When the bearded man his way into the tavern it hadn't been fully lit up, though dusk had already fallen. Walking the manner of a traveller taking in the sights of an unfamiliar city, he meandered towards the tavern-keeper's table. Baghdad wasn't as busy this year as usual, and the tavern seemed like it followed the trend.
"Peace", he greeted the tavern-keeper, "a jug of your best wine for me if you please".
"As you wish, my friend. You seem to have made a pile in the market square today".
"Not really", replied the man. "I managed to sell my wares, but for less than a few months ago. Baghdad seems to have lost its appetite for good stuff. But what use is all the money in the world for if I do not drink or eat my fill"?
"You must be related to our friend Nasruddin-the-ne'er-do-well", laughed the tavern-keeper, pointing to a man seated at a dimly lit table nearby. "He is the only man in Baghdad who still drinks as much good wine as he did last year. Have a seat, and I'll get you the wine".
The man with the beard walked over to Nasruddin's table and asked if he could join him. Nasruddin looked up and nodded his head, but hardly looked at his new companion, who also thought it best not to prod him into conversation.
The tavern-keeper barked a few orders at his assistant, a lad of few summers and little facial hair. A jug of wine appeared, which the tavern-keeper himself brought to the table that the two men were sitting at.
"I gather things aren't too good this year?", asked the man with the beard, introducing himself only as Yahya.
"No, Baghdad is definitely not as bright this year as it was last year. Times are bad, no one is making too much money, and people aren't spending much either. Can't blame them, no one has much to spend, even our friend Nasruddin, though he spends anyway. I sell about half as much wine as I used to, and have had to cut back on expenses". The tavern-keeper looked wistful for a moment. "If you'd seen this place last year, it looked a lot better. I had three assistants, and much more lighting". "Now", he sighed, "I can only afford this raw youth as an assistant, and can hardly afford oil to light the few lamps you see". "Times are bad for everyone", he continued, "My friend the butcher tells me he sells less meat, and I see him come in to drink less. I too can afford only less meat than before, so I hardly see him at all".
"And the oil-seller", asked Yahya the bearded, "I suppose he sells less oil too? And drinks here less?"
Nasruddin looked up, almost as if the conversation began to marginally interest him, but his eyes glazed over again.
"I suppose", said the tavern-keeper. "Everybody earns less, and spends less".
"All but the Caliph", remarked the tavern-keeper's assistant who had strolled over to listen in on the conversation. "He does just fine."
"Idiot!", growled the tavern-keeper, and waved the youth away. "These young 'uns always get themselves into trouble with their tongues". "But he's not all wrong", he continued, "the Caliph seems to be spending as usual, building roads and public works, and patronizing artists, poets and craftsmen as usual. It's as if all our troubles do not worry him. He's like Nasruddin here, drinking away as if nothing had happened."
"You should drink more of your own wine", remarked Nasruddin, "it might help you think". "If Nasruddin did not drink, and the Caliph tired of dancing girls, all Baghdad would shut down", he said, and nodded to Yahya the bearded: "you sir, with the beard, who do you think is right? The tavern-keeper who doesn't light his tavern, or Nasruddin who keeps drinking?"
Yahya's eyes brightened just a bit. "Is there any doubt?"
"Not really", said the tavern-keeper, "we have learned to tolerate Nasruddin's foolishness".
"Perhaps there's more to Nasruddin than foolishness, perhaps he's the wise one?"
They all looked at Yahya, all but Nasruddin puzzled.
"If few buy my wares", went on Yahya, "I earn hardly any money. And if I do not buy your goods, you do not make money, and so you won't buy my wares. So I make even less money. Do you see where I'm going?"
"Perhaps, but not fully" - the inkeeper's brow had furrowed.
"We are all part of a web of buying and selling. What I spend is someone else's income, and the other way round. What I spend comes back to me, so I spend",Yahya seemed serious now, "Of course, you must never spend money that you do not have, but you do not gain by not spending money that you have. By not spending, you only reduce the present income of others, and hence your own income tomorrow. What you spend at the butcher's and the oil-seller's is money that will come back to you and beget more money on the way. So spend, my friend, if you do not want to be poor tomorrow. Nasruddin seems to know that already."
And then he nodded to the tavern-keeper's young assistant ...
"The Caliph, I suppose is no stranger to this knowledge, he has the wisest men to guide him. So he spends his money on public works and promoting the arts so that others may spend as well, and keep money flowing through Baghdad. After all, only a prosperous Baghdad means more taxes for our dear Caliph, and more dancing girls". He was smiling again.
"It was nice drinking with you, friends. Here's money for the wine, I must be off now. Don't forget to spend this!"
After he was gone, they were silent for a while.
Until Nasruddin spoke up - "Nice beard, don't you think? Do you think he really likes dancing girls?"
And they understood ...
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As the gentle reader knows, there's been a lot written and said in India about austerity and the need to keep spending low during times of economic trouble. The government is going to town about "austerity", making ministers travel by cattle class and so on. Most Indian TV channels and editorials seem to agree that the everyone should tone down consumption. Public opinion seems to be in line with all of this, but unfortunately, it happens to be incorrect an economic point of view.
As John Maynard Keynes pointed out during the Great Depression of the 20th century, the way out of a depression is not through people tightening their belts, but spending as much as they can. Further, the government should spend as much as it could to increase aggregate demand in the economy and hence push incomes higher so the economy gets back to a higher natural spending rate, and therefore higher levels of income for everyone. That was a contrarian idea then, but it helped get the world out of the Great Depression. Thanks to governments dusting out and reading their copies of Keynes, and pushing the stimulus buttons, the world seems to have avoided a second Great Depression, though we aren't back into a collective growth phase yet.
So, do not be too enthusiastic about austerity, that helps no one. Reducing conspicuous consumption may be good from a psychological point of view, but unless that is compensated by spending the same money elsewhere, it actually hurts everyone. The right time to save is during a boom, not a bust.
Spend what you can today, help yourself earn tomorrow. And when things are good again, save for a rainy day. And when the rainy days come, spend!
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PS : If anyone wants to bring up inflation and rational expectations, there's another Nasruddin story in the works about that!
PPS: Statutory warning: The Mad Hatter is not an expert on Mullah Nasruddin folktales. Also, anything he says about economics may have been produced under the influence of too much wine.
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