Tuesday, February 10, 2009

John Maynard Keynes and Personal Finance

This post relates to the following Keystone Economic Principles:

1. We all make choices.
3. All choices have consequences.

7. Economic thinking is marginal thinking.
8. Quantity and quality of available resources impact living standards.

You might wonder how one could possibly link personal finance and decision-making with the man who many consider the greatest economist of the 20th century. (I have some thoughts on that, but that may be the subject of another post.)

The fact is, in Chapter 9 of The General Theory of Employment, Interest and Money - the same book that is at the core of many debates about what the government should do to alleviate the recession - Keynes lays out a simple list of motives that individuals have to save or spend. Now, Keynes being Keynes did not label them as such, but "a rose by any other name" is still a rose. These motives can be the basis for a discussion when teaching basic budgeting and can provide an opportunity to study what we should be doing with our finances, not just now but at any time.

Let's look at these and discuss them from a standpoint of potential for classroom activity. I've retained Keynes' original wording with my comments in parenthesis.

Motives to Refrain from Spending (Save)
Precaution - To build up a reserve against an unforeseen contingency.
(This is the emergency fund that most financial planners suggest.)
Foresight - To provide for an anticipated future relation between the income and the needs of the individual and his family different from that which exists at present...for old age, family education, or the maintenance of dependents.
(Clearly this is the basic saving for retirement, college, future support of children with special needs or elderly parents.)
Calculation - To enjoy interest and appreciation, because a larger real consumption at a later date is preferred to a smaller consumption.
(This may be seen as saving for a specific event - vacation, holidays, or wedding.)
Improvement - To enjoy a gradually increasing expenditure, since it gratifies a common instinct to look forward to a gradually improving standard of life rather than the contrary...
(One may think of this as providing for additional income above and beyond what is earned on the job.)
Independence - To enjoy a sense of independence and the power to do things, though without a clear idea or definite intention of specific action.
(Keynes is probably suggesting providing resources for opportunities that may arise so that we aren't forced to forgo opportunities for lack of funds, or to avoid debt.)
Enterprise - To secure a "mass de maneuver" (some financial advisors might refer to this as "critical mass", but it may represent the initial equity) to carry out speculative or business projects. (The funds that form the basis of major decision - starting a business, etc.)
Pride - To bequeath a fortune.
(What if you want to "leave something to the children?”
Avarice - To satisfy pure miserliness, unreasonable but insistent inhibitions against acts of expenditure...
(Calling Mr. Scrooge...)

Oddly enough, Keynes provided no explanations for these categories. Presumably, he felt they were self-explanatory.
Motives to Consumption (Spend)
(Things that provide us pleasure. Given the rest of the list, I presume Keynes would put spending for basic necessities in this category.)
(We might consider this the category for "impulse spending.")
(This clearly is where our charitable giving would fall.)
(We often make decisions that seem well thought out, but we often don't anticipate everything.)

(Personally, I'm not sure what the difference between these last two represented to Keynes.
The dictionary defines both as an unnecessary or showy display. It's possible that the first would mean a simple, visible display and the second would be more "vulgar." It's also possible that ostentation refers to a continuous state, whereas extravagance might refer to a single event - perhaps a celebration of some kind.)

Granted that I'm trying to delve into the mind of a long-dead great economist (especially regarding the spending categories). Nevertheless, these categories can provide a basis of discussion in a personal finance course. We are used to categorizing spending by "wants" & "needs". Keynes’s categories may be helpful in subdividing further. But they also can be helpful in analyzing past spending.

Furthermore, the categories for saving can provide students with a basis for goal-setting: are they longer term? Are they shorter term?

What do you think? Would these categories be helpful and useful in your classroom? I look forward to your comments.

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