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Excellent.

"You live, you win, because you reap the benefits of your thrift; you die, you lose, because you sacrificed enjoyment for no good reason."

The benefits of thrift are not limited to deferred consumption. Personally, I prize "freedom from worry" as the most valuable product purchased with my savings. It lets me act with impunity, take risks, give bad employers the finger, and allows me a great degree of resilience when personal initiatives sometimes fail. It doesn't even matter that its value is steadily eroded by inflation - that is the cost I gladly pay for my freedom.

This may explain cultural norms for high savings in China. Religious institutions were always heavily regulated by the government for millennia to prevent competing for political power, so monasteries and nunneries tend to be low-income operations based heavily on donations and some substenance agriculture. They certainly didn't have the power to tithe anyone, and they do operate some charity work but I doubt anyone really factors in those institutions when considering lifetime income.

Chinese culture, probably like other non-Western cultures, rely on familial (mostly intergenerational) income transfers for consumption smoothing. The norms that evolve from familial systems encourage saving because the system smooths individual consumption across time, but the income shocks are highly correlated across individuals: most relatives live too close to each other for perfect risk diversification so they still need something put away for the bad times.

reason - thank you.

broadstrokes: If you can achieve freedom from worry by donating 10% of your income to the church rather than saving enough to cover off the worst-case scenario yourself, aren't you better off? Especially if the probability of living until senility strikes is low, as historically it has been. Also the church's insurance policy pays off even if you die young - heaven, eternal life, etc.

Kelvin, "Religious institutions were always heavily regulated by the government for millennia to prevent competing for political power" That's fascinating, thanks.

I think that, historically, the possibilities for familial smoothing of consumption shocks were different in China and northern Europe because of differences in population density, type of agriculture, weather, etc. It's something that I've been puzzling over for a while. My colleague Ingela Alger has a recent paper about this.

I think there's no question that, in the past, people "saved", it's just that such savings took on different forms than what we understand as savings. Obviously, they didn't put cash in the bank earning 0.5%. However, in an agrarian economy, short-term savings in kind would have been a neccesity (i.e., saving in fall and borrowing in the winter). And, for those willing to take on more risk, medium-term savings might take the form of an invesment in chickens, pigs or a cow (a riskier proposition, given that they might die or be stolen).

And, even in the absence of effective institutions for saving (i.e., banks), there would have been long-term, and relatively secure, savings in the form of jewellery (both for men and woman), tools, armour/weapons, iron pots, spinning wheels, etc, (i.e., durable goods which would retain their value and which could be sold if need be). Much of what, nowawdays, we might think of as conspicuous consumption (investing in jewellery, consumer durables, etc) would have been, back in the day, an (imperfect) store of wealth against leaner times. Moreover, to the extent that these items were useful (i.e., tools, weapons, pots, etc.) they produced a "yield" for savers.

All of which is a round-about way of saying, that there may well be a shortage of evidence that people saved money (and why would they, it produces no yield and is vulnerable to being lost, stolen, forged or debased), but I think it's hard to say that people, back in the day, didn't save. If you accept the identity that savings=investments, the historical record of investments by even the poorest of people in productive goods neccesary implies that they saved.

Frances: "In 1810, world life expectancy was less than 40 years"

Indeed, world life expectancy in 1800 would have been significantly less than 40 years, given that the life expectancy in the wealthiest and healthiest economies (not neccesarily the same) in 1800 was in the mid-30's. For most of the world, the life expectancy at birth would have been mid-to-high 20's (depending on your source), not far off where it had been for the previous millenia. It is a semi-comforting fact to know that people in the poorest, most god-forsaken, countries in the world today live longer (though not neccesarily better) than the people in the richest countries 200 years ago.

Bob, click on that youtube video link in the first para of the post. You won't be disappointed. It shows *really* dramatically the increase in life expectancy over the past 200 years. One thing that's interesting is that in 1810, apart from England and the Netherlands, which were outliers in the life expectancy department, just about everywhere was poor and sick.

Bob: "And, even in the absence of effective institutions for saving (i.e., banks), there would have been long-term, and relatively secure, savings in the form of jewellery (both for men and woman), tools, armour/weapons, iron pots, spinning wheels, etc, (i.e., durable goods which would retain their value and which could be sold if need be). Much of what, nowawdays, we might think of as conspicuous consumption (investing in jewellery, consumer durables, etc) would have been, back in the day, an (imperfect) store of wealth against leaner times."

Interestingly, when Nick and I were discussing this topic off-line, I said to him "just think about cast iron frying pans." I was arguing that the substitution of teflon frying pans, that last a few years, for cast iron frying pans that will last a generation or so, is a metaphor for the cause of low savings.

This was the case in pre-1960s Québec, to a formidable extent. My grandfather was the church equivalent of a social welfare administrator for a diocese on the South shore of Montreal. He would manage healthcare, poverty-relief (welfare) and all sorts of social programs. The budgets for this were sizeable at the time.

The province's takeover of social services in the 1960s coincided with the phenomenal decline in church attendance. It wouldn't surprise me to find that those who didn't attend church every Sunday were punished by receiving inferior services...

"cast iron frying pans that will last a generation or so"

OT: I blasted my Le Creuset enameled cast iron pan empty on high heat for 20 minutes or so (distracted by the 3 year old). It's still useable but not as good as it was. A teflon pan would have been a molten pile of slag.

"But is any social institution is big enough and strong enough to substitute for individuals' lack of savings today?"

Isn't that backwards? I mean, I, as an individual, can save money and as long as nobody else is doing so, there will be no problem. But how can the aggregate of individual savings be big and strong enough to substitute for future real production unless it is specifically invested in a way that generates that future production? Sure, a cast-iron frying pan will still fry things 20 years from now, but how does wearing gold jewelry help?

One way of interpreting the European situation is that Germany, as a society, is trying to save for retirement. In aggregate, this can only be done by establishing claims against the future production of other societies. But societies are not like individuals, whose life story charts a hump-shaped financial trajectory. There is no particular reason to believe that a society that needs to buy real production on credit today will have a surplus of real production tomorrow, and some of Germany's claims appear to be highly risky.

In a historical context, life expectancy at birth isn't a very helpful number. What you should be interested in is life expectancy at age 15 (or so, maybe as young as 12). The age at which someone might be making the save/spend choice. Much higher child mortality rates artificially lowers the life expectancy at birth, and includes many, many people who will never be faced with a save/spend decision.

"But is any social institution is big enough and strong enough to substitute for individuals' lack of savings today?"
I think it's clear that there's no non-governmental institution that can substitute for individuals' lack of savings. But thankfully, the government is doing a pretty good job of it, and maybe that's why outside institutions aren't as strong as they once were.

The combination of CPP, OAS and GIS make it pretty much impossible to be poor (in an absolute sense...you may still be much poorer than your neighbours) in a Canadian retirement. EI also helps buffer the lack of savings against bumps along the way.

Phil Koop - Yes. Each individual can save for hard times by collecting gold bracelets and then selling them if need be; if the entire world tries that, it doesn't work, because all that happens is the price of gold goes down.

Everything boils down to: what is the nature of the claim that the old have on the production of the young. This is rarely recognized in policy discussions, but is the only issue that matters.

Patrick, the Le Creuset is also healthier for your 3 year old - I switched to cast iron when trying to find ways to increase the iron in my family's diet(living entirely on iron-rich chocolate not being a healthy option).

Guillaume - that's fascinating. I wouldn't be surprised either.

I was going to raise this point, but Neil beat me to it. In the context of savings, life expectancy at birth is not a very interesting statistic because in many periods the mortality rate before savings can begin is so strong. Consider, for instance, this model of Roman life expectancy, in which survival to age 5 raises the at-birth expectancy from 25 to 48: http://www.utexas.edu/depts/classics/documents/Life.html.

Phil, Neil - whether life expectancy is 25 at birth or 48 at age 5 doesn't really make any difference to the basic thrust of the argument. As long as one doesn't expect many years of zero or less than subsistence marginal productivity, faith is a good substitute for savings.

"But is any social institution is big enough and strong enough to substitute for individuals' lack of savings today?"

The state.

Greg Clark argues that in the past people were much less patient, and this is reflected in interest rates.

Frances:

English law never discriminated against Nonconformists in the administration of the the "Poor Law". To this day in England it doesn't matter what you believe, if you are resident in a Church of England parish you are a member of that parish and have the right to marry in the parish church, period. I have been informed of this repeatedly on another forum I'm on that is full of Anglicans of the CoE variety.

Similarly English hospitals don't have a history of either religious foundation or religious discrimination after the Reformation.

You did however have to pay a tithe which was collected as tax. If you were a Nonconformist you then has to pay for your own chapel and minister as well. That was much more of an issue. Nonconformists were also excluded from the universities and higher professions but that's not pertinent to this debate.

Frances, yes it does matter. Note that in less technologically developed societies production is hard physical work. The far end of the age scale would need lots of support to keep living.

"One way of interpreting the European situation is that Germany, as a society, is trying to save for retirement. In aggregate, this can only be done by establishing claims against the future production of other societies."

This is not accurate, AFAICT. Societies can "save for retirement" by decreasing consumption today and investing in capital goods which will increase future consumption. "Capital goods" and "investment" should be understood in a broad sense, of course: e.g. stockpiling durable commodities is a form of investment.

"Sure, a cast-iron frying pan will still fry things 20 years from now, but how does wearing gold jewelry help?"

Gold is an industrially useful metal and possibly a non-renewable resource, so stockpiling it is a genuinely useful investment, if not a very sound one. The fact that it looks cool when worn as jewelry is a plus, but pretty much the same would hold if you chose coin or bullion instead.

Jim: "Note that in less technologically developed societies production is hard physical work. The far end of the age scale would need lots of support to keep living."

Agreed. But most people don't make it to the far end of the age scale.

So each person setting aside enough consumption to support him or herself in old age on the assumption that they're going to make it is a bad idea, as it involves too much of a sacrifice of present consumption.

Insurance works better. And before insurance companies and before welfare states, social insurance in Europe was provided by the church.

Which is one reason why, historically, despite what Nick Rowe says in his post, the poor generally did not save (except in the form of tangible assets, as in the cast iron frying pay comment above).

Anon: you raise a crucial point, that needs another post for a full reply.

Frances: "Anon: you raise a crucial point, that needs another post for a full reply."

Here's a quick reply. In a small open economy, an increase in savings in that economy alone will not cause increased investment under perfect capital mobility. Instead it causes a net export surplus (lending to abroad).

Frances: "Which is one reason why, historically, despite what Nick Rowe says in his post, the poor generally did not save..."

Here's another interpretation: the poor did save. The church was the bank where they deposited their savings, and withdrew them in sickness or old age.

Just realised what Henry VIII did. He raided the country's pension plans! (Dissolution of the monasteries).

OT: My grandmother, as a NC, wasn't allowed to work as a teacher at the school I (later, of course) went to in the village. Father finally paid off the tithes, in a lump sum, around 1970, IIRC.

Nick, fair enough.

The problem was that the banks built massive cathedrals and paid their executives excessive salaries. So new banks, the non-conformists, came along and said 'we'll have no executives and minimal overhead, but you have to do more of the saving yourself.'

I have a friend who will always help me out when I need something - a boost when the car's battery is dead, for example. That's savings too.

Frances, in England and Ireland tithes were compulsory, they were in substance a tax enforced by law. The church had a legal claim upon the income of a landowner or occupier, enforceable by state action.

The parish (not always synonymous with the church, the Poor Law was administered by commissioners) had a legal duty to provide certain services such as poor relief.

It's a grandfather of the welfare state under the hood, only in this case there is no separation between church and state.

In Scotland the Scots Parliament and the Church of Scotland together passed and enforced the Schools Establishment Act 1616 and the Education Acts of 1633, 1646 and 1696. These acts levied an education tax for the provision of an elementary school in every parish in Scotland under the supervision of the Presbytery. Teachers were be appointed with the advice of the parish Minister and the gentry and fees were kept low through the assistance of the Kirk Session, right down to free for the poor.

Again with the legal taxing power of the state behind it I feel this is far closer to a welfare state than many are prepared to admit.

Frances: "The problem was that the banks built massive cathedrals and paid their executives excessive salaries. So new banks, the non-conformists, came along and said 'we'll have no executives and minimal overhead, but you have to do more of the saving yourself.'"

Yep! Damn that's good. Or, it's like tax competition in Tiebout?

Determinant: "Again with the legal taxing power of the state behind it I feel this is far closer to a welfare state than many are prepared to admit."

Looks very close to me. I'm prepared to admit it.

My mother, who was born in Malaya in 1939, told me that the "Ah Mah"'s (spinsters from China who migrated to Malaya to work as full-time maids, never married, and sent most of their remuneration back to their families in China) would make a small regular contribution to a matron who ran house that would take in maids who for various reasons found themselves out of a job. I have no idea how extensive this practice was; but just interesting to note that such a social insitution existed.

It is remarkable how strong family ties were (and still are) among poor Chinese families, that their sons & daughters were willing to leave the country to work overseas and risk their lives for the benefit of their families back home. I understand that families remaining behind would pool resources to send their relatives overseas, often paying large amounts to intermediaries. (A form of saving?) If the world's wealth were distributed more equally, I think we would not see as much pressure to migrate as we see today. Fewer families would be separated, fewer lives would be lost at sea or overseas.

My mother also told me of another rather complicated institution in which a group of friends would make a monthly contribution to the organiser. Each month, anyone of the contributors may put in a bid for the funds available. The system worked out taht the last person to bid for the funds would receive the most money. I had to ask my mother several times how it worked, and still don't quite understand it. (I'll find out more tonight.) Again, another form of savings institution.

Kien:

That's not actually surprising. Many trade unions in the UK ran out-of-work insurance schemes for the benefit of their members from the 1850's to 1945 when Attlee and the post-war Labour government created the British welfare state as we know it. The problem was when unemployment got so bad and lasted so long that benefit funds either became insolvent or workers exhausted their benefits without finding work on a widespread scale. This was a huge problem in the UK after 1918 as the British economy never recovered to 1914 employment levels before 1939.

This problem was one of the main problems which the Beveridge Report was designed to address.

"Historically, retirement saving was even more of a gamble than it is today. In 1810, world life expectancy was less than 40 years."

Like in Burkina Faso today. :(

But the question is not life expectancy, but life expectancy at age 21. In America that has increased maybe a decade in 300 years. (The main factor in life expectancy is childhood mortality, which remained high through the 19th century.)

Kien, the book "Portfolios of the Poor" (which someone refered to in comments on Nick's previous post, IIRC) describes several variations of savings clubs/mechanisms like the one you describe. It's fascinating read.

Frances, I would agree with others on life expectancy at birth. The huge difference between expectancy at birth and at age 5 means that many, many infants died. It also means that once you got to be 5, you actually had a fairly good chance of reaching 48 - thus did need to think of how were going to survive once you could no longer work. Not doing it is what would have been a gamble. It's not quite the same in developing countries today because life expectancy is badly affected by AIDS - the middle of the pyramid is being emptied.
PS love the analogy between churches and banks!

Yohanna and others - yes, of course, lots of people used to live to a grand old age in the past.

And, yes, at 48, after a lifetime of no health care and hard manual labour, one might be wrinkled and suffering from arthritis and decaying vision, and not nearly as productive as one was in one's prime.

But are you likely to be wandering demented around the street and needing 24 hour nursing care? No. Are you going to be able to do a few useful things around the house? Yes. Are you likely to have young adult children who would find it pretty handy to have a babysitter? Yes. Will your eldest hang around and help you work the family farm? Yes.

In the past there were any number of diseases that would finish off an otherwise healthy adult: Child birth. Appendicitis. Pneumonia. Heart attack (think Matthew in Anne of Green Gables). Tuberculosis. The accidents that happen when people do manual labour. Prior to antibiotics things that we would now consider absolutely and completely routine, like tooth extraction, were fundamentally dangerous. Contrary to what Min says, antibiotics alone increased life expectancy by about 10 years, and that's to say nothing of things like better natal care or the impacts of better nutrition.

The odds of being old *and* incapable *and* without family support were low - low enough that building up tangible assets like cast iron frying pans or furniture or axes or stoves or land plus being a good member of the church was a pretty good survival strategy.

"The odds of being old *and* incapable *and* without family support were low..."

I don't buy it. In either case, pre-modern or modern, the last 10 years of life are likely to be negative NPV years. In either case, you never know if you're in the 8th year of your last ten or the first year.

Mortality and morbidity are so strange. Before sewer systems were built, cities needed immigrants because they killed people at such a vast rate. For the vast majority of the rural class, I bet that life wasn't as bad or as short as we like to think it was. My dad's ancestral village in India has loads of old people. At least they have hormone-free, antibiotic-free, free-range milk and eggs, chock full of vitamin D and CLA, you know? http://www.ingentaconnect.com/content/isez/fb/2005/00000053/A00104s1/art00020

That said, the savings represented by a lifetime accumulation of tools and household goods is material. It's like in India, where you pray to your bicycle every year. My four year old daughter touched a nurses stethoscope once, and I chewed her out (surprising the nurse)... but I'm brown enough that tools are sacred.

This made me think of the Bush-era "faith-baised initiatives" (now with the added "Neighborhood Partnerships" under Obama), which really was a way to push the welfare state back to the churches, under the assumption that they were better at delivering certain services. This was not simply a giveaway to Bush's religious partisans, at some point it really was a cornerstone of compassionate conservatism. Not that it really went anywhere of course.

NewAlgier: "It's like in India, where you pray to your bicycle every year." I love that factoid! Are there any particular bicycle prayers that one says? Do they prevent flat tires? Are cars prayed to also? Please provide more information! B.t.w. in England city mortality was much higher than urban also.

Guillaume - I'm not convinced that the faith-based thing has died. It's certainly alive and kicking in many parts of the Muslim world, I don't know as much about other places.

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