I saw an article by George Reisman the other day and realized I could not understand any of it.
It’s peppered full of economic terms, for example, “savings” and “investment”. Is there a standard definition for such terms? Or does it differ between economic schools? Without agreed upon definitions of terms, one can’t get very far!
For example, if I buy gold, am I saving wealth in the form of gold, or am I investing in gold? In a deflationary period, if I save cash, am I really investing in the dollar?
Whereas Keynes says consumption spending drives economic growth, Reisman claims that savings drives growth. But surely growth is signaled by companies investing in higher-order capital goods, which is a form of consumption spending, since the goods eventually wear out?
And how is economic growth defined? Does one have to quantify the size of the economy at two different times, and then compute the difference to establish the amount of growth? If the economy is worth $1 trillion one day, and $2 trillion at a later time, then how can the figures be compared without knowing the marginal demand for the dollar? If people one day wake up and say computers are a tool of the devil, and they destroy all the computers, the economy will have fewer goods in it than before and yet will be subjectively superior.
Keynes is a hack. He re-defined a lot of terms that were in use in classical economics, and established odd relationships between various economic phenomena.
Anyway, investment is, broadly speaking, expenditure on higher order goods for the purpose of future production. In a way it can be seen as consumption, but consumption does not have this additional element, so it’s something different (although there are differences between other schools’ capital theory, the actual definition of it pertains to pretty much the same thing.) As for holding gold, it will only be an investment if the gold is expended with the purpose of future production. Otherwise, it is a form of savings.
Saving is deferring present consumption for future consumption. Investing is replacing a certain income with a risky income. The first requires to lower your time preference, the second to lower your risk aversion. Both are necessary for production to happen, although I have the impression Austrians focus much more heavily on the former.
if john ears 3000$ a month
each month he typically spends 2700$, that is his consumption
he has 300$ left over, thats his savings.
whats happening with his accumulated savings?
if workers like john hold their savings with banks/lenders,
the lenders can loan the funds (the savings) out to businesses, who wish to invest in capital stock.
savings and investment are two sides of the same coin.
investment is sort of like savings ‘in action’.
so, how is capital stock grown, is it through john consuming , or saving ?
reading this backwards: the more john defers his comsumption spending(lowering it) and ups his savings, the capital stock is increased
and productivity is increased which means more prosperity tomorrow…
if there was no saving and only consumption, the capital stock would erode/depreciate, and productivity would fall,
I think that’s only true currently because banks don’t ekeep 100% reserves.
If you wander over to Societe Generale next week and they say “I’m sorry, we don’t have the 10,000 € you deposited with us, we made a few mistakes and invested that rather poorly” it would be pretty accurate to say you just got ripped off. Effectively, when you “deposit” money at a bank today you are implicitly and in reality “loaning” them money and that loan has a risk associated with it. You are more or less being forced to invest, even if your intention was to save.
On the other hand, if when you walked into Societe Generale and openned an account on day one it was assumed that you actually wanted your money back when you came in next week (and no you didn’t want to have that money used to take out incredibly risky derivative investments - that was why you were putting it in a “savings” account and not a high risk fund) and it was also therefore presumed that the bank would maintain 100% reserves for those savings so that they definitely would be there when you came back, then savings and investment would no longer be two sides of the same coin.
In a 100% reserve banking system savings would genuinely be deferred spending and investment would geniunely be immediate use of capital stock (with a mind to generate future income). The only reason savings aren’t savings at the moment is becuase banks have a legal mandate to create false certificates of deposit for money they don’t actually have and lend out the same dollar up to 50 times over (in the case of Societe Generale, that is subject to a 2% reserve requirement).