Wednesday, July 13, 2016

Richard Koo — “Paradox of thrift was the norm before industrial revolution”

Rather than "paradox of thrift," I would say that it was the absence of credit owing to lack of investment opportunity with an expectation of repayment. More liberal credit extension made higher growth possible but brought financial cycles with it. 

Koo recognizes this but chooses to call it the result of the paradox of thrift. That seems odd to me.

Real-World Economics Review Blog
“Paradox of thrift was the norm before industrial revolution” 
Richard Koo


Random said...

Have the government invest? In what?

BTW, Krugman is still not admitting he is wrong on trade:

Tom Hickey said...

The basic idea behind MMT is for the government to offset excessive private sector saving desire so as to maintain available real resources in use.

Calgacus said...

Random:BTW, Krugman is still not admitting he is wrong on trade:

Why should he? I don't know what else he has said, but that article basically presents the MMT / Functional Finance position: "it all depends on offsetting policies". If & when sanity prevails (which he is rather overoptimistic about, true) "a first cut at the impact on overall employment is zero". The only real problem with "free trade" is the usual irrational responses "offsetting (?) policies" to it, based on careless thinking, although of course the carelessness has the usual bias towards making the rich richer.

That's a very good way of putting it Tom, better than Koo's, which I had problems with. That's basically the English early advantage in modern banking, in capitalism, the Industrial Revolution, in war. Money that was simultaneously harder (better "expectation of repayment" due to the state's tax power) and softer (more liberal credit extension, eventually to capitalists, by banking/merchants holding the state's debt).

Gary Hart said...

You guys don't really equate 2 million manufacturing jobs with 2 million service jobs do you?

Magpie said...

Richard Koo writes:

"Looking further back in history, however, we can see that economic stagnation due to a lack of borrowers was much closer to the norm for thousands of years before the industrial revolution in the 1760s. As shown in Exhibit 1, economic growth had been negligible for centuries before that. There were probably many who tried to save during this period of essentially zero growth, because human beings have always been worried about an uncertain future. Preparing for old age and the proverbial rainy day is an ingrained aspect of human nature. But if it is only human to save, the centuries-long economic stagnation prior to the industrial revolution must have been due to a lack of borrowers.

"For the private sector to be borrowing money, it must have a clean balance sheet and promising investment opportunities. After all, private-sector businesses will not borrow unless they are sure they can pay back the debt with interest."

I wonder if Richard Koo has ever considered that our species, Homo sapiens, has existed for about 200 thousand years, most of that time without any real notion of private, individual, property (notion which itself has evolved over time and is still evolving), let alone balance sheets, investment opportunities, savings, banks.

It never ceases to amase me the capacity otherwise smart people have to write so much bullshit.

Ignacio said...

Magpie tell that to Matt Franko who believes that every single generation expected "risk free" interest income on financial savings, something that was not even common before the second half of XX century and just in well developed nations (don't say pre-XIX/XVIII century even for most elites).

The way personal experience skews AND limits people's views (and solutions) is mind-boggling.

In any case, most borrowing is about paying for housing mortgages, that's where the bulk faucet of private credit comes from. With limits to housing bubbles and population growth those pop. Business only lag behind the household sector, which must be the primary driver of credit. the only reason business, temporarily, drive credit up is to transfer household debt from the top income earners (directives of mid/large corporations and stockholders) to the corporate balance sheet thought indirect means when rate of profit is falling apart for their business, to clean up their own personal balance sheets and loot the companies before they are affected by decreasing income stream (so, inflate results every way possible, realise stock options, cash in, increase corporate bonuses etc. all are ways to leverage corporate power to build up personal wealth and transfer wealth from corporations to household sector, which is why many of the non-large cap corporations have been building up corporate debt bubble lately).

Kaivey said...

I'm working class and was dead poor as a child. My mum bought me a pair of plastic shoes once because they were the cheapest in the shop. I hated them and they wore out in no time - thank god. She also said that I stopped us from starving in the summer because of all the scrumptying I used to do.

As a result of my childhood I have a lot in common with traditional conservatives. Apart from getting a mortgage I have never borrowed money in my entire life. I would just save up instead, even if it takes years. I'm not a risk taker with money either, I just stick it somewhere safe.

Gary Hart said...

Kaivey: I'm with you when it comes to debt. I am 68 and I was in debt a few times back in my early 20's. I learned how expensive debt is and quit it. A friend argued to me one time that if everyone was like me that no one would have anything but I don't agree. I say that if everyone was like me we could all have more because the bankers would be getting a huge chuck of every transaction. I say that anytime it is possible a person should save as if he is making payments and buy when he has the cash.

Magpie said...


I'm just the opposite of you. I started out as a middle-, upper-middleclass kid. I used to believe in all that self-serving crap those idiots believe. And I would have kept on believing that, too, if life had not taught me otherwise.

Poetic justice, you might say.

That's why I despise those people so much: I know them. I was like them. Each and everyone of us full of shit.

You have nothing to be ashamed. I and all those cretins on the other hand...


In a way, I guess those people interpret "The Flintstones" not as a comedy, but as a natural history documentary, a la Sir David Attenborough.

Ralph Musgrave said...

David Hume, writing about 250 years ago, noted the depressing effect that lack of money had on an economy. I think that's in his essay "Of Money".

Joe said...

I don't see how credit cycles aren't a paradox of thrift. After borrowing, I have to run a personal surplus in order to pay it back. If, simultaneously, too many people cut back their spending to try to pay back their loans, well viola, you have the paradox of thift. Everything comes back to the sectoral balances, to earn a dollar someone else has to spend a dollar. Cut back your spending, you cut someone else's income.

Tom Hickey said...

I don't see how credit cycles aren't a paradox of thrift.

Koo is taking about the period pre-1500 in Europe, at which time modern finance began to be developed, in comparison to the ahistorical pattern of exponential growth subsequently. Were there credit cycles before then? Did they result from net saving and under-investment due to individual preference for saving that adversely affected the system?

I don't see this arising prior to the advent of modern finance, e.g., in Renaissance Venice.

Looks to me like he is comparing apples to oranges.

The problem of constant low growth prior to then doesn't seem to me to be best accounted for by the paradox of thrift.

Magpie said...

Shocking as it may sound to the English, human history did not begin with Hume.

History is -- at most -- 5-6 thousand years long. It starts with the introduction of writing, about 3,500 BC in Sumer. Koo may be surprised by this, but on the Sixth Day God forgot to create writing.

That period of between 150 to 195 thousand years from the first appearance of humanity until the invention of writing is called Prehistory.

During those 150 to 195 thousand years of Prehistory no accounting whatsoever was possible: accounting requires writing and numbering.

And there wasn't that much to account for, anyway. Land was not owned by anybody: largely humanity was nomadic hunter-gatherers.

Balance sheets require not only accounting, but double-entry accounting. Luca Pacioli (1447-1517) systematised accounting: before the 15th century there were no "balance sheets": Romans, Egyptians, Chinese, Hindus, Greeks, Mesopotamians, Babylonians, Phoenicians, Carthaginians, Assyrians, Persians, had no balance sheets. (That is another thing God forgot to create on the Sixth Day).

Even after Pacioli, there were no balance sheets in the Inca Empire, or among the Aztecs or Maya.