Economic Wisdom to Apply in Your Twenties

Chapter 12

Chapter 1 Section 5 When did frugality become a bad tradition?
"It's your fault, at least in part. You spent too much money as an American consumer. You bought too much or too big a house, took on too much debt, and didn't live within your means. Your lavish lifestyle, It was one of the causes of the worst financial crisis since the Great Depression.

"Right now, you have to do your part to end this crisis. How? By spending. Many of you are suddenly frugal, so take a break. Congress and President Obama are sending you A tax rebate check that encourages you to stimulate the economy. So go out and spend your money, the future of the country depends on your spending."

This famous statement from the New York Times seems quite contradictory.But if John Maynard Keynes, the great economist of the 20th century, was still alive, he would definitely agree.In his "paradox of thrift," Keynes believed that changes in consumption would cause changes in national income in the same direction, and changes in savings would cause changes in national income in the opposite direction.

In the 18th century, Dr. Mandeville of the Netherlands told an interesting story in the book "The Fable of the Bees".A swarm of bees spends a lot of money in pursuit of a luxurious life, and the colony quickly prospers.Later, a person of insight stood up and said: "Brothers, what a waste of resources we are spending so much, it shouldn't be!" The bees thought it was reasonable.As a result, everyone ate less, used less, and spent a lot less immediately.It is also because of this that everyone does not work so hard every day, because they don't have to earn so much!It didn't take long for this group of bees, which had been thriving, to become lifeless and decline day by day.This colony of bees changed their habits, abandoned luxury and advocated frugality, and the result was the decline of the entire bee society.

The "logic of thrift" in the story of bees is similar to Keynes' "paradox of thrift".In layman's terms, the paradox of frugality says that in tough times, an individual's rational behavior (frugality) can be disastrous for the economy as a whole.Since everyone is saving, many frugals will end up out of work.

Maybe you are wondering, hasn't the Chinese nation always advocated "thriftiness" as a virtue?Why is virtue wrong?
Keynes gave a convincing economic explanation for this. He believed that from a microscopic analysis, a family can often become rich if they manage their household diligently, reduce waste, and increase savings; but from a macroscopic analysis, frugality has nothing to do with economic growth. benefit:
Public frugality → total social consumption expenditure decreases → total social commodity sales decrease → manufacturer’s production scale shrinks, unemployment increases → national income decreases, residents’ personal disposable income decreases → total social consumption expenditure decreases...

Such a vicious circle will eventually bring disaster to the country.As Keynes asserted in a radio program in January 1931, thrift would foster a "vicious circle" of poverty, adding that "if you save five shillings, it will put a man out of work for a day".

The paradox of frugality tells us that frugality reduces spending, forcing manufacturers to cut output and lay off workers, thereby reducing income and ultimately saving.Saving paves the way for individuals to get rich, but if the whole country saves more, it will make the whole society depressed and impoverished.

This is the difference between economists and sociologists.Sociologists are more likely to encourage you to stick to the virtues of thrift and thrift, but economists rationally point out the relationship between thrift and social economy from the perspective of optimal allocation of resources and maximization of social interests, especially when the aftermath of the financial crisis is still unresolved. At present, in order to stimulate the economy, it is even more necessary to stimulate consumption.

Wisdom Trivia: Frugality, Spending, Going Left or Right

One is that "excessive throttling" seems to have accumulated a lot of wealth, but in fact it ignores "open source", thus losing the possibility of obtaining more wealth.Relying on careful budgeting and saving money on food and clothing can only achieve a state of small wealth and peace, and this kind of comfort is sometimes at the expense of quality of life.

Second, frugality may make people feel complacent about the status quo and have no motivation to invest and manage money.When you are satisfied with the current consumption level, you will naturally think, why bother to earn more money.

The third is the repeated consumption of some daily necessities, which seem to save money every time, but when added together, it is an astonishing waste.Many people have had Walkmans or MP3 players, and earphones are very consumable. To save money, we mostly buy cheap goods from small stalls.As a result, the earphones are more wearable, disconnecting frequently and having to replace the earphones after a while.After a few years, you spend more money on cheap headphones than on branded headphones, and you have to endure the situation that only one earphone rings or the sound effect is not good.There are still many things like earphone consumption in life. It seems to be economical, but it is actually harmful.

Fourth, frugality in consumption often leads to overconservatism and prudence in investment, and if there is not even one active financial product in one's investment portfolio, the possibility of expecting to obtain high returns is very small.Just like a football game, if one side is all defenders, no matter how hard you try, the best ending will be a draw.If you want to win the opponent, you can only count on the opponent's player to kick the wrong goal.

(End of this chapter)