The Spirit of Capitalism, Precautionary Savings, and Consumption

Author(s): Yulei Luo, William T. Smith and Heng-Fu Zou

Source: Journal of Money, Credit and Banking, Vol. 41, No. 2/3 (Mar. - Apr., 2009), pp. 543-554
Published by: Wiley
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YULEI LUO
WILLIAM T. SMITH
HENG-FU ZOU

The Spirit of Capitalism,

Precautionary

Savings,

and Consumption
for
research has shown that the "spirit of capitalism"?a
preference
for
itself, in addition to consumption?has
important implications
growth and asset pricing. This paper explores how the spirit of capitalism
affects saving and consumption
behavior. We demonstrate
that the spirit of
savings. It can also
capitalism may reduce the importance of precautionary
explain the excess sensitivity puzzle: the spirit of capitalism causes dramatic
deviations from a random walk. Itmay also offer a partial explanation of the

Recent
wealth

excess

smoothness

Keywords:

puzzle.
JEL codes:
C61,D91,E21
the spirit of capitalism,
and saving behavior,
consumption
the sensitivity and smoothness of consumption.

The great sociologist Weber (1948) viewed the desire to

accumulate wealth as an end in itself as the defining characteristic of capitalist so
cieties. Recently, this notion of the "spirit of capitalism" has been used to address
a range of issues, including savings (Zou 1995, Carroll 2000), growth (Zou 1994,
asset pricing (Bakshi and Chen 1996, Smith
Smith 1999, Gong and Zou 2001,2002),
distribution
of
wealth
In this paper,
and
the
2001),
(Luo and Young Forthcoming).
we extend the inquiry to explore how the spirit of capitalism affects precautionary
savings and the dynamics of consumption.

We

are very grateful

to Pok-sang

Lam and two anonymous

referees

for their helpful

comments.

is Assistant
at the School
and Finance,
Professor
of Economics
University
of
William
T. Smith
is Professor
in the Department
(E-mail:
yluo@econ.hku.hk).
of
at Fogelman
and Economics,
(E-mail:
College
of Business
University
of Memphis
at The World Bank, and Professor
Heng-Fu
Zou is Senior Economist
wtsmith@memphis.edu).
and Economics,
Shenzhen
and IAS
of CEM A at the Central
University
of Finance
University,
Yulei

Luo

Hong Kong
Economics

at Wuhan

University

(E-mail:

hzou@worldbank.org).

Received

November

8, 2006;

and accepted

in revised

form

January

30, 2008.

Journal ofMoney, Credit and Banking, Vol. 41, No. 2-3 (March-April 2009)
? 2009 The Ohio State University

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544

I MONEY, CREDIT AND BANKING

Section 1 of the paper develops a very general model of precautionary savings in

the presence of the capitalist spirit. As inmost models of precautionary savings, we
consider a consumer who knows his current wage but is uncertain about his future
wage income (see the excellent survey by Carroll 2001). Following Zou (1994) we
the spirit of capitalism by allowing the consumer to derive utility from wealth
in
addition to consumption. We use a very general utility function and assume
itself,
that
income is a discrete-time diffusion process. Using themethods of Grossman
only
and Shiller (1982), we derive an exact expression for the expected growth of con
limit. This is of some interest in itself, since most of
sumption in the continuous-time
the literature on consumption relies upon approximations (Baxter and Jermann 1999,
Lettau and Ludvigson 2001, Gourinchas and Parker 2002), or restrictive assump
tions about preferences (constant absolute risk aversion [CARA] as in Blanchard and
Mankiw 1988, Hall 1988, Caballero 1990), or the income process (e.g., log-normality
inHansen and Singleton 1983, Carroll 1992). We demonstrate that the spirit of capi
talism causes the random walk hypothesis (Hall 1978, 1988) to fail: (nonstochastic)
changes in wealth can be used to predict changes in consumption if there is a spirit
model

of capitalism.
To shed more

light on how the spirit of capitalism affects savings and consumption,

Section 2 develops a simple model that allows a closed-form solution: consumers have
CARA preferences over consumption and wealth, and income is an AR(1) process.
This model has interesting implications for both precautionary savings and consump
tion dynamics. First, the capitalist spirit usually (unless income is stationary and
converges to its ergodic distribution very rapidly) reduces the precautionary savings
premium.

Second, the spirit of capitalism can explain the excess sensitivity of consumption
to anticipated changes in income (Flavin 1981, Campbell and Mankiw
1989, Deaton
a
of
the
of
when
there
is
1992):
capitalism,
growth
consumption can be pre
spirit
dicted by expected changes in income. This is consistent with the empirical results of
Campbell and Mankiw (1989), who regress consumption growth on income growth.
The coefficient attached to income growth in their regression is large and statistically
significant. They interpret this coefficient as the proportion of "rule-of-thumb" con
sumers in the economy. Our model suggests that this coefficient can also be interpreted
as ameasure of the strength of the spirit of capitalism.
Third, the spirit of capitalism may offer a partial explanation of the excess sensitiv
ity of consumption growth to unanticipated changes in income. Friedman's famous
permanent income hypothesis suggests that consumption should be smoother than
income. However, Campbell and Deaton (1989) and Deaton (1992) argue convinc
ingly that income is nonstationary. In this case, the permanent income hypothesis
predicts that innovations to income should be associated with larger innovations in
consumption. This is the excess smoothness paradox: if income is nonstationary, ob
served consumption growth is much too smooth, relative to the consumption path
In our model, the spirit of capital
predicted by the permanent income hypothesis.
ism mitigates the effect of an income innovation on consumption growth as long as
income

is nonstationary.

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YULEI LUO, WILLIAM T. SMITH, AND HENG-FU ZOU

Section 3 offers some concluding

I 545

thoughts.

1. THE MODEL

Suppose that time is divided into discrete intervals of length At (we will be con
sidering the limit as At ?> 0). Imagine a representative consumer with an infinite
the
planning horizon and a constant rate of time preference 6 > 0. He maximizes
lifetime expected utility of time-separable preferences defined over consumption ct
and wealth wt:

Uic"w')At>(1)

??E(it?a7)
the

where

<

At,

2At,

etc. We

assume

that U(ct,

in ct and wt, and that Uc > 0, Uw

differentiable

tinuously
Uww

is over

summation

wt)

is twice

con

> 0, Ucc < 0, and

0.

The consumer can borrow and lend at the riskless rate of return r, and receives in
come (ormore generally, nonasset income) of yt in each period. His budget constraint
is therefore
wt+At = wt (1 + rAt) + yt A/1

cAt.

(2)

In keeping with most of the literature on precautionary savings (Carroll 2001), we

assume that the consumer knows his income in each period but is uncertain about its
future

evolution.

is, there

That

We employ a very general

diffusion
Ayr
where

Azt

yt+M -yt

=
ayJByJVAt

is "future"

income process,

My,rAr + Azt,
and

t is standard

but

uncertainty,

assuming

not

"current"

uncertainty.

only that it is a discrete-time

(3)
normal.

The

conditional

expectation

and

standard deviation of the growth of income, fiyJ and ayJ, may be time varying.
The consumer maximizes
the expected lifetime utility in equation (1), subject to
the budget constraint in equation (2), given initial wealth w$ and the income process
in equation (3). The Euler equation for this problem is
Uc (ct, wt) =

t ,

1 -+- unKEt
I\t

[(1 + rAt) Uc (ct+At, Wt+At) + Uw (ct+At, wt+At)]

(4)
the limiting arguments of Grossman and Shiller (1982) (and more recently
employed by Bakshi and Chen 1996, Smith 2001), we can use this first-order condition
to infer the stochastic process for the optimal consumption path. Define
as the
a1ct
instantaneous
of
variance
the
of
(possibly time-varying)
growth
consumption, we
Using

prove:

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546

: MONEY, CREDIT AND BANKING

Proposition
consumption

EtdCt

Uc?, (ct, wr)

TT~<-x((9
ucc(ct,wt)

Ucc(ct,wt)

,~

First, assume that the optimal consumption

=

Ac,

Ct+At

lic,t At

ct-

For convenience,
express
notation
using analogous
Aw, =nWJAt.

right-hand

policy

is a discrete-time

diffusion

(6)

crCi,Azc,r.

the (instantaneously

nonstochastic)

growth

in wealth

(7)

Now consider the Euler equation

the

Ucc(ct,wt)

Ucc(ct,wt)

Proof.

growth of

Uw (ct, wt)
~ Ucw (ct, wt)
dt
dw<
Tr-<-x
7T~r-7

~r)dt-

UCcc(Ct,Wt)?lt

of

limit, as At -> 0, the expected

1. In the continuous-time
is

side

around

At

in equation
0,

c,+A,

(4). Take a second-order Taylor series

ct, and w,+A,

wt.

Using

equations

(6) and (7), this leads to

0=

(Uc (c,, wt)(r

-0)

+ f/cw (cr, w,)

+ Uw (ct, wt)) At + Ucc (ct, w,)/zc,,Af

EtAc]

+ J/ccc (c,, w,) ?-?.

/LtWf/Ar

(8)

rule, we have EtAc^ = o2ctAt.

Using equation (6) and the Ito multiplication
Taking the limit of equation (8) as At ?> 0 and rewriting the resulting equation
yields equation (5).
Equation (5) warrants closer inspection. Two of the terms in equation (5) will look
familiar;

the other

two

are new.

Consider the familiar terms first. The first term in equation (5) is similar to the
continuous-time Euler equation in nonstochastic models without the spirit of capi
talism: the consumption profile in nonstochastic models depends upon the difference
between the interest rate and the rate of time preference. The last term in equation (5)
is a precautionary
savings premium (Carroll 1992) that changes the slope of the
consumption profile. The new terms in equation (5) are the second and third.
The second asserts that the spirit of capitalism (Uw > 0) by itself tends to steepen the
consumption profile.
More importantly, the third term shows that if there is a spirit of capitalism then the
expected growth of consumption generally (as long as Ucw ^ 0 or Uww ^ 0) depends
upon the (instantaneously nonstochastic) growth inwealth. In other words, growth in
wealth can be used to predict growth in consumption. Thus, the spirit of capitalism
causes the random walk hypothesis tofail.

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YULEI LUO, WILLIAM T. SMITH, AND HENG-FU ZOU

! 547

It is also important to note that expressions like equation (5) are common (e.g.,
Carroll 1992, Campbell 1994, Baxter and Jermann 1999, Lettau and Ludvigson 2001)
as log-linear approximations. Log-linear Euler equations are very popular in solv
inmacroeconomics.
Other papers arrive
ing stochastic general equilibrium models
at

closed-form

but

solutions,

restrictive

impose

ences or the income process. Here, however,

continuous-time

limit,

for

a very

income

general

assumptions

this relationship
process

and

about

either

prefer

holds exactly
a very

general

in the
class

of

preferences.

2. CARA PREFERENCES
In order to shed more light on how the spirit of capitalism affects the precautionary
premium and dynamics of consumption, itwill be useful to consider an example that
permits a closed-form solution. To this end, suppose that time is continuous and that
the expected
1
?0

lifetime utility is of the following

C??
e-0t-ac'-Xw'dt.
/

form:l

(9)

Jo

The parameter a is the coefficient of absolute risk aversion with respect to con
> 0 measures the
sumption. The parameter X
strength of the spirit of capitalism. If
=
X
0, there is no spirit of capitalism and we recover the familiar case of CARA
defined over consumption alone.
In continuous-time,

dwt =

(rwt + yt

the consumer's

is a continuous-time,

Income

ct) dt.

budget

constraint

is

(10)

first-order

autoregressive

(Ornstein-Uhlenbeck)

pro

cess

dyt

p(--yt)

dt + adzt.

(11)

The steady-state mean of income is y = /x/p. The parameter p governs the speed of
convergence (or divergence) from the steady state. If p > 0, the process is stationary;
deviations of income from the steady state are temporary. If p < 0, the process is

1. Although we adopt the representative

the model
in principle could be generalized
agent framework,
to allow for consumer heterogeneity.
income
Suppose there is a continuum of consumers. Each consumer's
consists of an idiosyncratic
and an aggregate component. After solving for the optimal con
component
and obtain an expression
for
sumption rules of individual consumers, we aggregate across all consumers
income components would be canceled out after aggregation,
Since idiosyncratic
aggregate consumption.
however, aggregate consumption would only depend upon aggregate income. We conjecture that the "ag
would therefore have the same implications
for aggregate consumption
gregate" model with heterogeneity
and precautionary
agent model.
savings as would the representative

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: MONEY, CREDIT AND BANKING

548

and

nonstationary

to income

innovations

are "superpermanent."

This

last case

catches

the flavor of Campbell and Deaton's (1989) argument that income is nonstationary.2
The consumer chooses a consumption policy tomaximize expected lifetime utility
in equation (9), subject to the budget constraint in equation (10), and given the income
= p = 0, this reduces to the canonical
process in equation (11). If k
precautionary
= 0 but p > 0,
savings problem with random-walk income in Hall (1988). If k
it becomes a continuous-time
version of the precautionary
savings problem with
autoregressive income of Caballero (1990).
In an appendix (available on request) we use the methods of Merton (1971) and
Wang (2006) to demonstrate that the solution to this problem is the consumption
function
c(wt, yt)

= Q(wt,

- T o2
?, (12)

yt)

where
^
?2(w?

yt)

x=-?? 0-r-k/a
ar + k

???

1
?fi

r + k/a + p

r+k/a
?yt
r + k/ot + p

???

rwt,

(13)

and

T=a

r+k/a

2.

(r + k/a + p)2

In the appendix

available

upon

(14)
request,

we

also

show

that

the consumer's

transver

= 0, where
J(wt, yt) is the consumer's
v,)|
sality condition is \in\t^O0Ee~et\J(wt,
value function when his financial wealth is wt and his wage income is y,. A sufficient
and necessary condition for this to be satisfied is that the effective rate of interest be
r +

positive,

k/a

>

0.

This solution shares features common to all CARA models of precautionary savings
(see Hall 1988, Caballero 1990 for just two examples). First, consumption decom
poses into two parts, certainty-equivalent
consumption Q(wtyt) and a risk premium
is a linear function of financial
Second,
certainty-equivalent
consumption
?To212?
wealth

wt

and wage

income

y,.

that this solution is identical to the consumption function without the spirit
of capitalism but with an interest rate of r + k/a rather than r In other words, the
spirit of capitalism has the effect of raising the interest rate. The intuitive explanation
for this is straightforward. Suppose that I save a dollar of my wage income. In the
absence of the spirit of capitalism this will yield 1 + r dollars one period hence,
so the appropriate rate with which to discount my wage income is just the interest
Notice

second-order
and Deaton
2. Campbell
process. It is not
(1989) argue that income is a nonstationary
solution to the precautionary
savings problem with a second-order process,
possible to derive a closed-form
in equation
so we have focused on the first-order process
(3). This is tractable yet allows a form of
nonstationarity.
in the sense that it is the consumption
3. It is "certainty equivalent"
predicted by a nonstochastic model
is often used to describe linear-quadratic preferences, which do
with CARA utility. "Certainty equivalent"
not generate a precautionary
savings premium.

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YULEI LUO, WILLIAM T. SMITH, AND HENG-FU ZOU

I 549

rate. In the presence of the spirit of capitalism, however, investing the same dollar
yields psychic returns because the increase inwealth raises utility. In other words, the
market rate r is augmented by the "psychic" rate of return X/a (the relative strength
of the preference for wealth versus consumption). Therefore, r 4- X/a is the effective
rate

"psychological"

the consumer

at which

discounts

income.

wage

It is also illuminating to express the consumption function in terms of human

wealth. Following the literature, we can define human capital as the expected present
value of future labor income discounted at the appropriate interest rate. In the presence
of the spirit of capitalism the effective rate of interest is r + X/a. Therefore, human
wealth

is
/oo
(15)

e-ir+V?X'-?ysds.

calculations

Straightforward

imply that

+
,__
r +____?
r +X/aJ
X/a + p (yt
V ?rrr)

*'=

(16)

If r + X/a + p < 0, the integral in equation (15) diverges, so that human wealth
is undefined. Henceforth we therefore assume that r + X/a + p > 0. In other words,
cannot

income

Using

be

equation

"too"

nonstationary.

(16), the consumption

function

in equations

(12)?(14)

can then be

as

rewritten

a2

10-r-X/a

c(wt, yt) =-,

a

r +X/a,.

(r + X/a)ht

4- rwt

T?,

(17)

which means that consumption is linear in financial wealth and human wealth.
We will now explore how the spirit of capitalism (captured by the parameter "A")
affects

the precautionary

premium

and

the

time-series

properties

of

consumption.

2.1 The Precautionary Savings Premium

Consider first the precautionary savings premium. In the absence of the capitalist
=
spirit (X 0), the precautionary savings premium is simply
r
Px=o

=
??-rja

(r+ p)2

a2
?.

(18)

Note for future reference that dPx=$/dr <=>

Oasr >=<0.
That is, an increase
in the interest rate will decrease or increase the premium depending upon whether
r > p is positive or negative. Nonstationary
income (p < 0) is a sufficient condition
for an increase in the interest rate to reduce the precautionary premium.

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550

: MONEY, CREDIT AND BANKING

Things are quite different

premium is
Pi>o = ol

spirit (k > 0). In this case, the

if there is a capitalist

r + k/a'
?. (19)

a2

(r+ k/a + p)2 2

Recall that the "effective" interest rate in the presence of the spirit of capitalism is
r-\-k/a rather than r. It follows that the spirit of capitalism may decrease or increase
the precautionary premium depending upon whether the effective rate of interest
exceeds the rate of time preference. That is, 3Px>o/d ^ <=> 0 as r -f-k/a >=<
p.
We distinguish between two cases. On the one hand, if income is nonstationary
(p < 0), then the premium always decreases with the spirit of capitalism. On the
other hand, if income is stationary (p > 0), then the effect of the spirit of capitalism
on the premium is nonmonotonic.4
If r + k/a > p, then the premium still decreases
with the strength of the spirit of capitalism. However,
if income is stationary and
r + k/a < p, then the premium will actually decrease with the spirit of capitalism.
We now have the following proposition.
Proposition
premium
premium

2. An increase in the spirit of capitalism always lowers theprecautionary

is nonstationary. If income is stationary, then the precautionary
income
if
increases
with the spirit of capitalism, and then falls.
initially

2.2 Excess

Sensitivity and Excess Smoothness

The spirit of capitalism has important implications

of

dynamics,

consumption

excess

sensitivity

and

for the two fundamental puzzles

excess

smoothness.

consider first the case where there is no spirit of capitalism. Using

= 0, the
(14) and setting k
growth of consumption is simply
?
dct

[r
=r -+a-?

I ar

?-

? o~2~\

(r + p)2 2 J

To

see why,

equations

(12)

r
dt+?-?a

r+ p

dzt.

(20)

Note two properties of consumption growth in this benchmark case. First, it reflects
Hall's (1978,1988)
classic result that consumption should be a random walk under ra
tional expectations. As shown by Caballero (1990), Hall's conclusion is not affected
by the persistence of income: current and lagged consumption and income cannot
help predict the growth of consumption. In fact, it has been documented again and
1989, Deaton 1992) that changes
again (e.g., Flavin 1981, Campbell and Mankiw
in income predict changes in consumption. This is the excess sensitivity puzzle.
Second, the innovation to consumption is equal the annuity value of the innovation
to income (also a result due toCaballero 1990). This implies that if income is stationary
(p > 0) the variance of consumption growth is less than the variance of income growth,
at A* = a (p ? r). If p < 0, then k* < 0 so that _?x>o falls monotonically
4. Pk>0 reaches a maximum
and then falls as
if p > 0, then k* > 0; in this case, _?x>o rises to a maximum
with k for k > 0. However,
k increases for k > 0.

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YULEI LUO, WILLIAM T. SMITH, AND HENG-FU ZOU

I 551

as one would expect from the consumption smoothing suggested by the permanent
If income is nonstationary
income hypothesis.
(p < 0), however, the variance of
the
variance
of
income
consumption growth exceeds
growth. This leads to the excess
or
if
Deaton
income
is nonstationary, observed
smoothness puzzle,
(1992) paradox:
too
to
smooth relative
what the permanent income
consumption growth is actually
hypothesis predicts.
How does the spirit of capitalism
growth of consumption is now
[r+k/a-0
ar

Etdct=r

(X > 0) alter these predictions?

r+X/a

a2]
(r + X/a + p)z 2 J

-+

a--?-3?-dwt.

The expected

X
(21)

If there is a capitalist spirit, so that X > 0, the expected change in consumption

can be predicted by the growth in wealth. This is a special case of Proposition
1,
in
in
the
model
Section
1.
(5)
equation
general
To develop further insights about how the spirit of capitalism affects consump
tion dynamics, it is useful to use the budget constraint in equation (10) to rewrite
consumption growth as
, ^o-2] ^
T?
dt+
2 J

[lr-9+X./a
a
r-\-X/a

dct=r-??-+

r+k/a
r 4- X/a 4- P

adz,.

X/a
p
r + X/a 4- p Etdy,

(22)

is no longer a random walk when there is a capitalist spirit: the

Consumption
anticipated growth of wage income can be used to predict changes in consumption
when X > 0. Therefore, the spirit of capitalism provides an alternative explanation
for

the excess

sensitivity

to income.

of consumption

This suggests an alternative interpretation of the empirical results of Campbell and

Mankiw (1989). They regress consumption growth on income growth. The estimated
coefficient attached to income growth in this regression is large and statistically signif
icant.

They

the economy.

interpret
Our

this

model

number

as

implies

that

the proportion
this

coefficient

of

"rule-of-thumb"
can

also

be viewed

consumers

in

as a measure

of the strength of the spirit of capitalism.

Finally, consider the excess smoothness puzzle. In the absence of the spirit of
=
capitalism, when X 0, the growth of consumption is given by equation (20). Hence,
the standard deviation of consumption growth is
std(dct) = ?^?a.

r 4-/0

(23)

From equation (22), however, the standard deviation of consumption

presence of the spirit of capitalism is

std(dct)=

r 4- X/a
'
r 4-, X/a 4-, p

cr.

growth in the

(24)

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552

: MONEY, CREDIT AND BANKING

To show how the spirit of capitalism

excess

smoothness

affects excess

we define

smoothness,

the

as

ratio

r + k/a

A^std(^c,)^
std(dyt)

r + k/a + p*

Since absolute risk aversion k > 0, it follows immediately

that A ><
1 as
><
><
><
as
0.
0
This
0.
that
the
of
Indeed, 3A/3k
p
p
spirit
implies
capital
ism mitigates
the volatility of consumption growth when income is nonstationary.
In other words, the spirit of capitalism provides an alternative explanation for the
excess smoothness puzzle, because it reduces the volatility of consumption growth
when

income

is nonstationary.

We do not claim, however, that this simple model?with

CARA utility
excess
income?can
is
smoothness.
It
obvious
from equation
fully explain
income is nonstationary, the excess smoothness ratio falls and tends to one
the spirit of capitalism gets large (k -> oo). In other words, this basic model
excess smoothness

ratio will have a lower bound at one when

in the U.S.

However,

data,

aggregate

the

excess

smoothness

and AR(1)
(25) that if
(A -? 1) as

predicts the
income is nonstationary.
ratio

to 0.58.

is close

Hence, the spirit of capitalism itself cannot resolve the excess smoothness puzzle in
this simple model. Nonetheless,
the spirit of capitalism can help resolve this puzzle
when embedded in richer and more realistic economic environments. Specifically, it
is possible to show that if either (i) there are permanent and transitory components
to income or (ii) there is interest rate risk, then the spirit of capitalism can generate
a plausible excess smoothness ratio. We have established these results in a longer
these extensions make the
version of the paper, available upon request. Although
model more realistic, they shed little additional light on how the spirit of capitalism
affects

excess

smoothness.

3. CONCLUSION

Ever since Weber

gists

as an essential

last decade,

however,

(1948), the spirit of capitalism has been recognized

aspect
that?as

of modern,
part

capitalist
of a broader

economies.
effort

to address

It has

only

problems

by sociolo
been

over

of envy

the
and

have formalized this notion. The modern

"keeping up with the Joneses"?economists
economic literature on the spirit of capitalism has investigated its implications for
absent from this literature has been how the
growth and asset-pricing. Conspicuously
spirit of capitalism affects consumption and savings behavior under uncertainty. In
this paper, we fill this gap by incorporating the spirit of capitalism into a model of
precautionary

savings.

Our model with a simple AR(1) income process suggests that the capitalist spirit
may increase or decrease the precautionary premium, depending upon the degree
of nonstationarity of income. It also shows that the spirit of capitalism provides a
simple explanation for excess smoothness: it generates dramatic deviations from the

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YULEI LUO, WILLIAM T. SMITH, AND HENG-FU ZOU

By itself, the spirit of capitalism does not provide a plausible

random walk hypothesis.

for

explanation

excess

: 553

smoothness.

The model may have interesting cross-country

implications. Zou (1995) argued
that the high saving rates in East Asian countries and regions like Japan, Taiwan,
South Korea, Singapore, and Hong Kong may reflect the Confucian ethic of frugality,
which can be interpreted as an Asian incarnation of the capitalist spirit. Similarly,
our work suggests that differences in the spirit of capitalism may explain systematic
in consumption

variations

rates

growth

and

precautionary

across

behavior

savings

countries.

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