but not the short article) goes on to identify human capital as a major area where individuals can identify and invest in new possibilities (ie trainees) much better than our current educational and employment institutions currently succeed in doing. While the models I propose for doing so are radically new in the way they align mentor-protege incentives, their potential for expansion, were they ever to become mainstream, is enormous.

          More conservatively, individual searches for productive investment can at least bypass the currently bloated financial sector, eg by disintermediating mortgage loans.

          • Investment in one’s human capital seems like at least a plausible alternative use for one’s savings, but is there evidence that people are systematically underinvesting in that now? If so what explains it?

            I am curious to know why you think the mortgage market is inefficient in ways that can be avoided by disintermediation. My personal experience with the mortgage market has been the opposite, e.g. I can do a costless refinance with the investment of only a 2-3 hours of my time,

          • Joanna Masel

            It is possible that with the bond funds in my retirement account, I might own a mortgage-backed security backed by my very own mortgage. That sounds pretty inefficient to me, I’m pretty sure there is a decent spread. There are many individuals with both mortgages and retirement accounts. If their retirement account included a near-zero-risk option with interest rate equal to their mortgage interest rate, that would be an excellent investment choice for nearly all of them. Again, that points to inefficiency: why not pay down their own debt rather than acquire stakes in the debts of others?

            A full explanation of why I think people underinvest in human capital would need to be subject of a whole second book. But briefly, it comes down to another tension between relative and absolute competitions. A high proportion of our current education system is a costly signalling system a la Spence (in biology, this phenomenon is called the handicap principle). Anything that tips the ratio to create a smaller relative element and a greater absolute one could have a dramatic effect not on the number of years of training, but on the amount of human capital attained during that time.

          • The MBS example is a good one (and one of the reasons I have personally disliked MBS as an investment). Even with that example there could be good reasons for it– like liquidity and diversification, but I am not convinced that financial ignorance isn’t at least one of those reasons.
            I share your intuition with respect to the importance of signaling in education. I take it the crux of your argument is that makes education artificially expensive and thus people underinvest in the parts of education that are actually useful. Could be.

          • Joanna Masel

            Sounds like we have reached mostly agreement here. But for semi-mandatory employment-based retirement accounts with limited choices, it’s not fair to attribute decisions to financial ignorance – while this is likely often true, more sophisticated understanding would not change the fact that the superior option of using the money to prepay a mortgage directly, prior to entering the stock or bond market, is simply not available.

  • Derryl Hermanutz

    Businesses cannot enjoy sales and earn profits unless consumers have money to spend buying what the businesses are producing “for sale”. Consumers get Demand money by earning incomes that are paid out as business costs of producing a Supply of stuff “for sale”. Demand money = Supply cost. The same money that businesses pay out as their cost of producing a Supply, is the Demand money that businesses earn by selling their Supply “for money”.

    It’s a zero sum, break even, money-flow equation, from the macroeconomic perspective. Incomes = Cost Price is an accounting identity, true by the iron laws of arithmetic as applied to numbers with a $ sign in front of them. Putting a $ in front of 100 to make $100, does not alter the arithmetic of the 100. The same 100 is passed from hand to hand, spent and earned and re-spent and re-earned. None of this spending and earning creates any new money or adds to the total quantity of the money supply.

    $100 can be spent and earned and re-spent and re-earned 100 times; to create $10,000 of money spending and $10,000 of money earning. $10000 “worth of” economic value may have been produced, sold, bought and consumed. But nobody produced $10000 “of money”. There is still only $100 “of money” in this system’s money supply.

    Consumer Money Incomes = Producer Money Costs. Producers recover their money costs by selling their Supply for the money, to get their invested money back.

    The $100 “of money” is “spent” by producers and “earned” by consumers. Consumers now “have” the money, and producers have a Supply of stuff for sale. Consumers can then spend all of their income buying the producers’ Supply at Cost Price, and producers will be able to recover all of the money they invested as their costs. But they cannot earn a single nickel of money profit, because production and sales does not “produce” any additional spendable-earnable money.

    For many decades already, government and private sector deficit spending of commercial bank-issued credit money (bank deposits, issued by commercial banks to fund their loans and bond purchases) has been providing the “deficit spending” money that businesses earn as profits. Those deficit spenders are now debtors. And the corporations and workers who earned and saved all the deficit spent money are now rich in money savings.

    But Masel is right. The same $100 of “capital” is all it takes to fund the production-consumption economy. All those saved credits are excess financial capital — the “global savings glut” — that cannot be invested in money-profitable economic production. The Ponzi arithmetic of our zero sum money system is now clearly constraining our value-adding real productive economy.

    In the capital markets, the debtors’ interest-bearing debts are interest-earning “financial assets” that are sold to the savers who earned and now “have” all of the money that debtors borrowed and spent and now “owe”. So a couple of macroeconomic accounting realities become apparent.

    First, if savers do not spend their savings back into the economy where debtors can “earn their deficit spent money back”; then debtors will default on their debt servicing. All those “financial assets” become non-performing debts: uncollectible credits owed by flat broke debtors. Like 1929, and 2008.

    Second, unless debtors continue to borrow and spend evermore new bank credit into the equation, there is no source of new profit-money to earn. Businesses are back to break even cost recovery, assuming earners spend ALL of their incomes buying producer outputs. In a zero sum costs = incomes = sales revenues equation, some businesses can only earn profits at the expense of other business’s money losses.

    But earners are not spending their incomes. Earners are in debt paydown mode, so rather than spend all their income buying what they contributed to producing, they are spending some of their income repaying their past deficit spending. And soon-to-be retirees are saving rather than spending, to pad their retirement nest egg. So businesses are paying out incomes as their costs of producing a Supply for sale, but income earners are not spending that money buying the Supply. Total money sales earnings, and profits, will decline. Money losses — failure to recover even the cost of production — will be increasingly frequent. Businesses will cut costs, which directly cuts incomes, which further reduces sales, in a vicious spiral down to economic depression.

    It’s simple accounting arithmetic that has been clearly understood by macroeconomists of the Irving Fisher school since the 1930s; but is only now being rediscovered by a new generation of macroeconomists whose eyes were opened by their own generation’s monetary system collapse. Collapse is built into the arithmetic of the world’s zero sum commercial bank-issued credit-debt money system, where money and debt are created as linked pairs of assets and liabilities an commercial bank balance sheets. A balance sheet balances to $0. Total Assets must always exactly = Total Liabilities. Which is the very definition of a zero sum equation.

    Earners/savers end up owning all the credits/assets. Borrowers/spenders end up owing all the debts/liabilities. When savers refuse to spend, debtors can’t earn, and the system collapses in debt default that exposes the credits as uncollectible Ponzi delusions of interest-earning financial wealth.

    The solution, as Adair Turner is prominently advocating, is government money-funding, rather than debt-financing, of their deficit spending. Money-funding — government (via their central bank) issuance of their own spendable money — adds net positive $numbers into the equation: additional new money that is not owed as repayable debt by the spender of the money. Turner quotes Milton Friedman’s 1948 paper – A Monetary and Fiscal Framework for Economic Stability — where Friedman flatly states that governments should always issue, never borrow, their deficit-spending money. The additional money makes it arithmetically possible for businesses as a whole to earn money profits, among the proposal’s other macroeconomically literate benefits.

  • Swami

    I found your introductory paragraphs to be odd….

    First, an absolute contest (racing against a certain time) will not usually lead to steadily improving times. It will lead to stagnation slightly faster than the required time. Anything else would be inefficient, hence wasteful.

    Evolution is relative. Antelope are selected based upon their relative speed both with cheetahs and probably more importantly, to other antelope. Relative competition can and does lead to arms races and to improving times up to the point where negative feedback effects offset the self amplifying process (which again does eventually happen, thus again leading longer term to stagnation and no net improvement or progress). Faster antelope effectively helps to create faster cheetahs, solutions effectively create their own problems.

    Again, neither model leads to endless improvement. So I am not sure why you argue that one does and the other doesn’t, in evolution. Perhaps your book explains this in more detail.

    In economics, the situation can be different. But again, it is relative competition which does the work. If I specialize in making shoes, then if I can make shoes relatively better or cheaper than my competitor then I will sell more shoes at higher margins relative to competitors, thus quickly gaining market share and/or the opportunity for more investment. This is a self amplifying process which adds value. When you get billions of people specializing and competing in these relative ways then you create massive value. The broader process is basically a giant complex network of cooperation where people constructively compete among specialists to cooperate better.

    Next you state that in relative competition, fair play does not apply. I beg to differ. Sports, such as the olympics, is a relative competition (Gold is being relatively fastest not absolutely vs a standard) where rules or conventions of fairness are built into the institution. Runners are not allowed to bash competitors on the head and will lose if they attempt to do so. In markets, there are also rules.

    The point I am trying to make is that the distinction isn’t in any way between whether the competition is absolute or relative. And your characterization of relative competition is not accurate in properly functioning institutions. And the term properly functioning in great part references that the rules of competition are on net constructive rather than destructive.

    I think better terms would be constructive and destructive competition, not absolute or relative. Humans can in certain cases create constructive, positive sum competitions. As for evolution, competition is simply rarely constructive for obvious reasons including what is commonly referred to as the problem of cooperation.

    • Joanna Masel

      I admit that my verbal analogies are rather vague and loose. For a far more precise definition of what I meant by those arguable attempts to illustrate the distinction, see my mathematical work on evolution at Yes, most evolution is relative, but not all, or else extinction would not occur, nor would population expansions. Similarly in economics, maybe the shoes really are better, or perhaps they are simply the latest fashion without actually being any better on an objective scale. I agree that correctly applying the distinction in practice is hard work – but important.

  • jake

    Interesting read, I do agree with several points. Too much of the post great recession monetary stimulus had been sitting unproductive, in cash, which is not creating new production or “invested”. This, however, is more due to corporate cash hoarding than individual retirement savings. The largest problem with individualizing personal investment strategies is transaction costs, which only serves to enrich the financial industry. I would also argue the availability of financial capital does not fuel lending any longer (for “investment”), this is a demand fueled situation. Any bank faced with qualified borrowers will lend to those borrowers at anytime. Capital is not needed for this to happen, a bank will worry about reserve requirements later. Any lack of lending for “investment” simply shows the underlying weakness of our global economy at this point. I also disagree that baby boomer retirement will cause such disappropriate “dis-saving” that financial instrument valuations will suffer. Millennials are a larger population group than boomers and will be happily buying those instruments as the boomers sell. Secondly, the boomers have failed to accumulated enough assets, in amazing economic times, to have that impact. The larger problem will be society finding ways to fund their overconsumption once they run out of savings.
    On a personal note, I’m strangely attracted to the author. Maybe there is an underlying biological or evolutionary reason?

  • franciscolopezus

    A bit misconception about how economist think, after all, we favor real investment than secondary market saving, even though the latest is crucial in the process of price discovery (where the imperfect market price might be different from the monetary value of the marginal productivity of the asset. Is a good article albeit based on an incorrect premise regarding economists.

  • Gene

    I found the article interesting for a couple of reasons. It is rare in today’s economic banter to actually see someone acknowledge the distinct difference between saving and investing. The author is absolutely correct to point out the stark difference between the two. I would contend that the problem is not that people choose to save but that they are saving in the same medium that denominates most of the “assets” floating around in the financial ethernet.

    The answer is not to punish savers or try to encourage them to enter the shark tank with professional investors like Warren Buffet. These “passive” savings sloshing around in the vast web of overvalued crap in our stock/bond markets is where the problem lies. Ninety five percent of Joe six-pack “money” passively invested in our markets is ripe meat for the hft algorithms to dine on.

    Somewhere along the line we have forgotten how to save and instead consider the high risk of financial markets in the form of 401K’s or IRA’s as our savings plan. This is high risk investing, not saving.

    The author also makes a good point in identifying the functions of money when she describes the $USD as a fine medium of exchange but a sorry method of storing value long term. Hoarding dollars is a really dumb idea but saving is essential to a healthy economy. I believe one of the biggest problems in our financialized joke of an economic model is mal-investment created (at least in part) by all the passive savings swirling around in the shark tank. A real economy requires a medium of exchange, unit of account ($USD?) on one side and a good means of long term value available for savers. This saving vehicle must be an item that can be hoarded without affecting or restricting economic activity. I wonder what that could be?

  • Overt

    It seems to me that the author is confusing Saving with Speculating. From the article:

    “Saving means forgoing the consumption of goods and services today. Investment means converting this sacrifice into the creation of future wealth.”

    Saving is NOT the problem. The problem is that people take their savings and, rather than invest it in the creation of future wealth, they speculate by buying assets solely for an expectation of appreciation.

    We must disabuse ourself of the notion that buying stock is investing. The investment happened already- back during the public offering- or more directly, when the investment bank funded the offering. When that initial investment took place, the company made the capital investments to somehow pair capital and labor to deliver a new and valuable good or service to the economy. The investment was spent, and money was earned- that was the wealth created.

    The share in that company, however, is just an asset, like a car or gold bar. Certainly, as the company (the investment) develops more wealth, we will see the asset appreciate- but this gets into the pseudo zero-sum game that troubles the author. Whether the stock is held or sold at any point in time, the investment has happened, and the price of stock won’t change that. It may affect future offerings and future investments, but multiple trades of that share don’t change the initial investment.

    At the end of the day, people can (and do) get very rich speculating. But that is because our monetary system is broken. We have removed incentive to loan money by keeping interest rates low. We remove incentive to directly invest- regulations that stymie new business and restrict who can make large capital investments. We are practically forcing people to speculate on real estate and stock appreciation, rather than direct their money to the next business that will improve our economy.