From pg. of Hayke’s Prices and Productions and Other Works available online (http://mises.org/books/hayekcollection.pdf).
Does anyone know what Hayek is saying in the above statement?
I may be taking this out of context. but I think what he’s saying is this… which I’ll explain through parable, because I find it easier to explain this way (hopefully it’s also easier to understand this way):
Imagine you have an economy of “capitalists” and “consumers”. The capitalists own all the means of production and, in this economy, the only means of production is some lambs/sheep. The consumers work for the capitalists sheering and sheparding sheep etc. (which is how they get their money) and the capitalists pay themselves dividends (which is how they get their money) and so, actually, everyone is a consumer… which pretty much fits with reality. The only thing special about the capitalists is that they make decisions concerning production etc.
OK, so at the begining of the story the economy turns in a nice even fashion. The economy starts each year with 100 lambs, the capitalists decide each year to slaughter 50 lambs (to provide meat for consumption) and to retain 50 lambs for breeding. At the end of each year those 50 breeding lambs produce 1 lamb each and the result is 100 lambs again.
Now, total consumption (and thus the total amount paid out in salaries and dividends by the capitalists) is 50 lambs. If the capitalists want to expand production so that the economy could potentially produce more than 50 slaughtered lambs each year, the only way they could do this is by not slaughtering, initially, as many lambs… they would have to keep more aside for breeding. Thus any increase in investment (with a mind to increasing long term production) must implicitly come at the cost of short term consumption. The capitalists must, over the duration of their investment, pay out in salaries and dividends (i.e. to consumers) less than they ordinarily would.
So in the first year of “investing” they decide to slaughter only 40 lambs… they are thus left with 60 breeding lambs and so although salaries and dividends had to be cut by 10 slaughtered lambs during the first year of the investments, at the end of the year they end up with not 100 but 120 spring lambs. They can thus now sustain a total level of consumption of 60 slaughtered lambs on an ongoing basis. Thus in the long term, real salaries and dividends, as an aggregate, will rise as a result of their investment.
So basically I think Hayek is just saying that savings are required to fund investments - which implies a temporary drop in real incomes until such a time as the investment results in increased production coming on line.
Does that sound like it fits?
It does, thank-you.