I’m preparing for a debate with someone who is an ardent Keynesian, and just want to clear something up in my head about saving. Saving is simply the process of restricting consumption by reducing consumption or not spending earned money and instead saving (“hoarding”) it. From this restricted pool of cash savings there can be only investment, only investment can come from saving, and not from consumption. To invest you must save, and to save you must restrict consumption. So setting aside money as “savings” can either come from reducing consumption or by setting aside some of your weekly(monthy, etc) earnings.Am I correct so far? (I don’t want to talk about cash balances and how increasing them may not necessarily mean an increase in saving)
So does this mean (in a little bit of a broader sense), that saving is just not consuming? Which means individuals when receiving money can only consume or save at first? Only once they have saved can they invest. Does saving have to imply “earning” the money? For example, if I receive an inheritance or find $1000 on the ground and decide to save it by putting it in a deposit bank, then it is saving right? So saving comes about as an increase in cash balances, and then investment comes from it?
If anyone could tell me if I understand the concept correctly or not I would greatly appreciate it. Thanks.
Yes. The important part of the Keynesian argument here is that storing cash is in their view hoarding. Hoarding to an Austrian does not exist. Individuals keep differing amounts of cash on hand according to their preferences. These individuals then apply this saved cash according to their preferences for risk.
As for increasing cash balances, there are two reasons for this: The persons risk preferences have changes or their perception of market risk has changed and they decided to keep more cash. The second is that these Keynsians keep creating more money. As the value of money deteriorates, savers wanting to keep a certain amount of real wealth on hand will have to increase the number of nominal dollars to maintain it.
Yes, saving is the act of deferring consumption (increasing ones cash balances is another, unrelated, matter).
The way Austrians see it is that in order for investment to occur one must defer consumption in order to live off the saved goods in the intermediate time period (the period between the beginning of the investment and the point at which the metaphorical new “structure of production” is complete).
Keynesians, on the other hand, see consumption and investment (at least in the short run) as additive components, with consumption being stable, and investment not being stable (government finance is required to stabilise this).
The reason for this is essentially a disconnect between microeconomics and macroeconomics, this disconnect being the result of the lack of capital theory in modern macroeconomics. Keynesians see all investment as being close to consumption, that’s why you’ll often hear reference to stocks in shops. When consumers stop spending, shops are left with excess stock and as such curtail investment, considering this one can see why Keynesians regard the two as being additive components of wealth.
Capital theory regards capital as being the result of human action aimed at satisfying desires some time in the future. Keynesians forget this, and dismiss the later stages of production, focusing entirely on the derived demand effect and ignoring the interest rate effect. The Keynesians take the stages of production closest to consumption as being indicative of all investment.
This might be a stupid question, but just to end my confusion: When someone saves, it always manifests itself as an increase in cash balances correct? From then investment can occur.
This doesn’t necessarily mean that an increase in cash balances means an increase in saving, because someone can reduce investment/increase consumption to increase their cash balance right?
Not quite, when someone saves they defer consumption to some point in the future. If I mine 2tons of zinc and then sell 1 ton for cash and buy a car. My cash balance has not risen but I have saved 1 ton of zinc. I could trade that ton of zinc for 500 shars of a company and never have cash although this is a more difficult transaction.
Yes, an increase in cash could have come from converting savings in some other form into cash.
The Keynesian fallacy here is that holding cash is bad. They want cash doing something(something they approve of) and get into a tizzy when people don’t use it the way they want. The issue is that people have different risk and time preferences, and there are transaction costs associated with storing wealth in other forms of property.
Here is an example: I have a permanent advance of several thousand dollars from my company for future travel expenses. I keep that in a checking account because I might have to spend it to travel out of the country. I could keep that in a money market or some other account but then there would be minimum balances and like that I might get stung with in the future. This money is saved as far as I am concerned. Keep in mind that the Austrian theory is concerned with individuals not like the Keynesians, Monetarists and the like who are concerned with the intelligence of central planners like the Federal Reserve and think individuals acting according to their preferences are what is wrong.
Well in terms of the zinc, your “cash balance” of zinc has increased right? You mine 2 tons of zinc, purchase a car with one, and increase your balance with the other. Right?
Now you are getting into what is an investment and what is cash. It would be nice to have stable currency or cash like notes that can be redeemed for gold or zinc for that matter, but the current world with fiat currency has cash being whatever the government or its central bank determines it to be. I think of cash being the same as currency. I would define an investment as property used to generate wealth in the future. Things can be both consumed and held for investment, ie a home.
I personally view any delayed consumption as savings for the technical reason that the word investment implies that there is risk. Cash has only the risk of inflation and societal destruction while investments may become worthless and have transaction cost. The Keynesians have no response to those brokers that sold stocks and kept cash vs those who held stocks through the last crash. Obviously those holders of cash were much better off than the holders of “investments”.
You need to understand Austrian subjectivism to answer this. In Austrian theory there are two decisions with regard to saving, the first (it is logically prior) concerns the ratio of money to be spent on saving and consumption (time prefence) the second concerns the size of the cash holding.
At any one time a piece of gold can be a consumption good, savings or cash holding. It is only the actors subjective preferences that distinguish them. If an individual increases their cash holding they will (ceteris paribus) decrease the money spent on saving and the money spent on consumption. Therefore, it is logically possible that the actor in question can increase their savings whilst decreasing the money held, since the two are logically independant.
by “spending” money on saving you mean putting money in a saved fund right, as in “hoarding”? I am also confused at the bolded sentence, because it sounds like you are saying saving is investment. Can’t you increase your cash balance simply by decreasing consumption?
Saving money is differed consumption. This can either be direclty invested in the productive structure (as loans generally), or an increase in cash balances via “hoarding”. All investments are saving, but not all savings are investments.
However, increases in “hoarding”, or “cash balances” do not necessarily mean an increase in saving. It is most commonly referred to as an increase in the demand for money. An increase in cash balance can come from reduced investment or reduced consumption. Only when it is from reduced consumption is it an increase in saving. Even when you reduced consumption and do not invest, you are still reducing your time preference because you are preferring less present goods to future goods.
Savings through investment/granting of loanable funds helps the economy because it frees up resources in final stages of production to lend out to future stages of production. Businessmen use real saved funds to improve the productive structure. Society’s time preference is lowered and low interest rates are the result of healthy saving.
Savings as an increase in cash balances from reduced consumption still helps the economy. Resources are free in the consumer goods industrys and final stages of production, the purchasing power of the monetary unit increased, and therefore the real wages of economic agents.Time preferences are still lowered. De Soto says in Money, Bank Credit, and Economic Cycles that “when saving manifests itself as a rise in cash balances, there is a necessary decline in the price of consumer goods and services and in the price of products from the intermediate statges, as well as an inevitable reduction in the nominal incomce of the orginigal means of production and in wages, all of which adapt to the increased purchasing power of the monetary unit.”
Thanks guys. So one last question to clear my head up. On Page 261 of Human Action, Mises says “The amount which can be consumed within a definite period without lowering the capital is called income. If consumption exceeds the income available, the difference is called capital consumption. If the income available is greater than the amount consumed, the difference is called saving.”
So this basically states that what an economic agent does not spend on consumption is saving right? i.e deffered consumption? (not spending money on consumption) So if I work and get a 500 dollar paycheck at the end of a week and spend 100 on consumption, then regardless of what I do with the 400 (invest/hoard), makes this my savings right?