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Golden Rule savings rate: Difference between revisions

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</ref> as for example in the [[Solow growthSolow–Swan model]]. Although the concept can be found earlier in [[John von Neumann]] and [[Maurice Allais]]'s works, the term is generally attributed to [[Edmund Phelps]] who wrote in 1961 that the [[Golden Rule (ethics)|golden rule]] "do unto others as you would have them do unto you" could be applied inter-generationally inside the model to arrive at some form of "[[Optimization (mathematics)|optimum]]", or put simply "do unto future generations as we hope previous generations did unto us."<ref name="PhelpsAttribution">[http://www.newschool.edu/nssr/het/essays/growth/optimal/goldengr.htm Origin of the term described at newschool.edu] {{webarchive|url=https://web.archive.org/web/20160304111115/http://www.newschool.edu/nssr/het/essays/growth/optimal/goldengr.htm |date=2016-03-04 }}</ref>
 
In the Solow growth model, a steady state savings rate of 100% implies that all income is going to investment [[capital (economics)|capital]] for future production, implying a steady state consumption level of zero. A savings rate of 0% implies that no new investment capital is being created, so that the capital stock depreciates without replacement. This makes a steady state unsustainable except at zero output, which again implies a consumption level of zero. Somewhere in between is the "Golden Rule" level of savings, where the savings propensity is such that per-capita [[consumption (economics)|consumption]] is at its maximum possible constant value. Put another way, the golden-rule capital stock relates to the highest level of permanent consumption which can be sustained.
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