03 Jul 2009

Robert Wenzel Schools Me Yet Again on Economics

All Posts No Comments

A while ago Robert Wenzel took me out to the woodshed (in his mind at least) regarding the “natural” rate of interest. (I don’t have the link handy.) Our latest spat–which is good, to counterbalance the usual lovefest between my blog and his–involves savings.

It all started when Wenzel criticized the Commerce Department’s calculation of the household savings rate. (For the record, I am not necessarily agreeing with the Commerce Department’s method. I’m just saying Wenzel’s attack was off.) In so doing Wenzel said:

Money “in your pocket” is not savings, it is a demand for cash, likewise excess bank reserves (which have gone through the roof) that are held by banks are also funds that are a demand to hold cash. Neither is “savings” in the technical sense of money out in the economy bidding up capital goods. It’s sitting, not bidding up anything. This is not “savings”, but money held “as a demand to hold cash”.

I thought that was silly, so I emailed Wenzel and said, “If I put $10 a week into a jar on my dresser, you’re saying that’s not saving?”

Wenzel then wrote a new post on the topic, in which he subjected his readers to an entirely superfluous ode to the importance of theoretical precision. (Nobody’s denying the importance of crisp definitions, I was saying his definition was a bad one.) Here’s the meat of his position:

Thus, while I know what Murphy means when he calls putting money into a jar “savings,” I would never use the term that way. To me putting money into a jar, a wallet or under the bed is exhibiting a “demand for cash”. It is not out in the market bidding up for goods, in any fashion.

Now, money put into a savings bank, is to me savings. That is, there is no money in the bank after I deposit it there. The money is loaned out to others, who presumably are borrowing the money to bid for goods and services.

Thus, there is great confusion if you call money put in a jar savings (money which is just sitting there) and, at the same time, call money which is put in a bank the same thing.(Where it is, decidedly not sitting there, but out bidding for good and services).

Of course, you can adopt any functional definition you want. But if you go Wenzel’s route, you’re going to end up with some awkward situations.

For example, let’s say I go put $1000 in my savings account. I ask Wenzel, “Hey, did I just save $1000?”

If I’m reading Wenzel correctly, he would have to say, “I’m not sure. Let me call the bank and see if they’ve lent that money out to a borrower. If it’s still just sitting there in the vault, then no, you haven’t yet saved.”

(That might be unfair. Maybe he would say, “Yes you saved, but then the bank’s demand to increase cash balances withdrew your savings from the economy.”)

Another problem: Wenzel seems to be forcing savings to equal investment by definition. In other words, I don’t see what the distinction is between savings and investment in his worldview.

I think the basic problem here is that Wenzel overlooks that a given act can be both saving and an increase in cash balances. Look, suppose I spend $20 on a DVD. I both (a) consumed and (b) reduced my cash balances. Right? Surely Wenzel would agree with those two descriptions.

So, going the other way, if I take $20 out of my paycheck and put it into my piggy jar, I both (a) saved and (b) increased my cash balances.

It’s true, there are things that you have to worry about when someone saves by hoarding cash, versus saving by giving the money to a financial intermediary. But that doesn’t change the fact that devoting some of your income to increasing your cash position is a form of saving.

(The exact definition of saving for me is to consume less than one’s income. And then if you ask what income is, it is how much you can consume without impairing your capital. I’m pretty sure I got these basic definitions from Hayek’s Pure Theory of Capital. I would be very surprised if Wenzel found an Austrian who said that adding to cash balances wasn’t a form of savings, but I am ready to be corrected on that score. Maybe they do somewhere, but again, I’d be surprised to see it.)

Comments are closed.