Chapter dzǴ: Land, Money, and Capital Formation ȁȀȆthe bid-up value of collectibles and land, the less they satisfy their desires
for savings by holding capital goods (or securities issued to finance capital
goods).
şŕřŕŘōŞ ţśŞŞŕőş ōŎśšŠ ŏśŘŘőŏŠŕŎŘőş
As just suggested, a similar worry applies to collectibles—Old Masters,
antiques, rare coins and stamps, and similarly durable and nonreproducible
assets. If a change in tastes or circumstances strengthens the demand for
them (perhaps as hedges against ongoing inflation), the intensified bid-
ding raises their prices. Ļeir increased value—not merely nominal value
but value relative to other goods and services—is an increase in wealth
for individual holders, but it corresponds to no physical increase in wealth
from the social point of view. Nevertheless, this socially fictitious wealth
tends to satisfy and absorb the propensity to accumulate savings. Ļis Old
Masters wealth effect makes the volume of saving smaller than it would
otherwise be, releasing fewer resources for capital-goods construction. In
contrast, a strengthened desire to save and accumulate wealth in bonds
tends to lower the interest rate and promote real capital formation; the
increase in financial assets (and liabilities of the bond-issuers) is matched
by an increased quantity of real assets.
Ļis parable of the Old Masters is an analytical device and not a hint at
a policy proposal. It reminds us, though, of one of the costs of severe infla-
tion: disruption of financial markets and diversion of people’s propensity
to save away from financing the construction of real capital equipment.
... ōŚŐ ōŎśšŠ řśŚőť
Allais applies his argument about the sidetracking of thrift not only to
land but also to money. Of course, the very existence of money influences
the real fundamentals; the contrast with a barter economy is sharp. But a
Pigou or wealth or real-balance effect (PatinkinȀȈȅȄ,ȀȈȇȆ/ȀȈȈȁ) can have
the regretted consequences. Money, and especially a rise in the purchas-
ing power of a given nominal money supply, may constitute wealth or
an increase in wealth from the private if not the social point of view and
so may increase the overall propensity to consume and reduce the overall
propensity to save.
Ļe real-balance effect is probably most familiar in refutation of Key-
nesian worries abouttoo greata propensity to save, which in turn are