Expenditure and consumption life cycles I

Here’s a cool chart that captures graphically an important point about personal and investment life cycles. It may also help to explain some social practices that are otherwise hard to understand.

The young and the old tend to consume more than they earn (the gap shown in the red hatched areas in the chart). In the case of the young, the. big costs are education, house purchase and bringing up families. In the case of the old it’s higher costs of health and social care. Prime age adults tend to earn more than they consume (shown in the green hatched area).

The traditional way of managing these gaps is through families – where the young and old are looked after by the prime age working members of the family. It’s a system that tends to give male wage earners significant control over the young and the old and through the influence of social institutions, over societies at large. These institutions include temples and churches, unions and sports clubs.

So in traditional societies, we see that women’s rights and interests are generally neglected and older males can and do impose social norms on their families with respect to things like religious observance, marriage partners, sexual behaviour, dress codes and the like. Violate the norms and you get excluded from family support.

In rich western societies, we’ve developed an alternative: taxation and welfare. So instead of prime age adults looking after their own families from their family resources, society pools the resources through taxation and sets out criteria for providing education, healthcare and social care. Critically, the social norms for accessing welfare are not those of prime age working males but of all members of the society. It may sound hard – but remember that prime age men also get some benefits from this – the right to support for themselves as well as social insurance if their savings are insufficient for the consumption needs of the family. So we tend to see more respect for women’s rights, gay members of the family and more religious freedom and freedom of thought in these societies. There maybe an economic foundation to our values.

So if you think that religious extremists have excessive control over people’s minds in some societies, remember it’s almost always associated with the control that men (mostly) have over welfare. A key reform in these societies would be taxation to finance social provision and especially a provision that allows women who divorce or leave their husbands to have the right of public welfare support.

And in the most advanced societies, we have another means of doing this through sophisticated financial systems that make these transfers happen. Prime age adults save in banks, pension plans and other investments – and the money is lend to the young for education, house purchases, building businesses and they pay it back over their lifetimes – with interest. That’s what students loans and mortgages and the like really are- ways of making intergenerational transfers on a mutual consenting basis without taxation. This system requires not just taxation and welfare but effective property rights enforced by independent and accessible courts and institutions that have durability and stability. You don’t want to be a lender in a society that collapses in a bout of civil war or inflation.

But both taxation and financialisation have their issues- in the case of taxation we have issues with policing entitlement as well as the issues that arise when societies age. Then we find that the demand for consumption (or welfare) exceeds the savings that prime age adults can make and everyone’s living standards drop.

It’s an issue that’s relevant now given he financial strains caused by longer life expectancy and advances in medicine.