Savings - part 3

On the savings front, I think there are two fundamental types of savings. One type of savings is to use savings to fund new projects that could provide better value to society. The other type of savings is related to saving for retirement - underconsume now to be able to consume in old age when we won't have the ability to work. Let's take Peter Schiff's fish example to develop this thought further. Say there are 10 working people catching fish and another 10 working people making clothes. Everybody needs one fish to survive daily. The fish catchers can catch two fish daily and so they eat one fish and trade the other fish to buy clothes. Everybody would like to put on a new cloth everyday and the clothes making people can make 2 clothes each day and so they use one cloth and trade the other cloth to buy fish. In this simple economy, all the 20 working people eat one fish and put on a new cloth every day. All the people have to walk now to get to the next village and it would be nice if they had a faster mode of transportation. All the 20 people are working now and so don't have any time to devote to other stuff. The fish catchers could decide to underconsume on the cloth and decide to wear them for two days instead of one. Two things happen by this decision - the fish catchers will have an extra 5 fish per day in total due to reduction in trade. This underconsumption will also drop the trade demand for the cloth to 5 per day from 10 per day initially. Five clothes makers can satisfy this demand by working full time - 1 cloth for them and 1 cloth for fishmakers. The other five cloth makers only need to work half-time - just 1 cloth for them. They have the other half a day free and they need to do something to feed themselves. Here is where the fish makers use their fish savings - they would provide 1 fish to each of the 5 half-time clothes makers to work on producing a bicycle. It is a risky project - it could fail without producing a bicycle but if it did succeed, it would free a lot of time for everybody to shuttle between the neighbouring villages and they could trade more with those neighbours who would become more accessible. But the fish makers are using their savings to try to build something better for the society and add value to the societal standard of living. By under-consuming on an existing item, they are able to use their savings to channel resources (the five clothes makers) to work on a new value adding project. This is one of the fundamental use of Savings to drive value. If the 5 clothes makers didn't do much for the loaned fish, the Savings would have gone waste. I will talk about the retirement aspect of savings in my next part of the blog.