A skill testing question in economics from 1886

The mail has just brought me my own copy of Simon Newcomb’s great 1886 economics text, Principles of Political Economy. Just for fun, I offer you one of the questions at the end of one of the chapters that no modern student of economics ever gets asked or would likely have a ready answer to.

Trace the economic effect of the frugal New England population putting their money into savings banks. What do savings really consist in?

Even the notion of a frugal population is pretty antique. But all the difference in the world lies in the answer to that question.

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25 Responses to A skill testing question in economics from 1886

  1. Robert Blair

    Well Steve, I think Keynes won the argument a long time ago.

    Wrong he may be, but those in power cannot resist his magical siren call. I’m afraid it will always be “All the way with LBJ”.

    Those rare few governments who try to implement a more rational system get tipped out, sooner (Abbot) or later (Howard). Same elsewhere – Chile, Canada, Estonia.

    Howard was a genuine one-off: his “small target” tactic worked to shield him from the kind of shit-storm Abbot faces for his truly weenie efforts.
    But the ruling class are awake to that dodge now – it won’t work again.

    TA’s best chance is go the DD and then boots’n'all if he gets both houses. Otherwise walk away and let Australia enjoy what it voted for.

  2. is this a portfolio rebalancing or a reduction in consumption?

  3. Splatacrobat

    Savings should be an asset but all too often they are used as a provision for doubtful debt. These days having savings only serve to make large debt doubtful and small debt managable.

  4. A Lurker

    Trace the economic effect of the frugal New England population putting their money into savings banks. What do savings really consist in?

    I’m not an economist, however if I were a householder of that era I’d not trust the banks one iota, and instead use my savings to improve the property, pay off any debts owing, and with money over, negotiate with Old Farmer Herson who lives next door and is constantly laid up with gout to buy a nice little adjoining field from him so I can purchase a few milk cows and start up a dairy.

    The economic effect would be hard work on my part, resulting in wealth flowing into my household from sales of milk, cream, butter and cheese.

  5. H B Bear

    Clearly savings reduce consumption and aggregate demand. Presumably the people of New England did not prosper for their cautionary behaviour.

  6. stackja

    My answer: Passbook account that wages were put into every pay day. A little amount was spent on food and clothing and transport. Bills were paid on time. Another little amount was spent on going to entertainment.

  7. RMR

    A delayed increase in direct benefits (consumption) in anticipation of either removing future problems (risk) or investing for future growth (longer term consumption).

    Not sure what access to other sources of capital the early New Englanders had, so that plus puritanism probably encouraged a level of self-sufficiency and independence we don’t see often today.

  8. Infidel Tiger

    Howard was a genuine one-off: his “small target” tactic worked to shield him from the kind of shit-storm Abbot faces for his truly weenie efforts.
    But the ruling class are awake to that dodge now – it won’t work again.

    Howard may have adopted a “small target” strategy but he was to small government what fettuccine carbonara is to a small waistline.

  9. H B Bear

    The “small target” strategy is used in opposition, not government. In government, Howard showered pork on people like a land mine in a piggery.

  10. H B Bear

    Even the notion of a frugal population is pretty antique.

    Not in Asia. Although the Chinese are engaged in the greatest experiment the world has ever seen regarding non-market allocated capital spending.

  11. wreckage

    Look, every economist knows that a country where everyone owns their house and has a few thou’ in the bank is pretty much fucked. A nation where everyone is in debt to the eyeballs, has maxed out the credit card, taken out a second mortgage to buy more take-away dinners and has filled the garage with TVs they don’t want on GE Money is thriving, booming, really going great places as fast as can be.

    The science is settled. The consensus is in. Stop being deniers! DENIERS!

    You know what caused the GFC? AUSTERITY DID. If everyone had spent less time scrimping and saving, and more time propping up their lifestyle with shaky-as-an-epileptic-meth-addict credit, the GFC would never have happened!

  12. His Omniscience

    The question is wrong, or at least of little importance, as Kates would realise if he had any appreciation of the true economic drivers of economies today.

  13. Savings would have been largely kept as real bills at that stage, bought at discount from the market and maturing to full value within a limited time period. Thus they formed part of the system that provided both flexibility and scalability to the marketplace, allowing the chain of production to be funded by the purchase of goods at retail.

    It was quite a neat system that meant that all real bills were cleared up the production chain on the final sale of the produced items, allowing the amount of currency in circulation to scale effortlessly with the depth of the production chain.

    Of course the RBA does this these days by allowing currency to be pushed and pulled into the market as required — interestingly there are big annual flexes of the system (demands for additional cash) at both Christmas and Easter.

  14. Robert Blair

    IT:

    was to small government what fettuccine carbonara is to a small waistline.

    That may be so IT – do you have a matching comparison for Rudd-Gillard-Rudd then?

  15. Robert Blair

    H B Bear:

    Chinese are engaged in the greatest experiment the world has ever seen

    And a very interesting one. How long can they keep it up? If China was a security and I tried short-selling I would go bust a long time before they did.

    I can’t believe they can go on forever. But I can believe they can keep it up for another 5 or 10 years.

    The thinking person should have at least part of their stash in bullion, bitcoins and whisky before the inevitable happens.

  16. Robert Blair

    H B Bear:

    Note the parallel experiment: India.

    Starting from a similar point India has been held back by the rampant corruption inevitable in a heavily multi-cultural nation.

    Simplified:
    more multicultural > lower community trust > greater regulation > lower trust in Government > even more regulation > more opportunity for graft (to bend onerous regulations > lower trust in government > more regulation > recurse until collapse

    China seems to have benefited by being a relatively mono-cultural (and not shy about it) country, and by the government NOT being hamstrung by electoral pandering when deciding economic policy.

  17. Peewhit

    The Chinese are trying to lessen the corruption. If you can believe the CIA factbook then China has a savings rate of 50% of GDP. So despite all the talk of the debt problem there, the savings rate takes care of it quite easily. One of the benefits of having a Communist government in the past has been a flattening of social classes, especially compared to India. My older son tells me that the belief in re-incarnation in India tends to mean that there is a belief that you deserve to be in that class, as a punishment or reward for the last incarnation you had. At least in China the risk reward result is to do with the parents you have. At present China is less regulated and more capitalist than we are. The Chinese have been hard traders for a long time now, and they show no signs of changing. Another point is that when you shuffle through 1.3 billion people for the best politicians you are likely to find some really good ones, with charisma and sense. Our national politicians would not even reach local council level in China.

  18. H B Bear

    So despite all the talk of the debt problem there, the savings rate takes care of it quite easily.

    That simply looks at the funding side of the equation. Unless China builds productive things – railways, housing, mines, factories and so on to employ the hundreds of millions of people moving to the cities and creates self-sustaining, wealth-driven internal consumer demand the whole thing will fall over. Japan has shown simply constructing more stuff isn’t enough. Ghost cities and bridges to nowhere doesn’t fill you with optimism.

  19. stackja

    Liberty Quotes
    The pseudo-liberals monopolize the teaching jobs at many universities. Only men who agree with them are appointed as teachers and instructors of the social sciences, and only textbooks supporting their ideas are used.
    — Ludwig von Mises

  20. Alfonso

    Hee, hee….

    Savings is just money that hasn’t been geared yet.
    A transitory state.

  21. Tel

    So what was the answer? What did those frugal people put their savings into?

  22. Yohan

    That book by Simon Newcomb in 1885 seems very good just from a quick perusal of the online PDF version.

    It always strikes me how technically and logically sound much of classical economics is from the 19th century, before the Keynesian revolution swept the boards.

  23. Steve Kates

    Yohan. The amazing part of getting into this classical literature is how sound it is. Newcomb’s book is the last of the classical writers before the individualist rot of the marginal revolution swamped economic theory. But you can still see even after that the tremendous influence of John Stuart Mill in Henry Clay writing in 1916 and even Allyn Young as late as 1927. They and others like them were supply-side economists as we would describe them today. I am very pleased that you have actually had a look at what Newcomb wrote.

  24. Sam Oldfield

    Well it’s 1886 so we are still dealing with “circulating capital” so I am going to say it consists of loans made to others.

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