The Austrian School philosophy on the growth of an economy centers around savings not consumption. Only with certain assumptions does this view hold.
“Is savings bad for the economy” by Frank Shostak. The crux of the article highlights that savings, not consumption, is the basis for economic prosperity. In order for this to be true, you would have to assume that your dollars “saved” would be transferred to an entrepreneur/business etc. who would use that dollar to increase their productive capacity or increase their production. What becomes painfully evident from the current financial mess is that banks, as well as other institutions, make foolish bets with invested dollars- which in no way is beneficial to our economy. My point is that some types of consumption (ex: buying a computer) has the ability to increase ones productivity, whereas, some types of savings aren’t always beneficial. Wouldn’t the savings as a driver for economic prosperity be completely determined on how the savings is reallocated?
In that case it isnt a consumption activity its an investment activity. The fact that banks loaned money to the wrong people isn’t the fault of the savers.
When interest rates are artificially low (due to central bank policy) enterpreneurs go for activities that would otherwise be unprofitable at the higher interest rate, and the banks lend to them though they wouldn’t have at the higher interest rate. So the entire structure of capital and investment changes. Then, when the interest rates begin to adjust back towards the market level, the less profitable businesses go belly up and the banks are stuck with a higher level of default on their loans than they had accounted for.
Point is that it isn’t the savings that is the problem here, it is that the interest rate is being manipulated by the central bank which leads to long run problems.
So then savings aren’t necessarily the epicenter of economic prosperity. Improving ones productive capacity doesn’t necessarily imply “savings”. Savings are usless if squandered.
Banks don’t make foolish bets, they make risky loans, and they do so because they know their risks are severely reduced by interventionist entities/policy. In our case, the government (FDIC) and the FED back up the destabilizing loans made by banks. The lowered rate of interest makes foolish investment ventures seem profitable; if savings is forced upon society, then these investments actually become profitable. If you buy a computer for leisure it’s consumption, if you buy it for producing a good/service it’s capital and therefore investment. You need to do some kind of investigation if you wish to actually understand our current economic condition; guessing is never a good idea.
Savings are required for loans and investment. Investment is what grows economies, not consumption. The problem arises when savings are replaced with newly created reserve notes, or what some people call “dollars.”
Investment can’t come from consumption. If I want to build a factory, I either need to draw on my own savings or take out a loan from someone else. And that loan can’t happen if everyone in the world consumes 100% of their income/production, they have to save before they can loan me anything (unless of course they just counterfeit the money).
Forget savings as being a number of digits in your bank account. Think about money as only being a coupon you can use to acquire resources in the economy. It’s about whether you choose to consume resources for productive or non-productive means. When you produce goods or services you trade your produce (sell it) in exchange for money. If you choose to hold that money rather than use it to secure resources, that frees up the resources (steel, wood, etc..) to become material wearwithal for others to use. Asuming these, now available, resources are used by companies instead of consumers. Rather than build recreation vehicles or sports cars the resources instead build tractors or work vehicles. The resources are instead used to increase productivity to further increase future goods and services delivered to the economy. It was the savings of the producer, his/her choice not to consume resources for non-productive means, that enabled the resources to be redirected toward productive means.
For someone to obtain the resources (materials) to use toward investment at an affordable price (build a factory) that would create a profitable venture, someone has to withold from consuming those resources for pleasure in order for them to be available for investment. When you don’t spend and say you lock your dollars into a bank CD for 6 months, someone else gets that money for 6 months. If a business borrows that money then they also get access to the resources/materials in the economy that you witheld from consuming when you decided to save. In 6 months their productivity level has greatly increased due to their investment. They now provide many more goods/services to the economy than before their investment, while quickly also producing/selling/replacing those consumed resources to the economy to raise the money to pay back their debt to you. When you get your CD money back not only has the goods they consumed replaced in the economy for you to buy, but they are contributing even more to the economy due to the equipment or tools they built using your savings.
Being completely overexposed to sub prime mortgages or loaning money to a family to buy a house with no source of steady income are both foolish bets. Betting that the CDO’s will continue to pay revenue streams indeffinately and betting that the family will use his house as a piggy bank in the housing bubble to afford mortgage payments- are both “foolish bets”. The latter would fall under the sub-category- a risky loan. Understandably, your saying that the government makes these “foolish bets” more appealing because of their policies which undermines the risk-reward payoff.
The krux of my point was that it is overly simplistic to say that “savings” are what drives an economy. Certian types of savings and investment have the same end result as conspicuous consumption.
And of course, there has to be some consumption. And there will always be. We all need clothes, food, soap, transportation, office supplies, etc… but beyond the necessities to fulfill our means of production and the simple pleasures of life it is more productive to redirect our excess produce of goods/materials towards greater levels of investment for even more future production. This is where future prosperity comes from. In a world of exponential debt (our debt based money system) the assumption is that economic development and growth will be compounded and future production and prosperity will always be greater than today. This assumption is necessary so tomorrow the increased levels of production can pay for the debt that has been accumulated and compounded. We repay this debt without foregoing future consumption by always compounding our productivity level. We have over 60 Trillion $ to repay, thanks to our gov’t. This is our assumption anyways. Problem is that our real economic system is terribly flawed. Instead it is headed toward total monetary collapse because of such a flaw.
Consumption increases production. haha. what a joke. Why is it we’re in a $60,000 Billion dollar hole right now when it comes to national debt plus entitlement programs? I guess the production hasn’t been keeping up with the debt.
Your assuming that the money you saved in that CD is being deployed productively! If it is not- your “savings” is transferred to fuel someone else’s wreckless and unproductive consumption. In theory we would like to think they are being allocated efficiently, but practical application might lead us to a different conclusion.
Where our CD money goes depends on the bank’s interest rates and on people’s preference to consume now or to consume later in the future. When people choose to consume later they don’t borrow to consume on recreation. This low demand for money will drive down real interest rates. Low interest rates on longer term debt makes business ventures a lot more profitable, and this is the signal for businesses to borrow to invest. Also, when businesses do this, their assumption is that people do have the right to future money because the business is borrowing their real savings. Therefore, all this abundance of future goods/services will have future buyers because people aren’t broke.
Low interest rates, due to increased savings, makes business ventures more profitable. More businesses will borrow. Sure, there will be some individuals who want to borrow to consume for recreation. But as long as interest rates track the real supply/demand for savings then the economy will work itself out at an equilibrium level of recreational consumption and investment.
I never said “consumption increases production”- Im not sure where u got that from. What I said was, " some types of consumption has the ability to increase ones productivity". Don’t confuse this with non-productive Government spending.
No it doesn’t, consumption never increases productivity. If you buy a computer because you want to write a blog, that’s investment, and you’re computer is capital. If you want to buy a computer so that you can watch porn all day, that’s consumption.
It is when the central bank artifically reduces interest rates that throws the economy out of equilibrium with respect to savings and investment, which creates malinvestment and economic bust / recession.
Read the Austrian Business Cycle Theory (ABCT) why we have economic recessions.
Basically, the Federal Reserve’s printing press cannot create material wearwithal out of thin air. They only print money to create artifically low interest rates to borrow this newly printed money. Low rates don’t encourage people to save. People continue to consume for recreation. Material wearwithal is not reserved in the ecnonomy for investment. Business see low rates as the signal to be able to expand business profitably using debt. They borrow the newly printed money and bid up the prices of resources in the economy, in competition with the recreational consumption. As prices rise, due to this monetary inflation, the businesses realizes that their expenses are higher than anticipated. Profitability is lower than expected. They rely on ever higher prices to sell their goods at higher prices to be profitable. Therefore the Fed has to continue with printing money and creating inflation in order for these businesses to not go bust. Later, to calm down inflation and to prevent the value of money from falling too much, the Fed must withold from printing more money. Interest rates rise and prices stagnate. Profitability falls and businesses go bust. We get recession.
Now we’re just arguing semantics. If I buy a computer all day to “look at porn” I can also use it to send e-mail. My computer as consumption or as capital are not mutually exclusive.
The way to economic prosperity is to find ways to increase our productivity or productive capacity. This includes but is not limited to only “savings”.
It’s not semantics at all, in fact, it’s absolutely vital for economic investigation. Sugar used for tea is a consumption good, while sugar stored in an English warehouse is a production good, or a producer’s good; presumably it will be turned into candy. Again, economics is not as simple as people make it out to be, you should do some research.
This includes but is not limited to only “savings”.
Could you expand this concept?
If we decide to drive our tractors to the drive-in movie or have fun playing with it on the weekend then it is recreational. Because you’re wearing out the tires or engine then you can consider that a level of “consumption”, but it’s still a tractor.
We can have higher levels of consumption while having higher levels of production. If the level of production is compounded then we can continue to compound savings and production while having a level of consumption that also tracks this compound growth. Therefore, consumption can go up. It’s like skimming more and more cream off the top of a vat that is increasing in size as you add more milk. You’re still skimming the same percentage off the total size of the vat. Since the vat is growing you’re getting more and more cream. But it’s still a constant level of consumption with respect to production or growth.