HOPE and FEAR

The future tenses of “pleasure” and “pain.”

Definitions from an Irish potato farmer

Pleasure and pain in the planning stage.

Next year’s production

Probability

QMQsubFEAR

HOPE

Subsistence. If you have less than this, something very bad will happen to

you.

Next year’s production

Probability

QMQsubQsub’

THE ROLE OF SAVINGS

Saving reduces fear

Next year’s production

Probability

QMQsubFEAR

THE ROLE OF INVESTMENT

HOPEMORE HOPE

LESS FEAR

QM’

BUT …

Income (Y) = C + S + I Yeah, I know …

Just play along

or pretend for a moment that you’re not an economist

Setting aside the economics definitions, the usual use of the words “savings” and “investment” are derived from separate psychological impulses

If you must be an economist we could say Y = C + Sp + Ss, dividing Saving into precautionary and speculative motives

But … Holding Consumption constant, increases of Saving require deceases of

Investment and vice versa

We Save from Fear

We Invest from Hope

We Invest to get ahead

We Save to keep from falling behind

At some point, Investing more will increase fear by reducing Savings.

The farmer’s problem is to maximize a utility function whose arguments are Consumption, Fear and Hope, subject

to Y = C + S + I

I’m ready to sing now