A Question on Austrian Saving

Economics Economics Questions
1

To my last posts about this topic (Saving, Deposit Banking, and Cash Balances and Savings, Cash balances, and Deposit banking) I didn’t really receive any adequate responses to my question (not saying the responses were bad, but I just didn’t understand them or no one responded to them). So I guess the best solution is to word it in a different way. I’ll end my talk about the previous posts and look like I’m starting all over again

I am terribly confused on the Austrian meaning of saving. Some people say its differed consumption, while other people make it out to be more complex. For example, in this article(http://www.brookesnews.com/053101savings.html**)**, Gerard Jackson says

Most economists define savings as deferred consumption. But this is a very misleading definition that confuses the demand to hold cash with savings. To the Austrian school of economics savings is a process that defers present consumption in favour of future consumption by expanding the capital structure. This definition clearly excludes cash balances.

Using the Austrian definition we see that “cash flow improvements from realized gains on equities” cannot in themselves be defined as savings. To be savings they must be invested.

This is my opinion makes sense. However other places I look give it the meaning of simply differed consumption, or relinquishment/postponement of consumption, which can also include hoarding/deposit banking and such. This seems vague to me. Since I want to try to keep this brief I won’t go on looking for quotes and such and leave that “side” as that. So in order to ease my confusion, how about a scenario J? (This scenario takes place in a world of full reserves, meaning deposit banking/loan banking)

John works at McDonalds every week for 50 dollars a week. Every week he gets a paycheck. Excluding everything else (house etc), John spends 40 dollars a week on food. He has 10 dollars left. With this, John can either A) Buy more consumer goods, B) put the 10 dollars in a deposit bank (meaning, such as Huerto de Soto describes in Money, Bank Credit, and Economic Cycles, he pays a fee to the depositary for safekeeping and has access to it at all times) or C) Invest with it, either using the money to make his own capital good or loaning it out through a loan bank.

So my real question is: Are choices B) and C) considered saving? To me they seem like two separate entities that do two different things to the economy, and according to Gerard Jackson from his quote choice B) is excluded (Deposit banking meanings “cash balances” or “hoarding”-correct?)

So, if only Choice C) represents saving in the Austrian sense, then for example, If John was to put 10 dollars a week in his deposit bank account in order to accumulate enough money to buy a bicycle (which costs 50 dollars), then there is no saving correct? Likewise if John was to do the same thing but instead of a 50 dollar bicycle he was to buy a 50 dollar stock of McDonalds, then the saving would only happen when he buys the stock and not simply putting it in his account correct?

However, if both choice B) and choice C) are considered saving in the Austrian sense, then I sense a problem. John utilizing choice C) expands the productive structure, choice B) does not. For example, in the Austrian Business Cycle Theory, how can choice B) be included in the pool of savings Austrians talk about (the one which investment exceeds through credit expansion?) The pool of savings which finances capital growth can come only from loans (If we strictly limit us in the banking business), not deposits.

For example, if both of those are considered saving, then if Individuals save but don’t invest and put all of their money in their deposit bank, then there will be no more loans available to business, meaning the pool of saving has not increased at all.

Thank you so much to the person who answers this for me. I hope I have clearly made my point and believe it to be something many people are confused on (as I see two different sides). I hope that my question is not too long, and if someone would like me to elaborate then I will

John Brown

2

B and C both are savings, though c it becomes obvious that the savings is in the form of investement. B is more ambigious so that 3rd parties can slander and say ‘hoarding’. but it is saving all the same

it is wrong to look at the number of loans existing, checking for changes here and using that to determine that changes are occurring to the pool of savings, (there may be some correlation but not causation) but rather the opposite. savings allow for lending. it is not that lending allows for saving as you seem to have stated

3

How is B saving? How does his deposit fund investment?

4

it is not spending… , it is deferring its present use, in favour of a use in the future, or its present use IS its future use.

ask him why he deposits.

5

That is not saving by the above definition.

His $10 sitting in the warehouse does not seem like investing in the structure of production.

6

there is not a logical identity relating savings to investment.

there is a mechanism by which savings are translated to investements. loans are an example of this.

so all investments are savings.

but it is not so that all savings are investments.

at least this is my present understanding.

7

B is not saving, no consumption is being deferred. In fact, that’s the very point of a deposit bank and exactly the reason why FRB is a breach of contract.

8

in B what are the things being consumed? (that which is not saved)

9

The money itself is being consumed, in a sense. What you’re saying is the small change in my wallet that I haven’t yet spent is savings, which is silly.

10

calling the cash that is not spent from the wallet ‘savings’ is exactly as silly as saying a gold bar put in a safe at home and safe remaining closed for 5years is an example of ‘consumption’ (and that consumption, what the gold will buy, is not deferred into the future, when the safe is eventually opened and the gold spent)

11

Well, if you plan on misrepresenting me your argument would be correct, yes. The fact of the matter is you cannot determine a priori whether or not putting the money in the safe is savings or not. Should I subjectively intend on keeping the money in the safe for the entirety of the time then yes, it is exactly that. If, however, it remains in there for nothing other than safe keeping and I desire to spend it whenever the opportunity may arise it is exactly the same as the money in my wallet or coat pocket, it is money I have as a part of my cash balance. The decision as to how much I consume or to save is logically prior to the decision concerning the amount of money I keep in my cash balance.

12

well then we agree. why not answer the original poster in your preferred way and therefore improve on my attempt.

13

Because putting money in a deposit bank implies that one wishes to have instant access to the funds, if not then why not lend the money and gain interest on it?

14

ha, thats your answer as to why you wont answer the orignal poster ? [:P]

i dont understand what point you are adressing. sure a benefit to a deposit account is that by rights you can access to it , and consumer your savings. you could hardly consume what isnt there to be consumed, and if it has been there all consumable and the like up until you consumed it, you must have been saving it till you consumed it.

there are two ways to save, you can invest, this has the possibility of interest benefit. you can deposit, this has greater liquidity and risk benefits. why isd the latter not saving.

in a pre-monetary economic, crusoe style, we can talk of the fisherman that builds a stock of fish, that he can then eat from as he cuts back his fishing hours and turns himself to making nets. the 'stock of fish, the savings, does not earn interest, it is closer to the deposit form of saving than the invest form.

15

In order for John to be able to “hoard” 10 dollars though he has to :
a) Produce something - probably hamburgers
b) Not consume anything in return

He is producing without consuming… effectively adding nuts to the economy’s nutpile without taking anything away for himself. Those nuts are there for other actors in the economy to use and invest, even if John does not directly give them the money that would be required for them to do so.

John is contributing real savings to the economy through his act of simultaneously producing whilst at the same time not consuming - he is contributing just as many real savings to the economy as if he’d taken the $10 and instead invested it in the share market. The only difference is who will eventually end up benefiting from those real savings.

If he’d invested the $10 in McDonalds shares then the beneficiary of the savings would be plain to see. By “hoarding” his money in a deposit account he is not, in any way, preventing people from accessing the real savings that he has produced, it merely becomes less clear who will access them because it requires digging a little deeper.

The effect of “hoarding”, in the short term, will be that the total quantity of money in circulation will drop. If enough market participants were to do this, the general price level would drop and thus the purchasing power of the monetary unit would rise. People hoarding in this manner would therefore effectively see their savings distributed to all those market participants who were not hoarding, continued to spend and thus were benefiting from the increased purchasing power of the monetary unit… that might be consumers, it might be investors - who knows?

B is definitely saving though…

16

I don’t know whether to say that I’m happy that this many people responded or upset that it seems to be a confusion between people.

17

you could comment on the posts directly? the confusion may dissapear.

it seems jimmy and i agree, and possibly giles too, though i can’t say that with as much confidence

18

I think the article is wrong. Saving is not deferred consumption in favor of future consumption by expanding the capital structure. That is investment. Savings is deferred consumption only. Savings is a broader term than investment, and includes both investment and hoarding.. So in your example, both B and C are savings, but only C is investment.

19

But does hoarding entail deferred consumption? I’d say no.

20

it is a matter clarified by the context of the scenario being considered.

if i get hold of a salted fish and dont eat it till the next week, i hoard a fish for a week, i have deferred consumption for a week; i saved for a week, then i consumed the fish at the end of the week.

if i then consider ‘what did i do this week’, i might say, ‘i consumed a fish’ and i might also say ‘i did not save any fish this week’. and the fact of my saving doesnt get mentioned or is overlooked. my story has been simplified. often in writing a difficult economic tract, i might choose to use the latter simplification, to give proper emphasis and simplicity to the matters i really do wish to discuss. but i think the more detailed interpretation can always be fed back in.