Examples for the Great Cash Balance Debate of 2011
Let’s try a new approach. The reason I’m persisting in this argument is that I get the sense there are plenty of people lurking who can’t decide who is right. (I.e. if it were just Major Freedom and a few others arguing with me, I would have dropped it long ago because we’re moving in circles.) So let me try the following to get people to see why I am so sure that a good, subjectivist, individualist Austrian economist has to agree that diverting income into the accumulation of cash balances can be a form of saving.
Without further ado, ask yourself which of the following actions should be classified as saving:
(1) A person earns $10,000 during the course of a month, spends $9,000 on rent, food, gasoline, and other items that are consumed during the month, and devotes the remaining $1,000 to buying a 30-day bond that yields 1%. After the bond matures (one month in the future), the person plans on spending the principal and interest on consuming.
(2) A person earns $10,000 during the course of a month, spends $9,000 on rent, food, gasoline, and other items that are consumed during the month, and devotes the remaining $1,000 to buying a 30-day bond that yields 0.5%. After the bond matures (one month in the future), the person plans on spending the principal and interest on consuming.
(3) A person earns $10,000 during the course of a month, spends $9,000 on rent, food, gasoline, and other items that are consumed during the month, and devotes the remaining $1,000 to buying a 30-day bond that yields 0%. After the bond matures (one month in the future), the person plans on spending the principal on consuming.
(4) A person earns $10,000 during the course of a month, spends $9,000 on rent, food, gasoline, and other items that are consumed during the month, and holds the remaining $1,000 in the form of cash that earns a 0% nominal return. The person plans on spending the $1,000 one month in the future on consuming.
(5) A person lives in a Rothbardian world where the money is gold coins and banks are 100% reserve. Consumer prices gently fall about 2% per year on average. Even though the banks are solid, nonetheless the person is very suspicious and stockpiles gold coins over the course of his working career, spending less on consumption year after year than his income would have permitted. At age 70, he retires and starts spending down some of his stockpile on vacation cruises. When he dies, his estate still has 100 pounds of gold coins that his heirs acquire. (So did this man save at any point during his life?)
(6) A business owner in 1999 is worried that Y2K will screw up the financial system, and so every month instead of contributing to his Roth IRA as he normally would have, instead he lets his checking account balance start growing. Then in December 1999 he withdraws $300,000 in currency, out of which he will pay his employees and other expenses during the first quarter of 2000 if the electronic systems are all down. (So how do we classify the $300,000 in physical currency he holds? Is that not a business asset? Did he not save in order to acquire it?)
(7) There is a small island called Rothbardia where the people use gold as money. In 2008 they recognize that the rest of the world is about to start printing fiat money like crazy, and that this will push up the price of gold relative to most other goods. So the people in Rothbardia triple their normal cash holdings (which consist of gold coins and bullion, the money of their land). They are speculating that they will be able to unload some of these cash balances in a few years at a tremendous gain. (So did they stock up on present goods? Did they engage in a massive bout of consumption? Or did they “invest” in cash balances?)
Bob,
Again, you just don’t understand the objections to your argument.
Nobody is objecting to the fact that one can save (income-consumption) by merely increasing his cash balances over time.. Nobody, including Rothbard. So what’s with the “Rothbaridan world” thing?
Yes, one way to increase you cash holding is by saving, but another way is by dissaving. Another way is by doing neither… So using your own line of reasoning, I can conclude two other possibilities regarding what money is. To try to escape this objection, you went on to classify money as a future good or claim to one no different then a factory or an IOU, and proceeded to make the argument that the objection can be said about IOUs as well. But it is obvious that money is no claim to a future good, but a present good. That’s the whole point of hoarding it in the first place.
Dan wrote:
Nobody is objecting to the fact that one can save (income-consumption) by merely increasing his cash balances over time.
I thought Wenzel, MF, and Joe Salerno most certainly were.
I’m pretty sure you thought wrong.
But is just so happens that those claiming money=savings always give that example of forgoing consumption, but never give the example of capital consumption as another way by which one can and often does raise his cash balance.
Rothbard wrote “save” in quotation marks when referring to accumulating cash balances.
Yes I know and how does this show that Rothbard is saying that you can’t increase one’s cash balance by saving exactly? It merely shows that Rothbard, like Mises, is making the distinction between demand for money and demand for future goods. They can occur together and often do, but they are independent of each other. One should not conflate them.
Dan (DD5) wrote:
I’m pretty sure you thought wrong.
So far you are 0/2. I’ve asked Salerno to chime in.
Hang on a second Dan. Are you agreeing that someone can save by buying present goods?
I don’t follow the question. You can only save present goods, i.e., to forgo consumption means to save previously produced present goods and not consume them.
Can i save (plan to save) future money by hoarding future goods?
The reason I’m persisting in this argument is that I get the sense there are plenty of people lurking who can’t decide who is right. (I.e. if it were just Major Freedom and a few others arguing with me, I would have dropped it long ago because we’re moving in circles.)
Perhaps these lurkers could verify their existence (via private email to Bob if you don’t want to lose your lurker status) so as to ensure that Bob isn’t just wasting his time. Personally I stopped paying attention a long time ago, once it became clear that 1) Bob was obviously right, and 2) Major Freedom was never ever ever going to concede defeat.
Blackadder, I had people at Mises U come up and challenge me, asking e.g. if Bernanke prints money and drops it, are we all saving etc. And new people keep popping up in each thread, asking questions for clarification.
I stand corrected.
Isn’t Bernanke’s new money savings? In Roger Garrison’s text, it is the new money that creates the credit expansion and the extra (mal-)investment, correct?
Blackadder, it is my position that it is clear that Murphy is wrong, and that I am absolutely certain I hold the correct view. You can’t expect me to concede defeat when I expect others to do so.
There is island coinupia, where gold is money and everybody is allowed to mint his own gold coins. A man on that island has recently run out of wallpaper and instead of buying new wallpaper he decides to cash his paycheck and melt part of it down to decorate the walls. After a month his eyesight has deteriorated as the room is far too bright and he goes to see a board-certified opthamologist. Because of this loss in eyesight he has lost part of his job (w=MPL) and now has to melt down part of his wall and mint his own coins to pay the opthamologist.
Is decorating the wall saving, and melting it down dis-saving?
For the record: Does anyone reading this think that any of the scenarios (1) through (7) are NOT examples of genuine saving, where I don’t have to put quotation marks around the word? In particular, Dan, you agree that they are all examples of genuine saving? What about you, MF? I’ll email Wenzel and get him to chime in. I’ll try Salerno, too.
Bob, (7) does not specify how the increase in demand for gold was brought about. Did they achieve this hoard by decreasing spending on consumers goods, future goods, both?
Dan, right, I should have specified that in (7) they abstain from consumption spending. In order for the whole community to raise their cash balances, of course, gold must be mined or imported.
It all looks like saving to me.
I hate to beat a dead hose here,…again, but let me just say that even if you are right, you have not provided a valid argument in your defense. Particularly, you have not resolved the following logical problem:
If cash balance=savings
then it logically must follow that:
more cash balance->more savings, and
less cash balance->less savings.
The above must hold true for your equality to be true. Yet, it can be easily demonstrated that the above does not hold true. And the weird thing is that you actually agree , yet you still maintain that your equality of cash balance and savings holds true even though the above is easily proven to be a logical fallacy. You tried to do away with this problem by saying that the same problem can be said about factories, machines, bonds, etc… however, this in no way resolves the logical fallacy, for it could just mean that factories, machines, and bonds are also not savings (I’m not saying they aren’t, but just showing you that you did not in any way resolve the issue). The above remains a logical fallacy and it puts a hole in your cash balance=saving theory.
No it does not logically follow. More cash balances are only more savings if there is no switch out of bonds into money. Less cash balances are only less savings if it is a switch into consumption and not into bonds.
You assume that the total stock of savings changes by that move. In other words you are thinking in flows there. However when you are thinking in flows, any income at time t not consumed is necessarily saved.
Score!
The email has arrived. 1 the $1,000 is saving until the bond matures.
2. The $1,000 Is saving until theil the bond matures
3. There is no savings.
4. No savings.
5.No savings
6. Interesting, depending on how it is framed it could go either way,
7 Murph, do you spend hours thinking these up? I would say just as gold could be used for consumption in gold teeth. Gold could also be saving depending on what is in the mind of the actor, in the case you pose I would say yes.
Thanks Bob. Dan, please email your apology to my gmail account.
Just because he says it’s not savings doesn’t mean he believes it’s not savings. What if his fingers were crossed when he typed that? What if he doesn’t like Dan(DD5) and just wanted to make him look bad? What if someone hacked RW’s account and that wasn’t even RW responding? I say this is far from settled.
+1
Well, I apologize if I gave any impression that I know what Robert Wenzel is thinking when saying above “I’m pretty sure you thought wrong”. I’m not very familiar with his views. However, this doesn’t prove that your position is correct on this issue. I will send you a really nice and formal apology, or more accurately, a thank you letter, when you manage to resolve the logical fallacy above without resorting to further logical fallacies. I am holding firm to the Misesian position on money, savings, and interest rate. And I believe I have put fourth valid explanations for why some of your examples don’t pose any problems or holes for Mises’ theory of money and credit.
Oh come on Dan. Here’s what you wrote in reaction to my post:
Again, you just don’t understand the objections to your argument.
Nobody is objecting to the fact that one can save (income-consumption) by merely increasing his cash balances over time.. Nobody, including Rothbard. So what’s with the “Rothbaridan world” thing?
If you’re now admitting you’re not familiar with Wenzel’s views, then why were you so confidently telling me I was wrong and getting frustrated that I am dodging all the important issues on this?
I think you and I are fairly close on this, in the grand scheme of things. Wenzel doesn’t even think a guy buying a 0% bond is saving the principal (!!!). So it’s not worth us debating, when I’m dealing with that.
And remember, Rothbard said “save” in quotation marks. I am curious how he would have responded to the above scenarios.
Because I considered the important issues not in Wenzel (which I’m not that familiar with) but with what I have put fourth, as well as what I believe is the Misesian and Rothbardian position.
But, But, you’re arguing with Hoppe!
Thanks, Bob. You made me see the nonsense in Hoppe’s argument against Selgin and White. You’re an fraudulent free banker Bob!
Noiselull, don’t tell that to this guy.
Come to think of it, why is everyone so upset at the idea of a negative income tax? Seems perfectly reasonable to me. And withholding is awesome! It makes it so much more convenient to send your rightful tax payment to the proper authorities.
And here is another devastating reason why cash balances cannot possibly ever equal savings.
The total aggregate cash balance of everyone is always fixed. It never changes. It is impossible for everyone to hoard cash at the same time as the Keynesians would have us believe. Every act of hoarding by one individual is offset by an act of dishoarding by another (or dispersed among others). So cash balances among individuals are just constantly shifted around. They can never increase or decrease in the aggregate (assuming fixed supply of money). So it is nonsensical to say that cash balances are savings when every penny in the economy is always in some cash balance anyway. Whenever you add up all the cash balances in the economy they always amount to the some fixed total sum. So bob, yes you can hoard by saving but you can’t save by hoarding.
Yeah this is a good point Dan. I don’t think it is devastating, but I definitely want to think this through before answering.
Isn’t this simply assuming that V in MV=Py is static, instead of just stable?
This was precisely my point when I said that by Bob’s argument, all cash in existence will have to be considered as a part of the savings. In fact, what in this makes Bob’s argument look even worse is that if we accept his argument, we will also have to accept the claim that adding to the money supply increases the total savings. It adds to the cash balance since all cash has to be in someone’s cash balance. However, if cash balance is savings, then additions to cash balance (on the aggregate) must be considered as additions to savings.
I hope Bob will reply to this point as it puts a big question mark on his contention.
You’re confusing nominal with real quantities. Adding to the nominal supply, under the assumption of neutrality (helicopter drop) will increase nominal savings. I doubt Bob argues that it will increase real savings.
If you want to talk of real savings, you will have to concede Dan (DD5)’s argument that since money spent on getting consumers’ goods just changes hands and shifts into a different person’s cash balance (where it becomes savings), there is no effect of cash balance on aggregate savings. That is still a question to be answered.
What do you mean that cash balances have no effect on aggregate savings?
Either cash balances are part of savings and then this is plausible: savings is not a function of savings. Or cash balances are not part of savings and then you argue that any cash balance is never the result of dis-saving: savings is not a function of cash balance. This seems rather implausible.
I like your logic, Murphy. 1 through 3, and then 4, are deliciously devilish.
(1) Person saved $1000
(2) Person saved $1000
(3) Person saved $1000 (Wenzel says there is no savings. I disagree, because investing in a bond is saving, since it is abstaining from consuming in an exchange context, regardless of whether it ends up earning interest or not). Ex ante, it would be weird for one to even invest in a bond knowing it yields 0%, but then again, it might be the case that keeping cash in a bank is more risky than owning say a government bond that yields 0%, because a bank failure may wipe out the money completely, whereas investing in a government bond is typically more secure. But technically speaking, I would say that someone investing in a bond is saving, regardless of whether it ends up earning a net interest gain. After all, not all savings-investment generates gains. Many times investors incur losses.
(4) No saving
(5) No saving
(6) During the time he holds the $300,000 in cash, no savings. As soon as he invests in labor, that’s $300,000 in saving. Presumably, he’ll expect to earn a profit.
(7) If gold is their money, then their stockpiling of gold in anticipation of increased purchasing power of their gold vis a vis fiat money, would be like a user and holder of fiat money expecting a large increase in the supply of real goods vis a vis fiat money, which may then lead to them seeking to hold slightly more fiat money. If the island of Rothbardia uses gold as money, then it would be impossible for everyone to increase their gold balance, unless there is an increase in the supply of gold. The only way that the Rothbardians can stockpile 3 times more gold is by either mining more gold (which requires saving-investment), or selling more goods and services to fiat money nations who are asked to pay in gold. Having said all this, I will say that the Rothbardians who are stockpiling gold money are not saving, they are just increasing their cash balances. At no time are they abstaining from consuming in an exchange context. They are making no investments by hoarding gold.
I hope I passed this quiz.
Here’s a question for you: Is there anybody engaging in an act of saving in these examples:
A. Suppose on the same island of Rothbardia, there is a fixed aggregate supply of 1 million ounces of gold, owned disparately among the Rothbardians. Suppose also that the inhabitants own an aggregate accumulated savings (factories, shops, machines, tools, stocks, bonds, etc) totalling 500k ounces of gold in monetary value. Now, let’s imagine that all or most Rothbardians attempt to hold more gold ounces as cash, in order to become more liquid. Owners of assets try to sell their assets, and previous buyers try to buy fewer assets and retain more gold money as cash. The result is that there is a decline in the monetary value of accumulated savings. Suppose then that after 1 month, the monetary value of accumulated savings has declined to 250k ounces of gold.
B. I own 100 ounces of gold.
C. I own 100 ounces of gold and I tell you I intend to eventually invest it in a 30 year bond.
D. I own 100 ounces of gold and I tell you I intend to eventually consume with it.
E. We agree that if I cut your grass you will pay me 100 ounces of gold (I’m an expert of lawnmowing and my market price is absurdly high). I agree with Suzy to buy her 30 bond for 100 ounces of gold. You and I agree that after I cut your grass, instead of me taking ownership of the 100 ounces of your gold, I instead ask you to just give the money directly to Suzy. You agree with that, and the net result is that you have a nice cut lawn, I am the owner of a 30 year bond, and Suzy owns 100 ounces of gold.
F. You give me 100 ounces of gold as a gift.
I’ll try to answer your questions tomorrow, MF. I have to crash right now.
But I’m glad you see at least why I think I’ve “got” you on these ones. The difference between 3 and 4 is a bit weird for you, don’t you think? Note how Wenzel bit that particular bullet by denying someone buying a bond is saving, if it yields 0%.
Also, I applaud your consistency in denying that the guy in (5) ever saved. I am shocked you can say that, but so be it.
Yeah, you’re right, I (finally) get why you insist that your treatment is superior.
For what it’s worth, I also think you “got” Wenzel on the 0% bond example in (3). My guess for why he said buying a 0% bond is not saving (and why you asked it) is that he thought that by answering “it’s saving”, you were going to ding him by coming back with the idea that buying a 30 day bond that yields 0% is essentially the same thing as stockpiling cash for 30 days, after which you can then say you got him to admit that he agrees with your treatment of saving. So he said “no saving” in order to stop you from doing that, but in the process, he was backed into claiming that investing in a bond is not saving.
So it looks like Wenzel has (either shifted or introduced) the criteria that only something that (at least contractually) yields a nominal return can be considered saving. He would therefore be forced to say that investing in a $1 trillion bond for 100 years that yields 0% is not saving, but investing in a $1 trillion bond for 100 years that yields 1 penny of return IS saving. I mean come on. How can exchanging money for a 0% bond for an explicitly contracted period of time not be saving? I guess I now know what you must be going through, haha.
For the transition from 3 and 4, I thought that was awesomely clever. As soon as you went from 3 to 4, that’s when the lightbulb finally came on for me.
You are saying that holding money is “for all intents and purposes” investing in “something”, for an individually subjectively determined period of time, and this particular “something” just happens to yield 0% nominal return. It also seems to be “doing” something, namely, putting it aside instead of consuming with it, and by “saving=income minus consumption,” savings are taking place.
I finally know your logic now, and I think it is logical as far as it goes, but I still don’t it’s right, because of what it tacitly rests on. You are including, as Keynes did, autistic exchange phenomena into the concept of money. I think this fundamental assumption is why there is such disagreement. If we all agree that an individual who manipulates an object by himself, exclusive from an interpersonal exchange framework, is consistent with that object being a money, then everything you said about saving money follows.
But for me, money ONLY has meaning in an exchange framework. If something is no longer exchanged as a medium of exchange, it is no longer money, even if the objects are unchanged from the time it was money to the time it’s no longer money. Money to me is a dynamic concept. It can be physically rigid, it can he rigidly held, but the meaning of money I think resides in a dynamic rather than a rigid framework.
Let me give you an example so that you know what I am saying. Suppose Robinson is on his island, and he picks 10 coconuts a day. He eats 8 coconuts a day to live, and for the last 6 days, he has been stockpiling 2 coconuts a day, accumulating 16 coconuts. Today, he has decided to spend the next 2 days building a raft to get off the island, sustaining himself with the 16 coconuts in the meantime.
Here’s the question: Since Robinson is clearly making an autistic exchange with himself, can the coconuts that he is picking, eating, and stockpiling, be considered money? After all, coconuts are the universal means of exchange on the island. Robinson is the only person there. He is using coconuts to make a future exchange with his present self. I would say that no, coconuts are not money on this island. I am sure most would agree.
Getting back to the real world now, I think that by calling the stockpiling of dollars “saving money”, you are tacitly presuming all the presumptions and attributes of money when you are making the autistic exchanges (taking the money you earn, and putting it from “here” to “there” for a period of time, exclusive to an inter-personal exchange framework) in your examples. But I think you are discounting your own existence by doing so. Money arises because of individuals using a particular commodity as a medium of exchange. You play your part in this phenomena by acting upon a commodity in inter-personal exchanges. If you are going to DO anything with MONEY, then you have to be using it in some exchange. If you don’t DO anything with the commodity in inter-personal exchanges, then you are really collapsing the commodity’s monetary status and doing your part in turning it into a physical commodity without any monetary status.
Thus, if you are going to DO anything with money, then you must be in some interpersonal exchange framework. Merely putting the money you earn from one hand to the other is completely outside the monetary framework. The only actions within the monetary framework are the initial receiving of the commodity, and the subsequent giving of the money. What you do with the commodity in the meantime is outside the framework of inter-personal exchanges and hence outside the framework of money. By accepting a commodity as money, you are expecting/hoping that others will continue to treat it as money in the future. If you accept a commodity, but then you cannot find an individual who wants it as money to them, then the commodity loses its monetary status, and you no longer even have money.
But here’s the kicker: we can’t know, nobody can know, whether what you have in your hands is “money” until we see you USE your money in some exchange and someone else accepts it. You only give a commodity a monetary status by it being used in exchanges. If you’re not exchanging the commodity, then you are not acting in accordance with the commodity being a money.
That’s why holding money is not “saving” to me. It’s just holding money. If everyone hoarded a commodity that is money, then it would no longer even be a money. By you as an individual holding onto a commodity that you think is money, you are tacitly presuming that others are not holding onto their money, and vice versa.
Imagine your example once again where you held money for 30 days. What would happen if at the end of the 30 days, the dollar collapses and it is no longer money? Could you be said to have saved money? No, we must say that you held a commodity for a period of time that used to have monetary status but no longer does. We can only know you saved MONEY if we see you successfully USE the commodity in an exchange.
That’s why saving money is, to me, something you can only do when you invest (like in a bond), because that is when the commodity elicits a monetary status.
In short, I get your logic, hopefully you get my logic, you nailed Wenzel, and I need a coffee.
” If you don’t DO anything with the commodity in inter-personal exchanges, then you are really collapsing the commodity’s monetary status and doing your part in turning it into a physical commodity without any monetary status.”
Do I read you correctly that money that is hoarded is subtracted from the money supply?
No, that’s slightly different from what I’m saying. What you just said is, I’m sure you will agree, ridiculous. What I am saying is that by not using a commodity in exchanges, that commodity loses its monetary attribute, because money is a medium of exchange.
If everyone hoarded the money commodity, and started to engage in barter in order to survive, then the commodity would cease to be a money.
What I can’t figure out are the exact circumstances that we can identify that would enable us to conclude when and how a commodity acquires a monetary status, and when and how a monetary commodity ceases to have monetary status.
I know that if I as an individual hoarded money and intended to never use it, then the the supply of that which I am hoarding, be it fiat money or gold or whatever, won’t lose its monetary status in the greater economy. But if everyone does it, then it will lose its monetary status.
So if we imagine the entire population of people, and one by one they start to hoard dollars intending to never use them, and as each individual hoard dollars, they begin to trade in barter, then when will the commodity go from money to just a regular commodity? Or is this not even the right way to approach it?
Wow MF I am blown away (seriously). I’m glad I persisted with this, and Blackadder and others should see that sometimes Sisyphus gets the rock to stay up on top of the hill (or whatever he was supposed to do…).
OK I think I get what you are saying, but what about this: I save by stockpiling boxes of food waiting for The Big One. Then when the black helicopters are overhead, making it impossible for me to get to the grocery store, I open up my survivor shelter, can opener in hand. But I discover to my horror that mice have gotten into all my dry food.
So, did I not really save? More to the point, did I just prove with my story, that it’s nonsense to think that stockpiling food should ever be classified as saving? Don’t we have to say, “Once you EAT the food, then we know you were saving the past 4 years when you were hoarding it. But until you actually eat it, we have no way of knowing.” ?
I don’t think that’s how any accountant or economist would treat the food situation. I think you’d say that the person was indeed saving–consuming less than his income–and investing in foodstuffs, but then he suffered a capital loss along the way when the mice broke in (which was recorded on the books upon discovery).
I would do something similar with cash.
Or, if you don’t like the food example, suppose I save 15% of my income year after year, plowing it into the S&P 500, and then the market crashes. Are you going to say we don’t know if my buying of stock was saving, until I actually sell off the shares and go to Tahiti?
I am truly inspired by what has transpired.
After much perspiring, my patience was not expired.
I forgot to ask this in the other post, but here goes:
In your framework, is it possible for an individual to take part in a division of labor, monetary exchange economy, and not save, that is, not abstain from consuming?
In my mind, it is impossible in your framework for any individual to take part in a division of labor, monetary exchange economy, and not save and not abstain from consuming.
If you think about this, I am certain that you will come to the same conclusion as me about this.
Assuming you do come to that conclusion, then I must ask you: Since your framework makes it impossible to not save and not abstain from consuming, why oh why are you even talking as if one is CHOOSING to save and abstain from consuming in all your examples?
You say things like:
“I am “setting aside” my money “in order to” consume it later on. All this talk of yours makes it seem like saving and abstaining from consuming are further choices on top of the choice to take part in a monetary exchange economy.
But in your framework, “saving” and “abstaining from consuming” are logically deducible and a priori necessary and unavoidable in the context of division of labor and monetary exchange. There is no human choice element in “saving” and “abstaining from consumption” in your treatment.
I don’t know what the full significance of that is, but my intuition is that something is just not right.
Wow MF I am blown away (seriously). I’m glad I persisted with this, and Blackadder and others should see that sometimes Sisyphus gets the rock to stay up on top of the hill (or whatever he was supposed to do…).
I’m glad you persisted too, because just look at how much we all learned from each other. It would have sucked if we all acted like Krugman, never debated anyone, and just retreated to our nice cushy pulpits yammering to yokels all day long, haha. That is actually why I am so belligerent. Mostly it’s to get ideas out in the open, where it can be communicated. I stay anonymous in all online debates because I only care about ideas.
OK I think I get what you are saying, but what about this: I save by stockpiling boxes of food waiting for The Big One. Then when the black helicopters are overhead, making it impossible for me to get to the grocery store, I open up my survivor shelter, can opener in hand. But I discover to my horror that mice have gotten into all my dry food.
So, did I not really save? More to the point, did I just prove with my story, that it’s nonsense to think that stockpiling food should ever be classified as saving? Don’t we have to say, “Once you EAT the food, then we know you were saving the past 4 years when you were hoarding it. But until you actually eat it, we have no way of knowing.” ?
Epistemological constraints are a priori necessary in all propositions, even if they are tacitly presumed. As someone who is not you, the only way I come to have knowledge about you is by observing your actions, and then inferring that because you are a human, you act as well. I know the general logical categories that are a priori to your actions, but I cannot know the specifics of your actions until I observe you act.
So when you tell me that you are stockpiling cans of beans in a shelter, and after 4 years you go into your shelter, only to discover mice have eaten all your food, then I can’t say there is food there, and I can’t say that you saved food for 4 years. All I see is you going into a shelter full of empty cans (the mice had can opener teeth).
What if the mice ate your food the day after you put the food in there, and you didn’t know about it until 4 years later when you went in? Could you say that you saved food for 4 years? Given what I observe you doing, is it wrong to say that your actions are consistent with you being a human waiter at a dimly lit, buffet restaurant for mice called Chez Bombey, and you just served the mice up with some tasty beans served in cans? What if this is something that someone actually did intentionally, and their movements are exactly identical to your movements observationally?
I know this sounds ridiculous but I wanted to make a point that what you have in your mind, Murphy, can ONLY be known to me and everyone else (indeed this is true for all us humans) through your observed actions (indeed anyone’s actions).
Did you save “your food” for 4 years? Only if I see you eat the cans of beans after the 4 years. If not, then how can I know whether you saved, or just threw them away in a very expensive way? You could of course just tell me, but then again you can’t just tell me that a commodity is money and then abracadbra it becomes money. Money only arises in exchanges, not verbal proclamations. So yes, I can know that you saved “your food,” provided I see you eat “your food,” because something needs to be eaten in order for that something be a food.
If you say that what I am saying is rather silly, then just imagine observing me doing the exact same thing as you, but instead of stockpiling cans of beans, I stockpile cans of dirt instead. Suppose you asked me what I am doing, and I responded “I’m saving my food for the Big One.” You’d probably be very suspicious of me, and you would probably say that the only way my proposition to you would be correct is if you see me actually eat the dirt. Well, that’s all I am asking of you with the canned beans.
I know this sounds silly, but it’s not, because we all have very specific ideas in our minds about what we are doing as individuals in our actions. But in order for us humans to acquire KNOWLEDGE of what is happening in the world around us, of what people are thinking, we have to observe their actions.
The way I try to think like an economist is by thinking that I am just a physical entity whose true nature is known only by me (because I have inside information on myself), and because people can’t see inside my head, they can only see my actions. Their knowledge of me as a human is only through my actions.
Money is a concept of human action, specifically it is a concept in interpersonal exchanges. I can’t say that you are saving “money” because money only has meaning in exchanges. By holding money, that to me means you are holding a commodity that you expect will have a monetary attribute in the future, through your exchanges. By increasing your money balance, that to me means you are providing a series of productive goods/services over time to others.
When you say you are saving money, I treat that as you producing and earning money in exchanges, because money to me only has meaning in an exchange context.
When you say you are saving food, I treat that as you acquiring a series of items that you eventually eat, because food to me only has meaning when people eat it. I mean, the mere fact that cans of beans are edible doesn’t make it food, any more than your pet dog being edible doesn’t make it food either. Only if I see you eat your dog can I know your dog is food. Only if I see you use your commodity in exchanges can I know you saved money, instead of just forgetting about it or being a necessary participant in the never ending flux of time that makes holding money inevitable, let alone purposeful.
Your method of defending your position can be used the other way. You argue that earning money over time and accumulating a cash balance is saving money. OK, fine. Let’s take your logic as far as it can go to see if you are willing to go “Full Murphy” the way Wenzel used to go Full Wenzel, before he said investing in a zero return bond is not saving.
Let’s suppose holding money is saving money. Let’s suppose you program your bank account in such a way that as soon as it is possible for your computer to do so, any money that enters your cash account, is immediately transferred to Amazon.com in order to buy Krugman a copy of Chaos Theory.
Suppose that your INTENTIONS are that you want your earnings to go directly to consumption, and if you had your way, you would have had it so the individual paying you bought the book directly from Amazon themselves on your behalf. But because of how things are, there elapsed a period of time where for one 1 yoctosecond (Google it) you owned the money. Would you say that you saved money?
I don’t think that’s how any accountant or economist would treat the food situation. I think you’d say that the person was indeed saving–consuming less than his income–and investing in foodstuffs, but then he suffered a capital loss along the way when the mice broke in (which was recorded on the books upon discovery).
Woah, now I know why MY treatment is superior. You just argued that consumer goods that stay consumable for a positive period of time (all consumer goods in fact) can be investment goods, i.e. capital goods before they are physically consumed. By that treatment, I can “invest” in a hamburger by going to a restaurant, paying for a hamburger, and then going to the washroom to wash my hands, “delaying my consumption” for 2 minutes, “stockpiling” my hamburger on a plate. What economist would say that hamburgers being purchased to eat are investment goods? If you used my framework of interpersonal exchanges instead, in a monetary economy, then you would not even think of saying that holding a hamburger before you eat it is an investment.
In my mind, an investment is a monetary expenditure for the purposes of making subsequent monetary sales. It is not a physical “stockpiling”, or an autistic exchange-related manipulation of an object. The only way I’d call your stock of food an investment if is you bought the food with money for the purposes of making subsequent sales. If not, then I would just say you are holding consumer goods, JUST LIKE I would just say that by holding money, you are just holding money, and not investing in money (unless of course you bought the money for the purposes of making subsequent sales of money, in which case you’d be an FX trader).
I would do something similar with cash.
I don’t think you can do that. Money is a whole different ballgame. Food is capable of being produced and consumed by the individual totally apart from an inter-personal exchange context. Money is not. Money only makes sense in an exchange framework.
Or, if you don’t like the food example, suppose I save 15% of my income year after year, plowing it into the S&P 500, and then the market crashes. Are you going to say we don’t know if my buying of stock was saving, until I actually sell off the shares and go to Tahiti?
BINGO. Only if I see you buying the shares for the purposes of making subsequent sales, which means I have to see you make subsequent sales, can I know that your share purchase was an investment and thus saving.
After all, if you bought the stock in order to derive direct utility from the mere ownership of it, and you did not buy the stock to make subsequent sales, which is possible you must admit, then you actually bought a consumer good, not an investment good. It is EXACTLY what distinguishes a pick-up truck being either a capital good or a consumer good, depending on whether the truck was bought for the purposes of making subsequent sales (say it was being used in a grocery delivery business) or not for the purposes of making subsequent sales (say it was being used for your own self external to the inter-personal exchange framework). I can’t know the reason why someone bought the pick-up truck unless I see them act in such a way in the future that will enable me to know why he bought it, after which time I can say he bought it as a consumer good or an investment good.
In other words, it’s not the physical appearance of something that makes it a capital good or a consumer good. It is the human element, that is, the purpose for which it was bought, that distinguishes consumer goods from capital goods. I think the same principle is present in money and savings. A commodity can be either a consumer good or it can be money, depending on the purpose people attach to it. But in order for me to know someone’s purpose, I have to see them act consistent with that purpose.
MF, I think that you make an interesting argument about the ability of a bystander to assess the purpose of someone’s actions.
So, as I see it, the debate has come down somewhat to an issue from whose perspective is an action being judged and when that judgment is occurring. Specifically:
– what is the purpose of the action of “accumulating” X from the perspective of the actor?
– what is the purpose of the the action of “accumulating” X from the perspective of the bystander?
– what is the purpose of the the action of “releasing” “accumulated” X from the perspective of the actor?
– what is the purpose of the the action of “releasing” “accumulated” X from the perspective of the bystander?
Is that what this debate has come down to?
“To save” means: to keep from ‘using up’ resources that were appropriated to be ‘used’ for some purpose. The “act of saving” (realizing an economic surplus) occurs ONLY when we transact for goods or services at a discounted price from the implied price of our appropriation. In other words, “savings” occurs at the “point of sale.”
E.g. Let’s keep it simple. Murphy decides he will need 2 oz. of gold for the purpose of obtaining 20 oz. of silver. Suppose the market only required Murphy to use 1 oz. of gold to get the 20 oz. of silver he wanted. In this case, Murphy “saved” 1 oz. of gold on the transaction (2 oz. of gold appropriated – 1 oz. of gold used = 1 oz. of gold saved).
How can you “save” something without first specifying what (how much) you planned to spend?
Murphy writes:
“A person earns $10,000 during the course of a month, spends $9,000 on rent, food, gasoline, and other items that are consumed during the month, and devotes the remaining $1,000 to buying a [fill in the blank]…”
This person had an income of $10,000 for the month – I have no problem there. The person spends $9,000 on rent, food, gasoline and other items – okay, I have a question: was this expense less than, greater than, or equal to the person’s spending appropriation for these items? The same question can be asked of the remaining $1,000 the person uses to purchase bonds or whatever.
I don’t think it’s accurate to label “income – consumption” as “saving.” Income refers to “an inflow of resources” and consumption refers to “the using up or outflow of resources.” In essence, Murphy’s “saving” equation is a roundabout restatement of the profit (loss) equation: revenues – expenses = net earnings. It should be noted that, profit (loss) can be dealt with in 1 of 3 ways: (1) It can be retained, thus increasing (decreasing) ones equity. (2) Profit can be paid-out, i.e. dividends to owners. (3) Combination of (1) and (2). Murphy’s position is that “retaining ones earnings” is an act of “saving.” “Retaining ones earnings” is the act of increasing ones equity/capital/net assets through the accumulation of undistributed profit. “Retain” means: “to keep in service.” Profits are being kept in service to whom they belong for the purpose of what? The purpose of equity/capital for a business is to support operating, investing and financing activities. The purpose of equity/capital for an individual is… [discuss]
I don’t know what to say. I can’t look away. Bob, you have the patience of Job.
The only way out of this is to lay it out in algebra, with carefully worked out symbols distinguishing each term.
But honestly, Bob, eat healthy and don’t drink or smoke, because the only way to ‘win’ this debate is to outlive Wenzel, MF, and DD5
Argosy Jones wrote:
The only way out of this is to lay it out in algebra, with carefully worked out symbols distinguishing each term.
You’re kidding, right? That would be further proof that my views are Keynesian. People are disputing the formula that “saving = income – consumption.” You think if I wrote S = I – C they’d be happy?
Well, not exactly,
But, if you could derive S=I-C from their assumptions, you might make some headway.
Alternatively, you could attempt to show their inconsistency concerning stocks and flows by expressing flow variables with their attendant units. (this would have been handy for you earlier in the discussion)
Thirdly, you might attempt to demonstrate mathematical inconsistency in their model, which in a perfect world would be a win for you.
But seriously, this is an argument over accounting, right? Can you really exclude math?
I really want you to win this argument, but I suspect that MF, at least, is preparing his headstone to read, “S != I-C”. Sorry that would have to be “Savings is not equal to income, less consumption, for any given period of time.”
Argosy Jones wrote:
Alternatively, you could attempt to show their inconsistency concerning stocks and flows by expressing flow variables with their attendant units. (this would have been handy for you earlier in the discussion)
Argosy, did you see the part where MF was saying a stock variable was equal to the difference between two flow variables (or vice versa)? (And he wasn’t taking two stocks, divided by time.) He didn’t even have the units lining up, and you think I’m going to pin him down that way? MF laughs at such objections.
Funny, I recall one of the criticism against Keynes being that he wasn’t consistent in his use of stocks and flows. Perhaps MF, out-‘Keynesed’, you there ;).
Yes, I saw that. At that point, I gave up trying to persuade MF that Liquidity preference was a valid consideration.
I think in MF’s thinking, you could take two instances of the “same stock” at different times and the difference would be a the flow over the time.(but you said, “he wasn’t taking two stocks, divided by time”) he’s correct-
Holdings on April 1 – Holdings on March 1 equals net savings per month(March).
Where he went wrong was in thinking you could take the difference between two “different stocks” separated in time, and get some kind of intelligible flow. At that time, he was arguing that both saving and savings are stock variables. (any example would only lead to confusion)
Anyway, It looks like I was wrong and Major Freedom has conceded something and withouth equations. So it looks like you took the correct approach. Well Played.
Yes, I saw that. At that point, I gave up trying to persuade MF that Liquidity preference was a valid consideration.
Valid consideration to what? Interest? Already showed it doesn’t determine interest rates.
Murphy still hasn’t answered the 3 objections I made way back when to the liquidity preference theory.
Where he went wrong was in thinking you could take the difference between two “different stocks” separated in time, and get some kind of intelligible flow. At that time, he was arguing that both saving and savings are stock variables. (any example would only lead to confusion).
Which “different” stock variables are you talking about?
http://consultingbyrpm.com/blog/2011/07/checkmate.html#comment-20436
You claimed as follows
Then bob asked you,
And you said
I hope you can understand our position here.
And I said I give up on convincing you of liquidity preference in interest rates.
I’m sure bob will get to it eventually. He wrote a dissertation on the subject, and I didn’t so it’s just as well.
http://en.wikipedia.org/wiki/Pumped-storage_hydroelectricity
You might like to take a good look at this article. It’s a good analogy for saving, with clearly intelligible stocks and flows of water.
You can even extend this into a discussion of liquidity preference. ZING! (no but seriously, you could)
Can we talk about liquidity preference now?
Strike that, people would immediately call you a ‘hydraulic keynesian’.
Argosy, did you see the part where MF was saying a stock variable was equal to the difference between two flow variables (or vice versa)?
Just to chime in, flow variables can be formed by two stock variables across time. Single stock variables like consumption (buying a consumer good), money stock, are not flow, because they have meaning at single moments in time, whereas investment, income, are flow variables, because they require periods of time.
(And he wasn’t taking two stocks, divided by time.) He didn’t even have the units lining up, and you think I’m going to pin him down that way? MF laughs at such objections.
There were no units in my explanation other than money and time.
(8) A man believes that society is breaking down, and the government is powerless to keep control of the situation. He gradually builds a stash of preserved food, guns and ammo in a secret underground geocache until he is confident that he can weather the storm. The story is interrupted before we discover whether or not society does actually break down as expected.
Sorry Bob, but it is unacceptable to present such a set of examples without a genuine prepper in the list. I’m off to read Red Meat comics now…
I’m going to make a serious attempt to answer the question now, but not on the terms that it was asked. There’s no reason to believe that “saving” and “investment” are two distinct states with a clear cut line between them. Most things in the real world form a continuium with a logical separation existing only for our cognitive convenience. I think it’s perfectly reasonable for savings and investment to exist as part of a continuous risk vs planing horizon profile and the exact place that we draw the line is largely a matter for personal preference.
(1) The risk profile for the 30 day treasury is largely flat, because there’s not much chance of significant inflation over 30 days and (so far) treasuries tend to get paid. The planning horizon is short because *generally* there’s a decent market for second hand tresury bonds (i.e.the person holding the bond does not need to commit to a long term decision).
(2) Same as (1) but a worse deal for the buyer.
(3) Same as (2)
(4) Same as (3) but lower risk… inflation risk is the same but just in case government decides to stab the bondholders, it’s safer to hold cash. Thus the risk profile is slightly better, but the planning horizon is still short term. Note that planning horizon for cash or 30 daybond is both short term providing someone wants to buy the bond (i.e. liquidity in the market) if liquidity collapses (which could happen) then cash has shorter planning horizon than bonds.
(5) Risk is low if gold is a standard currency and inflation is unlikely (based on the premise given). Planning horizon is short term, because the person in question could choose to spend at any time. That is to say, even though their intention is to save for their old age, their commitment is only to keep the gold so long at it might be convenient. In this way they hedge against sickness, etc. Anyone can claim an intention, it’s commitment that matters.
(6) It is not clear whether the question refers to the act of withrawing cash as “saving” or the act of growing the account balance, so the question is ambiguous. In general, this behaviour is clearly based on the intention of minizing percieved risk, whether it really improves the risk profile depends on the individual’s correct estimation of a Y2K crash. Using the perspective of the individual in question I would have to say that the risk is low and the planning horizon is still short term (just enough to get past Y2K issues).
(7) This is actually the most high risk strategy of all (but I emphasize that risk is a matter of perception) because the citizens of Rothbardia are well aware that deliberatelty stockpiling gold well beyond it’s useful purpose as a medium of exchange can only be beneficial if their speculative estimates turn out to be fulfilled. Thus, they risk a worldwide disinterest in gold (e.g. what happened in the 80’s and 90’s) and they have no personal use for such large quantities of the stuff. It’s a speculative gamble. Planning horizon is potentially long term because they risk getting stuck holding a commodity that is impossible to sell (without massive loss). Eventually they can sell off the gold, even into a hostile market, because sooner or later someone will want it, but that might be a long time later. I’d mark this one as the only thing that resembles investment.
Point is that in option (7) the participants are deliberately taking a risk, and putting themselves into a position they cannot easily and quickly back out of. In all the other cases the participants are looking for ways to minimize risk (although their individual perspective on sources of risk does vary).
Tel wrote:
There’s no reason to believe that “saving” and “investment” are two distinct states with a clear cut line between them.
Right, I think the two are inseparably, and instantaneously, linked. When a person abstains from spending income on consumption, and thereby allows his cash balance to grow, I say he is (a) saving (possibly only gross saving, because other dissaving might offset this action) and (b) investing in cash.
Sure, but you must at least accept that there is a difference in the risk profile of various investment options, and also a difference in the planning horizon (or level of long term commitment if you prefer to see it that way).
Thus, there is an intrinsic difference between investing in cash, and investing in the construction of a new bridge or factory. However, that difference is not clear cut because there are many fine grades of risk available for investors to choose from. Thus the difference is really a difference of degree, not a logical separation.
Prof. Murphy,
In my view the definition of savings here is narrow. It appears to be that any income earned that is not used to purchase goods is saving. I think it is correct to say that increasing one’s cash balances is saving. But I think it is also correct to say purchasing goods that are not used in immediate consumption is also saving.
For example, if I get my paycheck and straight off go buy my lunch, that’s consumption. But grocery shopping will lead to savings in a different form. I exchange cash balances (reduce them) and increase my food balances. My food balances often take the form of goods that will last for a long time; peanut butter, canned goods, pasta. Some is perishable, but I freeze much of that. So my food balances should be considered as savings until I cook up and consume my vittles, no?
I think, correctly understood, we would find that peoples’ savings, as a stock, fluctuate a great deal day-by-day and week-by-week. And they will vary by person and household. To construct aggregates from these is to miss these very different cross-sectional and time-series variations.
A beautiful and comprehensive monetary structure lecture by Hoppe was posted yesterday at mises.org.
Understanding the utility of money settles the debate.
Link?
http://mises.org/daily/3449/The-Yield-from-Money-Held-Reconsidered
Yeah I have that up in my browser. Haven’t read it yet.
This seems like a battle over semantics, trying to apply a formal economic definition to a word with a clear non-financial meaning. An ordinary definition of “save” would be something like “to keep that which otherwise would have been lost”. “Savings” would simply be “that which I have set aside though my saving”. To an ordinary person like myself, financial “saving” is really deferring consumption, and any “investment” after the fact is completely orthogonal to the question of whether I saved or not. Whether it stays in cash balances or stocks is irrelevant. You can claim that isn’t “saving” if I keep it as cash, but then I would say you are simply torturing the English language.
Bob,
Am I going to get a certificate or anything?
You are not wasting your time in taking this discussion further from my subjective standpoint. I admit that I am one of those “lurkers” who has been following this (and all of your work) somewhat closely. Even though I’m an amateur on these topics, I find myself compelled to read what is sometimes over my head. Ultimately, I have now sided with you on this matter. I am also happy to say that I have a better understanding of the logic of Major Freedom based on his response above. Very good discussion and responses.