15
Jul
2011
WordPress Messes With My Comment Settings Again
Sorry, don’t know why the comments were closed on some of the recent posts. As always, that wasn’t conscious on my part. I can’t stand it when bloggers post something provocative and then close the comments. (But maybe now I have to be less judgmental; maybe WordPress is messing with those people too.)
OK. Since I am still unable to see an open comment option on the other thread, I thought I’ll post my response here instead.
You had said
“But of course he is forsaking consumption. He got paid $20 in the first week, and only consumed $15 of it. So that was $5 in present goods he could have had, yet didn’t. Same thing for weeks 2 through 51.”
I still think you are wrong. If we agree that money is the ultimate present good, then the $5 he hoards every week cannot be treated as a forsaking of consumption per se. All he has done is chosen to hold the present good money (which he can only hold or exchange) over another present good (any other consumers’ good that he could ‘consume’).
So, when you say “So that was $5 in present goods he could have had, yet didn’t”, you are wrong because he did have $5 in present goods – the money he decided to hoard.
Hence, I still think that you are in error in labelling the $5 Johnny keeps aside every month as a saving. While it is OK from a layman’s perspective to muddle up concepts of cash balance and saving and call them all ‘saving’, I feel that from a catallactic perspective, it would be erroneous to treat an addition to cash balance as ‘saving’ as it does not involve forsaking a present good to obtain a future good but instead involves an exchange of one present good for another.
@Bala: but your premise doesn’t hold. Money is exactly NOT the ultimate present good. It’s role in exchange is to make it easier to get what you want. It’s transitive.
Ultimate or not, money is a present good.
“In the monetary economy, since money enters into all trans- actions, the discount of a future good against a present good can, in all cases, be expressed in terms of one good: money. This is so because the money commodity is a present good and because claims to future goods are almost always expressed in terms of future money income.” – Rothbard in MESPM 2nd Edition, pp350
The core of my premise is that money is a present good. Unless you are questioning that, I am afraid my criticism holds.
Here is Rothbard elsewhere.
“The capitalists earn income in their capacity as pur- chasers of future goods in exchange for supplying present goods to own- ers of factors.” MESPM 2nd Edition, pp 352
Since the good that capitalists offer to the owners of future goods (factors of production) is money, I assume Rothbard is in effect saying that money is a present good.
I’m sorry I wasted your time. Here’s Rothbard specifying it as explicitly as he ever could.
“In the monetary economy, the present- future market, or what we may call the “time market,” is expressed completely in terms of money. Money is clearly the present good par excellence. For, aside from the consumption value of the monetary metal itself, the money commodity is the one completely marketable good in the entire society. It is the open sesame to exchange for consumption goods at any time that its owner desires. It is therefore a present good.” – MESPM 2nd Edition, pp 375
Hence, I am all the more convinced that Bob Murphy is wrong.
Yeah I ran into this when Wenzel and I argued about cash balances a long time ago. Rothbard is being inconsistent here. He clearly says in the quote I provided that if you consume less than your income, you are saving.
He also clearly thinks that saving = investment.
So if Johnny has an income of $20, and consumes $15, he has clearly saved $5. If he used that $5 to buy a T-Bill, everybody agrees that would be an investment, and the T-Bill would be a future good.
On the other hand, he holds the $5 bill in his wallet. He then spends it a year later on consumption.
From the original POV, why would that $5 be a present good? Especially suppose that guy fully intends to spend it a year later.
To the extent that it’s a present good, it’s because it’s providing a flow of services by giving the option of immediate consumption. I.e. this is exactly what Keynes means by its “liquidity” services.
So I am admitting that Rothbard’s treatment of cash balances isn’t fully satisfactory, NOT because he is disagreeing with me, but because it’s a little hard to reconcile with his own statement that saving = income-consumption and saving=investment. Rothbard is forced to say that someone choosing to carry higher cash balances (out of reduced consumption) is investing in the form of present goods, which sounds weird.
I’ll restate more or less what I thought about Rothbard’s quotes in an earlier post:
Perhaps this is me trying to read between the lines a little bit, but I was of the impression that Rothbard thought savings=investment.
In Chapter 6, where Rothbard starts talking about the production structure, the interest rate, and savings, Rothbard explicitly states that “Problems of hoarding and dishoarding from the cash balance will be treated in chapter 11 on money and are prescinded from the present analysis” (page 398). If one takes this statement strongly that all matters related to hoarding are abstracted from, your quote on page 420 is still in agreement with the statement that savings cannot be hoarded. Since in Rothbard’s framework, any Income-consumption in the ERE is invested in the production structure and not hoarded, then in the ERE savings can be defined as Income-consumption, since it necessarily equals investment.
Rothbard best describes his view of saving and hoarding in America’s Great Depression:
“But can’t savings be “hoarded”? This, however, is an artificial and misleading way of putting the matter. Consider a man’s possible allocation of his monetary assets: Clearly, our individual decides at one and the same stroke about allocating, his income in the three different channels. Furthermore, he allocates between the various categories on the basis of two embracing utilities: his time preferences decide his allocation between consumption and investment (between spending on present vs. future consumption); his utility of money decides how much he will keep in his cash balance. In order to invest resources in the future, he must restrict his consumption and save funds. This restricting is his savings, and so saving and investment are always equivalent. The two terms may be used almost interchangeably. These various individual valuations sum up to social time-preference ratios and social demand for money. If people’s demand for cash balances increases, we do not call this “savings leaking into hoards”; we simply say that demand for money has increased” (page 398).
This passage shows that Rothbard thought savings was equal to investment. An individual can “save” money by putting it into hoards, but this is not related to time preference and thus isn’t saving in the interest rate/capital lengthening sense. Rothbard says something along these lines in MES on page 386, stating “If a man wants to “save” (notice the quotation marks around saving) money for some future use, he may “hoard” it rather than spend it on a future good, and thus always have it available.” You can call it saving in ordinary parlance, but according to Rothbard economically speaking it is not saving but instead only reservation demand for money.
This is at least my interpretation of Rothbard.
I agree that Rothbard’s treatment of cash balances isn’t fully satisfactory. However, I also feel that is resolved quite easily if you consider my other point (which I made on another thread) that
Income – Consumption = Addition to cash balances
and not
Income – Consumption = Savings
In fact, I would go on to say that at the point of receiving income,
Income = Addition to cash balance
An addition to cash balance is logically antecedent to what one does with that cash balance. This cash balance may, subsequent to addition, be exchanged for other present goods for consumption or for future goods as an investment or just retained as cash balance. Under this treatment, only the cash balance exchanged for future goods may be treated as savings. I see no problem of consistency in then treating this savings as investment and saying
Savings = Investment
On your other objection based on Mises’ objection, I have a basic objection to it. You said,
“The workers labored away, and didn’t consume anything for it.”
This is, IMHO, incorrect. If Mises said this, then Mises was being inconsistent. The workers are holding a present good and are consuming its service of the cash balance function. As Rothbard points out, unlike even a good like Rice where one cannot conceivably consume a tonne of rice all by oneself in a short period of time after receipt, money can be exchanged for a variety of present goods, all of which can be consumed in a rather short span of time. It is the most marketable of the present goods. Money is the easiest thing on earth to ‘blow’. It is therefore upto the worker to decide what is the most appropriate way to ‘consume’ the services of the money. It that be an addition to cash balances, then so be it. I don’t see how that becomes grounds to treat the cash as anything other than a present good.
Hence, I feel I should stand by my objection to your example. I would obviously extend this objection of mine all the way to your admiration of Keynes’ point on the relationship between cash holding and interest rates (and the very purpose I am making this objection), but that is another discussion that I wanted to take only after addressing your example satisfactorily.
Bala, just to expand on this: If we abstract away from the ability to hold money for long periods, then yes it is a present good. I.e. if we are picturing the capitalists “really” advancing present food, housing, clothes, etc. out of the subsistence fund, and workers get to consume right now while the capitalists wait a year for the finished product to emerge, then yes the capitalists are advancing present for future goods, and that’s why they earn interest.
But as Mises was pointing out, suppose that the workers get the money from the capitalists in exchange for their work today, and then the workers sit on the cash for a year. Then it’s not at all clear that the capitalists have advanced present goods for future goods. The workers labored away, and didn’t consume anything for it.
So for sure, if the workers spend the money on consumption, clearly the capitalists are advancing present goods in exchange for future ones. But if the workers save their wages (in the form of higher cash balances), it’s not as obvious that that’s the way to describe what’s happening.
“If we abstract away from the ability to hold money for long periods, then yes it is a present good.”
I would say you have to abstract away from the ability to hold money for long periods. Part of the reason is that the ability to be ‘consumed’ (by exchanging it for other consumers’ goods) at virtually any point in time is one of the primary reasons it became money in the first place. So, this attribute is an attribute of money itself. It would be incorrect to analyse the function of money without performing this act of abstracting away.
Further, I also feel that the proper way to analyse hoarding is by choosing an appropriate time period for the analysis. In the case of Johnny in your example, the correct period of analysis is 52 weeks during which period he has 52 bursts of income (gross additions to cash balances), 52 bursts of consumption (spending on consumers’ goods) and 52 bursts of net additions to cash balances. At the end of the 52nd week, however, there is an additional spending of $260 on the watch that he gets. So, seen in this 52 week time-frame, Johnny has not saved at all. He has spent every dollar he earned on consumption.
This picture would be very different had Johnny invested in, say, a lawn mower that he could use to provide lawn-maintenance services to new clients. At any point in time from then till the end of its life, the lawn-mower would be a part of his savings as it would not be a good he holds for its own sake or the services it can render to help him attain his own ends. It is only a means to a present good, money.
This analysis appears perfectly consistent with the approach that savings = investment as well.
Just some stuff to think about, I’m no expert on WordPress :
http://www.internetblog.org.uk/post/1272/chinese-hackers-implicated-in-cms-hack-attack/
http://how-to-blog.tv/blog-security/evil-visitors/
Yet another from Rothbard.that confirms my premise that money is indeed a present good and hence that my criticism is valid.
“Thus, capitalists advance present goods to owners of factors in return for future goods; then, later, they sell the goods which have matured to become present or less distantly future goods in exchange for present goods (money).” – MESPM 2nd Edition, pp 374
I have an alibi. Don’t know about Roddis.
Are there some legit economists who wanna read this?
http://eatingpropaganda.blogspot.com/2011/07/textbook-economic-propaganda-literally.html