The rise of hedonistic economics

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July 1st, 2010 Rajiv Shastri

It’s been a while since my last post and its not because I’ve been busy otherwise. I’ve been working on a currency model that has the potential to resolve some of the global imbalances that exist. But like with any model, its throws up new problems and ultimately, one has to make a choice between the existing problems and new ones.

I have never seen a model or an economic school of thought that solves all problems without creating new ones. If that were possible, we would all be in economic utopia. There are times when the Libertarian model seems to work better and times when substantial benefits are to be had by following Keynes, and these aren’t the only choices available. In the end, economic decision making boils down to making a choice between immediate problems and future problems. Its the difference between being hedonistic and ascetic.

If one looks at individual decisions as well, there are obvious differences to be seen. There are consumption-oriented individuals and savings-oriented individuals. Hedonistic & ascetic respectively. A nation’s orientation is derived from its citizens and consequently, there are nations which are either hedonistic or ascetic. With the demise of communism (or at least its most powerful manifestations) the economic war has now changed. The war is now between Hedonists and Ascetics.

The choice between the two isn’t purely economic in nature. A nation can be capitalistic and still be ascetic, with Germany being a prime example. It is also possible to be socialistic and hedonistic, with Greece leading the charge here. The choice is cultural and affects almost all aspects of life. But it is economics where this divide becomes the most apparent and Gross National Savings is an indicator one can look at to determine this.

As things stand, Greece has the lowest Gross National Savings (GNS) rate in the world. It is followed by Portugal, the US and the UK amongst others.  Data for Greece and Portugal isn’t easily available, but estimated savings for 2010 are 6 per cent and 7.5 per cent of GDP respectively. For the 10 year period 2000-2009, average GNS rate for the world has been close to 22.50 per cent, the US and UK have managed an average of just over 14.75 per cent. The difference of close to 7.75 per cent grew to over 9.50 per cent in the case of the US and 8.9 per cent for the UK over the last five years. These nations can very easily be classified as the most hedonistic in the world.

Looking at the Euro Area in general, the average GNS rate over the last 10 years has been close to 21.25 per cent, lower than the global average by just over 1.25 per cent. For Germany these numbers are 22 per cent and 0.50 per cent respectively. The Euro Area (with the exception of Greece & Portugal) along with Canada  are ascetic in absolute terms, but on the margin in relative terms.

Turning to the  Middle East, Asia and the Commonwealth of Independent States. Savings rates in these regions has always been higher than the global mean, averaging 35.50 per cent, 31.85 per cent & 28.90 per cent respectively. These regions can be easily classified as ascetic, both in absolute and relative terms.

Net National Savings reinforce this point with Greece, Portugal and the US all in negative territory. The UK is marginally positive, but the recent budget with it’s much vaunted austerity measures may be the first step towards correcting this. Almost every other country in the world saves a portion of its Gross National Income for the future. Time series data for Net National Savings isn’t easily available as well for all nations, but occasional data indicates the above equally clearly.

All of us are born hedonists. As babies and children, we tend not to think about the future impact of our need for instant gratification. As we grow, we begin to worry about the future impact of our decisions and this is reflected in our actions, words and overall approach to life. Juxtaposing this to the global stage, it would be fair to conclude that today’s hedonistic nations are the children of the world. Like any child, they want their problems to go away now, regardless of whether this hurts their future. And now these children want the adults to follow their way of life. And are going to great lengths to ensure this.

The battleground for the recent war of words between New Keynesians like Paul Krugman, Mark Thoma, Martin Wolf etc) and “Austerians” (almost everyone else) seems to be continuation of the fiscal stimulus undertaken by most nations to tackle the recent crisis. But scratch the surface and one can clearly see that the war is, in effect, between Hedonists and Ascetics. New Keynesian economists believe that the only way out of the current mess the US finds itself in (unemployment @ 10 per cent-plus) is to continue spending money the government doesn’t have in the hope that it’ll create enough jobs and pay for itself going forward. The fact that this kind of profligacy added to the intensity of the recent crisis is but a matter of detail. And the possibility that this may result in a bigger mess is something that they will face in the future. The battle cry is to make things better now, no matter how it hurts the future.

Much like a parent giving in to a child’s tantrums, the actions of global leaders are being guided by this noise. And as is normal, the adults will pay for this as well.

The blogger is an independent macro-economic consultant and has been a part of the debt market for over 15 years. He also blogs at www.rajivshastri.com. Views are personal

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2 Responses to “The rise of hedonistic economics”

  1. pravin Says:

    people may be hedons or ascetics.the nation is a collective and only will a manipulating force like the govt be able to make the nation collectively hedonistic or ascetic.
    the keynesians look at everything as an aggreggate.libertarians look at individual actions.no wonder the keynesian recommendations are all about the manipulator (govt) doing more manipulation.
    the libertarian position is,let it be -get out of the way

  2. Vijay Says:

    Well said. I have thought this is also true for the go for broke style of corporate management. Contrast say Enron with a conservative utility. That said I think this obsession on growth at all costs mentality has lead to a near extinction of the conservative manger almost by “natural selection”. (And perhaps that in itself is a result of the conservative business mind set domination for a long time before that??)

    Maybe what was true the Corporate perhaps in the aggregate gets reflected in the nation. And as you correctly say that is in turn reflective of the populace mindset.

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