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check out my vertical integration. and my beard. and my gun.

Noah Smith mused about a subject I’m interested in – the fundamental conceptual issues at the nature of saving – in a way I like to muse about it – thought experiments – so how could I not deconstruct his post in excruciating detail?

Specifically, I’d like to focus on the economy of his deer hunter (one of many, in his example, but just one for this purpose): a man who lives, alone, in the woods, hunting deer. I’m going to break this down as much as I can while abstracting away the non-deer parts of his economy (shelter, clothing, tools, etc). Because the deer hunter is an economy – and while he might be an economy of only one human, who we’ll call Vronsky -, we can productively and fruitfully view him as a vertically-integrated economy, and break him down into four sectors:

1) A firm that hunts deer. The firm locates as many deer as possible and kills them, then sells them to the next sector. It has most fixed costs (labor to hunt deer) and therefore pays relatively fixed wages, the rest collected as profit.

2) A firm that processes dead deer into venison. This firm always purchases all the deer killed by the first firm, and always sells all of its venison to the next two sectors. It has more variable wages (because it has variable labor as its primary input) and takes the rest as profit.

3) A firm that stores processed deer. This firm always buys all the surplus venison produced by the processing firm, salts it, and stores it until there is a market for it. We will discuss its economy in more detail below.

4) The consumer. It always buys a certain amount of venison (let’s call it C) no matter what.

Now, in actuality, all these firms are the same person – Vronsky, who owns all the firms, provides all the labor, and collects all the wages and profits (which he then proceeds to, largely, eat). But we can break the internal economy of his life away from Williamson-ian integration and imagine a market that works something like this:

There are flush years and lean years – periods, that is, in which D (the amount of deer caught by the hunting firm) is either greater than or less than C. Let’s see what happens in a flush year.

The first firm kills some amount of deer, D, that is bigger than C (we’ll call it C + S). It sells C + S deer to the second firm, pays its wages, and collects profit (let’s imagine the firm breaks even in years when D = C).

The second firm processes all the deer into venison, and sells C venison to the consumer and S to the third firm. This firm always breaks even because its labor varies in direct proportion to its production which varies in direct proportion to the available venison.

Now, the third firm. What should be clear is that the third firm is the closest this economy has to a financial sector – it buys venison when it’s plentiful and sells it when it’s, er, dear. This means it, essentially, stabilizes the internal price of venison (and also raw deer). It also is a very different firm from the other two, since labor is a minimal input – it is a capital-intensive firm that specializes in storage and market mastery (we’re assuming it inherits all the capital, physical and intellectual). Assuming our flush year is t=1, the firm has costs – purchasing the venison, salting it, and storing it – but no revenue. Which means it has to borrow. From whom? The consumer’s wages should always = C, so it must borrow from the profitable sector of the economy – the first firm, who has profited from a plenty of deer to kill. Essentially, the amount of raw deer necessary to produce an amount of venison = C costs exactly the wages of a year’s worth of deer hunting, and the wages of processing the deer into venison are equal to the mark-up of venison over deer, meaning all the profits flow to the first firm – the hunting firm. So it loans the money to the third firm, the storage firm.

This works in reverse in lean years. In a lean year (let’s say t=2 is exactly as lean as t=1 is flush, so C-S) the hunting firm is in the red, since it pays wages beyond it’s revenue. However, it can call in a loan from the storage firm, which has almost no costs incurred but suddenly tons of revenue from selling its surplus! So it can pay back the loan to the first firm. So there are now no net savings, nominally or physically. Balance. Om.

But let’s say there isn’t long-term balance. That creates two potential scenarios – one of long-term scarcity, whose end is obvious and really quite sad for poor Vronsky. But long-term plenty is more…interesting.

If there is long-term plenty, a couple things could happen. If we are speaking strictly ceteris paribus, then we would see larger and larger imbalances between the accumulated bonds of the hunting firm and the accumulated debt of the storage firm, ending in…financial crisis! Salted venison doesn’t last forever, so it would be essentially squatting on toxic assets it would be loathe to revalue without the projected revenue to pay off it’s accumulated debt. It would go belly-up, and basically need its loans forgiven – by which we mean, of course, that Vronsky has to write off a lot of old, stinky venison into the river.

But assuming non-ceteris paribusitywhat we would actually see is that, as salted venison becomes plenty, prices decline to the point where no amount of hunting can support the wages of the hunting firm. To skip the boring stuff, what happens is that Vronsky consumes more leisure as he eats down his stock of salted venison and takes up whittling or something.

Now, over the truly long term, endless plenty absent productivity increases is impossible for Malthusian reasons unless you want to assume a Children of Men kind of deal. But even there, we wouldn’t see infinite saving because Vronsky would, sitting on a giant pile of meat, only hunt to the extent he wanted to, not needed to.

The key, in the end, is this – that saving is just as much about production than consumption, and it’s really about the future-orientation of production. In a world where Vronsky is alone, and has no reason to invest in future growth, he won’t endlessly stockpile venison because of diminishing returns and will therefore shift to other forms of spending his time. But in a world where Vronsky was future-oriented, at least minimally, he might spend his savings to create extra time he could use to develop more efficient hunting tools, thus saving even more time in the future. Or he could develop a game that would amuse him. Or he could pack a sack full of salt venison and go on a quest to find a friend, or at least a basset hound.

The real point, in the end, is that nominal savings (which always equal nominal debt) are very disconnected from whether current production is creating value for the future. In the 00’s we simply invested too much of our productive capacity in building overly-large houses in low-cost but low-value locations, which created a lot of nominal debt and therefore nominal savings but didn’t enable the United States to be more productive in the future. On the other hand, higher taxes that built high-speed rail wouldn’t show up as saving, but from the perspective of society, we would be deferring fleetingly pleasurable consumption of movies and candy and craft beer and what have you towards building valuable infrastructure that would make us richer in the future. That’s not nominal savings, and in the short-term GDP looks the same, but that’s true saving in the modern world.

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The latest episode of EconTalk stars Jim Manzi discussing the Oregon Medicaid experiment. Without getting too much into their (very interesting) discussion of the econometrics of the experiement – or into my substantial and growing skepticism of econometric methodology writ large – I want to take their jumping-off point and go in a totally different direction.

Manzi’s jumping-off point is noting that, of the ~35,000 individuals offered free or dirt-cheap health insurance through Medicaid, only about 60% of them actually took up the state’s offer. In other words, its only somewhat more likely than a coin toss that any given poor person, handed free or nearly-free health insurance on a platter, would submit the paperwork to procure it.

Forget about the econometric implications of that – from an individual standpoint, that’s nuts. Say what you will about health insurance, but ceteris paribus it’s a hell of a lot better to have it than not, and when the cost of getting it is an hour or so filling out forms plus a Forever Stamp® we would have to at the very least seriously puzzle over why someone wouldn’t do it.

Russ Roberts calls the active ingredient here "prudence" ("because it’s an Adam Smith word," and I swear if I hear him mention Smith or Hayek on his damn show one more time…) but I’m going to go ahead and say that’s probably not the deciding factor. Instead, I’m going to go with "life is complicated and people are busy."

Let’s take the following as axioms: 1) each individual has only so much time in a day; 2) everything takes some time; 3) individual computation power is limited and exhaustable within certain temporal boundaries. While behvaioral economics certainly has grappled with the third proposition, I’m not really sure economics as a field has dealt well with the first two, especially in conjunction with the third. But I would argue that they’re really, really important, and even more important in light of the broad political movement over the past few decades to shift from state provision or command-oriented economies to market mechanisms and consumer sovereignty. Because, while you can make a lot of compelling arguments in a set of cases considered in isolation for "more market," if you look at the aggregate impact of vastly increasing both the number and complexity of choices/time-unit average individuals need to make you might be looking at a recipe for disaster.

Now, the libertarian-inclined might say "I consider that on some fundamental level irrelevant, individual freedom of choice is a first principle." And while I am not particular inclined to guide public policy on an a-consequentalist political philosophy that doesn’t distinguish humans from computers, let’s stow the philosophical argument for now – certainly most libertarians are not anarchists so even that principle has its bending point – and arbitrarily accept that some individual decisions should/must be made collectively by agents of the group, and say, "well, what should they be?"

I’m going to go ahead and say "access to medical care" (as opposed to all medical decisions) should be way, way, way up near the top of that list. Medicine is complicated. Really, really complicated. Medical decisions are loaded with moral and personal and interpersonal signficance about the value of life. So why should we a) complicate medical decision-making with the notoriously Byzantine private health insurance industry or b) complicate critical non-medical life decisions (like labor market decisions) with medical implications. It’s hard enough to decide whether to move your family to take a job; it’s hard enough to decide the best way to care for a dying loved one; and everything else in life – balancing checkbooks, balancing schedules, balancing obligations to friends and family and coworkers and community and the self, balancing pleasure and work – is hard and complicated enough without having to constantly worry about the status of your health insurance or whether your health problems will bankrupt you or which doctor or clinic or specialist takes which insurance and which jobs offer which kinds of insurance. Life is hard and complicated enough. Hard and complicated enough that you might not even notice if the state sends you an envelope with a too-good-to-be-true offer of free health care, or that you might not have the time, ability, or wherewithal to verify the offer or submit the paperwork if you did.

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