In Murray Rothbard’s America’s Great Depression, the neo-Keynesian argument that investment is a form of spending rather than saving is refuted by stating that there is no separation between the two; “In order to invest resources in the future, [a person] must restrict [one’s] consumption and save funds. This restricting is his savings, and so saving and investment are always equivalent.” (pages 38 & 39, Fifth Edition, emphasis mine.)
While I understand that both “hoarding” and investment indicate a lower time preference WRT the demand for money, it seems like this statement intimates that there is no difference between sticking money under your mattress and buying stock.
Rothbard states several times early on that there is no effective difference between saving and investing and that the two terms may be used interchangeably, but unless one is saving by depositing money in a fractional reserve bank, which will then go on to invest the money itself, how can this be? Am I merely getting hung up by equating investment with loaning money to those who will utilize it? If so, what is this definition of investment that is escaping me? Or is there a more specific definition for the practice of sticking money under one’s mattress?
Please Note that I am excruciatingly green in my understanding of macroeconomic theory. I’ve never taken a macro course in school; Sound bites and a quick skimming of Economics in One Lesson are the extent of my knowledge. If I’m missing something painfully obvious, I would appreciate a push in the right direction.
While I am not sure what Rothbard really means, what you say is right.
Money that is hoarded is not investment. Saving is only that abstained spending which is directed into investments. So, even consumer loans are not really savings. They are actually dis-savings.
I think what Rothbard said is that every time you are postponing consumption, you’re saving (and that includes hoarding money and investing). This is this way because those are different ways of having money at your disposal in the future. If you own money to someone who will consume it, it’s still saving, as you’ve already postponed consumption in order to be able to borrow that money.
Why not? It’s postponed consumption anyway. It has the effect of raising the purchasing power of money, also.
You wouldn’t be able to give a consumer loan without saving in the first place. There was still some consumption postponed. I think that savings is not abstained spending which is directed into investment. Every time you postpone consumption you’re investing, as you demonstrate low time preference. This is the same as saying that every dollar that is not spent now, will be spent in the future.
Money that is hoarded (or demand to hold money) is certainly investment! You are investing in the value of the money unit. It is productive as far as it satisfies the want of the individual who is holding the money. There is no loss of utility to society.
Hans Hoppe gave a brilliant talk on this subject, outlining how hoarding is not necessarily unproductive as claimed by the Keynesians and even free bankers.
I think Rothbard is trying to say that the important part of saving is the deferring of consumption and what you do with the savings: buy gold, put it in a mattress, put it in a bank, buy a bond, buy an asset, buy bunch of assets, etc is just the server expressing their risk and time preferences.
Also, don’t knock hoarding. Sometimes, like the period between Jun 2006 and now where the Dow Jones went from 14K to 7K to 10K. So hoarding cash in the mattress would have given a gain of 0 and the person would their principal. Contrast this with a contracted interest rate of 2%. If I need my money now then that 2% looks mighty low. As for holding money in banks, there are a lot of banks that have failed and people have legitimate concerns of banks being safe. First of all, your bank records are available for view by all of the the law enforcement apparatus. Secondly, banks are not exactly safe as ALL fractional reserve banks are at any point in time insolvent. Lastly, hoarding money increases the purchasing power of the currency and in a fractional reserve system, it increses the purchasing power by a lot.
People put money under their bed for a reason, they’re deferring consumption now for consumption in the future, i.e., investing/saving (maybe you’re saving for college or a vacation). Now it would make a lot more sense to put your money in an interest baring account, but some nations are so plagued by inflationism and FRB that they would rather lose the PP of their money then risk it in a bank (or in government bonds, securities, ect..)
Wow! Lots of great input from all of you; I really appreciate everyone’s help!
A big ‘Thank you’ to abskebabs for the audio link. Two quotes from the lecture really brought home the concept:
No one cares about the nominal units of money in his possession. Rather, people want to keep cash with a definite amount of purchasing power on hand.
With the quantity of money given, the higher demand for money can be satisfied only by bidding down non-money goods’ prices. Consequently, as the overall level of prices falls, the “purchasing power per unit money” rises.
If I understood this correctly, the reason why “hoarding” can be considered synonymous with “investing” is that one is putting downward pressure on non-money goods’ prices, resulting in higher real dollar value. In effect, one is “investing” in the purchasing power of the dollar itself.