Truck and Barter

Comments

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Brad DeLon wrote:

As people try to save more, they try to put more money into banks which make loans to people seeking to buy banana plantations. Less money is spent buying bananas--banana inventories rot and people feel poor as incomes fall. More money is spent buying banana plantations--the prices of banana plantations rise. The owners of the banana plantations feel richer, and so they step up their purchases of bananas, and the economy recovers.

How long does this process take? Ah, that is the question...

-- March 5, 2006 1:47 AM ∞

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Paul wrote:

how would it affect the interest rates?

-- March 5, 2006 2:59 AM ∞

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Steve Hashim wrote:

Start exporting bananas and use the profits from exported goods to produce a good that is demanded.

-- March 5, 2006 4:42 AM ∞

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Steve Hashim wrote:

Are there financial institutions in the community? If so, the savings should cause bond prices to rise and interest rates to fall. This would create more liquidity for investment from financial institutions. This liquidity could be used to invest in the production of a demanded food. Through market forces jobs, profits and competition would be created in the market for the new food and the banana industry would ultimately disappear. Anytime investment is made it is necessary for the financial intermediaries to act as an intermediary. The only way for money to continue growth is for the bank to act as a borrower/lender. As savings begin to grow and the demand for bananas begins to fall, there must be a shift in investment to a profitable market. To sum it up, this society should make sure the financial intermediaries are playing their role in understanding the drop in demand and making the decision of shifting investment towards production of a demanded good.

-- March 5, 2006 5:09 AM ∞

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Don Lloyd wrote:

What would happen if a community that only produces bananas decides to save more? The same number of bananas is produced, but people spend less money on bananas. Prices fall, profits turn to losses, workers are laid off, income drops, and even fewer bananas are sold. Eventually, the community starves to death. How can you resolve Keynes’s dilemma?

The losses will only be temporary if government does not prop up the marginal producers who should leave the business to more efficient and inventive producers who can produce more bananas more cheaply every year. Standards of living will rise and even if no other products can be produced, then the service sector can grow.

Regards, Don

-- March 5, 2006 9:37 AM ∞

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James C.W. Ahiakpor wrote:

Keynes's quote hides the fact that he is here using saving to mean something else, hoarding, rather than what the classics or (most) ordinary people use the term to mean, namely, the commitment of one's non-consumed income to purchase interest- or dividend-earning assets, such as bank deposits, bonds, and stocks. This is how he could confidently declare in 1938 (Economic Journal) that "Saving has no special efficacy as compared with consumption, in releasing cash and restoring liquidity." This declaration follows after his contemporaries, especially Dennis Robertson, had criticized his claims about saving being bad for investment and the economy in his 1937 (Economic Journal) statement: "The investment market can become congested through the shortage of cash. It can never become congested throught the shortage of saving. This is the most fundamental of my conclusions within this field."

Thus, when one recognizes Keynes's confusion about the working of a monetary economy conveyed in his banana economy claim, one simply needs to explain that confusion rather than spend much time analyzing it. So, in the first place, there must be other things being produced besides bananas, or else the producers must be going naked to their farms and working only with their bare hands. They would also be sleeping in the open space, and bananas would be the only thing they would eat. And we can go on extending the implausible implications of Keynes's analogy.

But in a realistic economic setting, if households cut back from purchasing bananas and saved their incomes (in financial institutions), more funds would be available for borrowing by those who produce banana bread, banana puree, banana fritters, and the numerous other things that can be done with bananas not consumed by households.

Keynes gave his scenario of the banana economy to illustrate his mistaken notion that savings retard economic growth -- the paradox of thrift proposition -- contrary to the classical explanation that savings drives an economy's growth. See the clarification of his misinterpretation of the classical theory of growth in my 1995 article, "A Paradox of Thrift or Keynes's Misinterpretation of Saving in the Classical Theory of Growth?" (Southern Economic Journal) or chapter 9 in Classical Macroceconomics: Some Modern Variations and Distortions (Routledge 2003). Too bad many economists still get stuck on Keynes's changed definitions of economic concepts that puzzled him, leading to several of his unhelpful propositions that continue to plague modern macroeconomic analysis.

James Ahiakpor

-- March 5, 2006 4:47 PM ∞

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Don wrote:

In this context, investment is planting another banana tree. Any financial system would just facilitate the transformation of savings into investment. Any laid-off banana pickers would be hired as banana tree planters.

Moreover, while 'profits turn to losses', this isn't necessarily the case in real terms, since the price level is falling.

-- March 8, 2006 6:17 AM ∞

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Juliano Camargo wrote:

If this community is isolated and they only produce bananas and nothing else I would say their money is... bananas. There is no emergence of money in a single commodity economy.

All agents are banana-producers. There is no specialization, no trade, any decisions on production, consumption and saving do not interfere on the market, since there is no market!

-- March 8, 2006 7:07 AM ∞

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Paul wrote:

see also Kevin's post
http://truckandbarter.com/mt/archives/2006/03/bananas_and_pot.html

-- March 8, 2006 11:49 PM ∞

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Alex Bowman wrote:

People would get slimmer. Why did their banana consumption decrease? You'd get sick of only eating bananas all day too.

-- April 20, 2008 10:48 PM ∞

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Mattia Landoni wrote:

If there is only one good (bananas), then there is no need for money as there is nothing to exchange. So the only way to save is to stock up on bananas. And if people have bananas rotting at home and they don't want to eat them, then they were producing too many in the first place. Soon, the economy will shrink to a point where people have the optimal quantity of bananas and more leisure than before. Bananas and leisure are complementary goods. Mmmhh... bananas.

-- November 11, 2008 6:26 PM ∞