Rothbard Sides With Wenzel on Cash Balances
Such is my devotion to truth, integrity, and the scientific status of Austrian economics, that I am unilaterally reporting the following footnote that I discovered while preparing tomorrow’s lecture for my online tour of Man, Economy, and State.
The context is Rothbard explaining how individuals’ rankings of present versus future units of money give rise to the equilibrium pure interest rate. He points out that because of time preference, nobody would ever give up more than 10 units of present money for 10 units of future money. Then he says in footnote 11 of page 386:
It is not valid to object that some might prefer to use the money in the future rather than in the present. That is not the issue here, which is one of availability for use. If a man wants to “save” money for some future use, he may “hoard” it rather than spend it on a future good, and thus have it always available. We have abstracted from hoarding, which will be dealt with in the chapter on money; it would have no place, anyway, in the evenly rotating world of certainty.
The fact that Rothbard is putting “save” in quotation marks, in conjunction with Wenzel’s other quotes that he dug up from Rothbard the last time we had this argument, makes me think that Rothbard probably would largely side with Wenzel in our spat, especially if he heard that I had said nice things about Keynes’ views on interest and money.
Two things:
(1) I still believe that Rothbard endorses the formula that “Savings = Income – Consumption.”
(2) I still believe that because of (1), Rothbard’s position is untenable if he sides with Wenzel and thinks that adding to your cash balances isn’t really a form of saving.
He obviously thinks it is a form of savings. He says as much!! The key phrase here is “form of.”
Is increasing your cash balance savings? Yes, but so is a lot of other things.
“If a man wants to “save” money for some future use, he may “hoard” it rather than spend it on a future good, and thus have it always available. ”
Rothbard considers this savings (in a general sense). Not to be confused with other forms of savings (like increasing loanable funds).
Not all savings are alike.
Sure I could take that angle, Mattheus, but Rothbard wouldn’t have written, “If I man wants to ‘save’ for the future by buying bonds, he may do so.” I.e. the fact that he put it in quotation marks means he thinks it is a weird usage.
I’m using your master definition of savings=income-consumption, and reaching the same logical conclusion: to say saving money is indeed weird, or simply incorrect. You “save” money but really don’t save money, for only income-consumption is savings and not some commodity or piece of paper. I hold on to money because it has a yield of its own. The real savings is the act of reallocating resources to investments at the expense of consumption or hoarding actual consumer goods in a warehouse or something. The hoarding of cash by itself does not create any future goods for you to consume if you do not also lower your time preference. At best, you could consume more goods in the future only by restricting the future goods of somebody else, indicating that the original act of cash hoarding (while time preference has not changed) was not an act of savings.
Dan, I think this is totally wrong. Everything you just said about cash, I could equally say about bonds.
You might say, “No, because the corporation could take your loan and invest it,” but the corporation might not. It might sit on the cash itself. In that case, would you say that my decision to not consume all of my income, and use some of it to buy a corporate bond, wasn’t really saving after all?
Bob, I say you’re missing the point. The cash itself is not savings whether I hold it or the employees of a corporation hold it. From my individual perspective, lending that money to the corporation by curtailing consumption is certainly savings. Whatever the corporation decides to do with that money, I will have my future consumption rise if the contract of the loan is fulfilled.
I think you’re complicating the matter and trying to prove too much with that example. According to you now, money is just another future good. Do you think money is a future good? So when you buy an IOU, you are exchanging a future good for a future good and not a present good for a future good?
Considering your devotion ;), what did you think of the recent Rothbard v. Friedman ‘fight’ and their defenders? George (Selgin) noted that he was not too impressed with Rothbard on money, I have the impression that you too are not too impressed or am I reading you wrong?
I fear though that in answering this question, you might hit on the nest of rothbardian hornets 😉
Wow!! I was about to post this very footnote as I was reading MES yesterday while preparing to listen to the recording of Lecture 2 of your academy course. I was about to say the same thing and say the following.
1. I believe Rothbard argues that income adds to cash balance and not saving (you explained that yourself, and very nicely at that, in (I think) session 6 of your academy course ‘Praxeology through price theory’).
2. I still believe because of 1., Rothbard’s position is tenable while on the other hand, your position is untenable because it leads to the conclusion that the entire money supply is a part of total savings and that hence, the further flawed conclusion that adding to money supply boosts savings.
I don’t think mere quotes are the only thing we can go by to know Rothbard’s position regarding savings and cash balances.
“The rate of interest, we must reiterate, is determined by time preferences, which also determine the proportions of consumption and investment. To think of the rate of interest as “inducing” more or less saving or hoarding is to misunderstand the problem completely.” – pg 789, MES
Notice the “or.”
“Sometimes sharp changes, such as a sudden burst of hoarding or a sudden raising of time preferences and hence a decrease in saving, may arrive unanticipated, with a resulting crisis of error.” – pg 853, MES
The implication here is that only a change in investment, and not a change in cash hoarding, can result in a change in one’s savings.
“Thirdly, the consumption function is necessarily an ex ante relation; it is supposed to tell how much consumers will decide to spend given a certain total income. Historical statistics, on the other hand, record only ex post data, which give a completely different story. For any given period of time, for example, hoarding and dishoarding cannot be recorded ex post. In fact, ex post, on double-entry accounting records, total social income is always equal to total social expenditures. Yet, in the dynamic, ex ante, sense, it is precisely the divergence between total social income and total social expenditures (hoarding or dishoarding) that plays the crucial role in the Keynesian theory. But these divergences can never be revealed, as Keynesians believe, by study of ex post data. Ex post, in fact, saving always equals investment, and social expenditure always equals social income, so that the ex post expenditure line coincides with the income line.” – pg 863, MES
The argument here is that one can only ever observe savings as equal to investment, and not cash hoarding, which means even if we observe someone increasing their cash balances ex post, Rothbard would not call that an increase in savings.
“Now, suppose that instead of an income tax, the government levies a 20-percent annual tax on consumption. Fisher maintained that such a tax would be levied only on consumption. But this is incorrect, since savings-investment is based solely on the possibility of future consumption. Since future consumption will also be taxed, in equilibrium, at the same rate as present consumption, it is evident that saving does not receive any special encouragement.” (the footnote to this paragraph states: “Neither does hoarding receive any special encouragement, since hoarding must finally eventuate in consumption. It is true that keeping cash balances itself yields a benefit, but the basis for such balances is always the prospect of future consumption.”) – pg 1181, MES
The footnote beginning with “Neither does hoarding” implies savings is separate from cash balance increases.
Interestingly, “Man, Economy, and State” is not where we can find Rothbard’s clearest explanation on his position regarding savings and cash hoarding. For that we need to go to his book “America’s Great Depression”, pg 38. He writes:
“Savings and investment are indissolubly linked. It is impossible to encourage one and discourage the other. Aside from bank credit, investments can come from no other source than savings (and we have seen what happens when investments are financed by bank credit). Not only consumers save directly, but also consumers in their capacity as independent businessmen or as owners of corporations. 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:
He can (1) spend money on consumption; (2) spend on investment; (3) add to cash balance or subtract from previous cash balance. This is the sum of his alternatives. The Keynesians assume, most contrivedly, that he first decides how much to consume or not, calling this “not-consumption” saving, and then decides how much to invest and how much to “leak” into hoards. (This, of course, is neo-Keynesianism rather than pure Keynesian orthodoxy, which banishes hoarding from the living room, while readmitting it by the back door.) This is a highly artificial approach and confirms Sir Dennis Robertson’s charge that the Keynesians are incapable of “visualizing more than two margins at once.” 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. – pg 38
and later on the same page:
“The Keynesian doctrine artificially assumes that any increase (or decrease) in hoards will be matched by a corresponding fall (or rise) in invested funds. But this is not correct. The demand for money is completely unrelated to the time-preference proportions people might adopt; increased hoarding, therefore, could just as easily come out of reduced consumption as out of reduced investment. In short, the savings-investment–consumption proportions are determined by time preferences of individuals; the spending-cash balance proportion is determined by their demands for money. – pg 38
Then he writes as a footnote on pg 51:
“On the other hand, wage rates maintained above the free-market level will discourage investment and thereby tend to increase hoarding at the expense of saving–investment.”
MF right, Wenzel dug up some of these quotes when he and I went head-to-head on this a while ago (at least a year I think). If we interpret Rothbard to merely be saying that accumulating cash balances need not be evidence of saving, then that’s fine; I have said that myself. (Specifically, if you just change the form of your investments from something else–like stock–into cash, that doesn’t constitute a new act of saving.)
But if Rothbard is going the Full Wenzel and saying that somebody who reduces consumption and uses the difference to boost his cash balances, is hoarding but not really saving, then I think Rothbard is just wrong.
Let’s look at it from a different angle.
If somebody reduces his investments and uses the difference to boost his cash balance, would he be saving, or would he not be saving?
If you say he would be saving, then you would be saying that reducing one’s consumption is not a part of the act of saving, but that is inconsistent with your declared position that saving takes place only when one abstains from consuming, according to the formula saving = income minus consumption.
If you say he would not be saving, then you would be saying that adding to one’s cash balance is not a part of the act of saving, but that is inconsistent with your declared position that savings takes place when one adds to their cash balance.
Either way, your position regarding savings and cash balances contains inconsistencies.
In other words, how can you hold the position that selling stock for cash is not an act of saving, considering all that you have said about the mere holding of cash (and not consuming with it) is saving?
You said before that the mere earning of income and the holding onto cash that inevitably results, generates saving because one is holding onto cash (and not consuming with it). I then said consumption would then require savings! and you said yes, it would.
Now you’re saying that adding to one’s cash balance doesn’t necessarily show evidence of saving. Does that mean you hold that selling assets (which earns income) and the inevitable increase in one’s cash balance and holding onto cash, which would make “saving = income minus consumption” POSITIVE, is now no longer associated with savings, so ignore the formula?
I’m confused and unable to put all your statements together into a consistent framework.
No. Rothbard would say that he is doing two things:
1. saving
2. increasing his demand for money
Why can’t you demonstrate demand for more then one thing at the same time? I am anxiously waiting a response to this.
BTW< This is the accusation MF quoted above from Rothbard about Keynesians not being able to separate demand for money from savings/investments in future goods.
OK, if that’s how Rothbard would explain it, then he and I agree. So would Keynes.
And thus Keynes’ original point goes through: If we all agree that in some circumstances, accumulating cash balances is a form of saving, then it can no longer be true that “interest is the reward to saving.”
And now, I predict, you will tell me that actually, this isn’t really saving anymore. Because then Keynes might look right.
I’m glad you would agree, but I think Keynes would not. Keynes is conflating the two operations while Rothbard is explicitly showing they are distinctly different things, that is, (1) and (2) are independent of each other, although they could certainly occurs together. I don’t think this is Rothbardian, but actually Misesian. And I don’t understand how you could both agree with Rothbard above but still maintain that accumulating cash balances are savings; so You’re saying that (1) and (2) are equivalent after all, or what? I am confused.
I claim that your entire argument is based on a logical fallacy: A and B occur together, or A occurs just before B, therefore…. A is the cause of B, or A=B, etc…. But no, it can easily be demonstrated that A can occur independent of B, and vice versa, so it is impossible that A=B. The two often occur together and I say that is what is tripping you. Grandma hoarding by curtailing 10% of her income every month is demonstrating two separate and distinct demands at the same time: (1) savings and (2) increase in reservation demand for money because money has a yield of its own.
Dan this is becoming painful. I am not expecting you guys to endorse my framework at this point, but I can’t understand why it’s so hard for you to understand what I am saying.
Everything you are saying about cash, could equally apply to bonds.
Suppose my holdings of bonds goes up during the month. Does that mean I saved? No. What if I start the month with no bonds, had zero income during the month (i.e. I didn’t perform any services for anybody or earn any dividends from my property), sold off my house and all my shares of stock for $1 million total, spent $900,000 on cocaine, and spent the remaining $100,000 buying bonds? I clearly didn’t save that month, instead I dissaved by $900,000. If you want to say I invested in bonds, that’s fine, but only by disinvesting from my other assets.
That’s what I’m saying with respect to cash balances. They are simply one way of transferring my purchasing power into a future period. It’s a way of deferring the consumption of my income in the immediate present.
So now, Dan, with respect to the above post talking about bonds, somebody could say, “It’s a pure confusion to think you can ‘save’ by buying bonds. These are completely different things, operating on different margins. There is the tradeoff between consumption and investment on the one hand, and there is the demand to hold bonds on the other. Only a Keynesian would confuse saving with bond accumulation.”
Yes, that is exactly right, if you like the way Rothbard and Wenzel are handling cash balances. Yet I doubt anybody would continue to stubbornly deny that it makes sense to say people can save by buying bonds, or that bond holdings can be a part of someone’s savings.
For what it’s worth, I’m trying my best to understand your framework.
I just get confused. For instance, this paragraph you wrote:
Suppose my holdings of bonds goes up during the month. Does that mean I saved? No. What if I start the month with no bonds, had zero income during the month (i.e. I didn’t perform any services for anybody or earn any dividends from my property), sold off my house and all my shares of stock for $1 million total, spent $900,000 on cocaine, and spent the remaining $100,000 buying bonds? I clearly didn’t save that month, instead I dissaved by $900,000. If you want to say I invested in bonds, that’s fine, but only by disinvesting from my other assets.
doesn’t make any sense to me.
If you sold your home and stocks for $1,000,000 total, then your income cannot be zero. Your income would be $1,000,000 for whatever time period is being considered.
If you took your earnings from selling your house and stocks, and spent $900,000 on cocaine, and $100,000 in buying bonds, then in the Wenzel/Rothbard/MF framework, you:
1. Owned accumulated savings worth…whatever the monetary value of your stocks happened to be (say $500,000)
2. Your home (say it’s worth $500,000) would be a durable consumer good, and hence not technically an investment.
3. Since you sold your stocks, you “disinvested” by $500,000, and reduced your accumulated savings down to zero.
4. The selling of your home is not a disinvestment, because a home is not a capital good (assuming you are not using it as a commercial office space, bakery, that is, depreciating the value of the home and treating it as a cost of doing some business that utilizes the home, etc). You simply sold a consumer good for cash.
5. Once your accumulated savings drop to zero on the basis of selling your stocks, then by reinvesting $100,000 in bonds, you saved $100,000, since you abstained from consuming from that $100,000. If the relevant time period considered is the one month, then the net result is that you disinvested by $400,000, and thus reduced your accumulated savings by $400,000, leaving you with a net $100,000 in accumulated savings.
6. If the relevant time moment is the end of the month, i.e. ex post, then you have zero cash, and thus we can say that your demand for money has dropped to zero. But your time preference has not, because while you made an investment, you consumed as well, namely, you invested $100,000 but you consumed $900,000. Ex post, we can say that your savings exactly equals your investment, namely, your $100,000 investment is equal to your $100,000 in savings. Ex post, savings always equals investment.
OK Major, does it ever make sense for me to describe someone as living beyond his means, and drawing down his savings? I.e. can anyone ever consume more than his income in a given period, without borrowing money from outsiders?
7. And since savings always equals investment ex post, then we can say that profit/interest IS the reward (reward is an ex post concept) for savings as such.
Because investments always return a positive amount? What if you invest in cash balances?
” somebody could say, “It’s ……… bond accumulation.” ”
Wouldn’t that somebody be wrong in this case? Isn’t holding a bond an act of exchanging a present good for a future good? Therefore, isn’t holding a bond an act of forsaking consumption in the present for consumption in the future? Isn’t all this not true in the case of holding cash? Isn’t that the difference between holding bonds and holding cash?
Like MF, I too am trying to understand your model but am completely unable to. And I am not trying to be stubborn. I come to your blog to learn (not to take you on in a debate).
Bala wrote:
Wouldn’t that somebody be wrong in this case? Isn’t holding a bond an act of exchanging a present good for a future good? Therefore, isn’t holding a bond an act of forsaking consumption in the present for consumption in the future? Isn’t all this not true in the case of holding cash? Isn’t that the difference between holding bonds and holding cash?
Well, it sure seems to me that when Johnny doesn’t spend his income on consumption, week in and week out, for a whole year, and then buys a nice watch with all the money he “saved” for the previous 52 weeks…that he deferred present consumption in exchange for that future watch. I thought that was so obvious that it would settle the matter, and yet here we still are.
OK Major, does it ever make sense for me to describe someone as living beyond his means, and drawing down his savings?
It does make sense to me to say that someone is living beyond their means, but I would not say that someone drawing down their accumulated savings and consuming from it should be considered as living beyond one’s means, because one actually has the means to live, namely, one’s savings.
I.e. can anyone ever consume more than his income in a given period, without borrowing money from outsiders?
Sure, by disinvesting and “consuming capital”, i.e. accumulated savings.
Because investments always return a positive amount?
No, because investment are made with the intention of making subsequent sales. I define investment as an expenditure of money for the purposes of making subsequent sales.
What if you invest in cash balances?
If you “buy” dollars for the purposes of making subsequent sales (in money), then I would say you are investing in dollars. You would have to be a foreign exchange investor because it is weird to say you are buying dollars for the purposes of making future dollar sales.
If however you are taking your dollars and buying Yen for the purposes of making subsequent sales in dollars (because you are hoping that the Yen will appreciate against the dollar) then I will say that your acquisition and holding of Yen is an investment.
I can’t know this until ex post however, when I observe you doing something with your dollars. If I see you take your dollars and buy Yen, and I see you not buying consumer goods in Japan, then that is you using your dollars for something other than consumption. That is you investing in Yen.
If however I see you take your dollars, buy Yen, then you use that Yen to buy consumer goods in Japan, then I must say that you did not make an investment, because you did not, by your actions, buy Yen for the purposes of making subsequent sales in money, you purchased Yen in order to buy Japanese consumer goods. Ex post, since I did not see you invest, you did not save.
Of course, only you can ultimately know WHY you bought Yen as soon as you bought Yen, so I cannot say anything about your actions until I see you do something ex post, like buy dollars back, or buy Japanese consumer goods.
If you bought Yen for the purposes of buying Japanese consumer goods, but then you changed your mind and bought dollars back because suddenly the Yen appreciated against the dollar, then ex post I must conclude that you made an investment.
Everything money related, in my view, only has meaning when exchanges are made. Money as a concept is a medium of exchange.
I think Rothbard did not call holding cash as saving because of his adherence to the revelation principle. Only by observing what you do with your money in exchanges can we know whether or not you saved with your money or consumed with your money.
If you aren’t making exchanges, nobody can know what you are doing, and, I think, it is unfair to replace praxeology as the foundation for everything economics related, with an individual’s ideas. Only by purposeful action can I know you saved. If I don’t see you do anything with your money, then I can’t say you consumed (you looking at your money and deriving a consumer’s utility from it), or saved (you intending to invest it later). Only by observing your actions in exchange can I, or anyone else, know that you consumed or saved.
I posted to Wenzel’s blog the following proposition:
Do you consider money to necessarily be an alienable concept?
If money necessarily has to be alienable, then we must conclude that money only makes sense as a concept in an exchange framework.
Since holding onto a commodity is not exchange related, it is impossible for anyone to conclude that another individual is “doing” anything with the commodity, indeed, it is impossible to even conclude that the commodity is even a money.
If everyone held seashells, thinking it was money, but nobody ever made any exchanges with them, can we conclude that seashells are a money? No. The only way that money, and any uses of money, makes any sense is in an exchange framework, since money as a concept is a medium of exchange.
After trying really hard to understand what your thought process is, I think the above is the key issue here.
You want to think that the concept of money has an additional attribute that requires a context other than just exchange. You want money to also have the attribute that requires a context of non-exchange.
But can money make any sense in a context other than exchange? I don’t think so.
This is why I don’t treat holding money as saving. Saving, investing, consuming, these concepts to me only make sense in an exchange framework. Thus, the only way one can save money in my mind is by using money in exchanges other than consumption.
I realize I just shat on the concept of “alienable”. Alienable is the wrong word. What I mean is “exchangeability”, or any word that refers to interpersonal trades.
And I also think I misunderstood your question when you asked:
I.e. can anyone ever consume more than his income in a given period, without borrowing money from outsiders?
I responded:
Sure, by disinvesting and “consuming capital”, i.e. accumulated savings.
I had in mind eating one’s seed corn, but clearly that was stupid, because we’re supposed to be in an exchange framework, and so disinvesting would generate a money income, and so in order for someone to consume more than he earns in a given period, assuming he did not start with a cash balance, is by borrowing money, or receiving charity.
Bob, you have to eliminate all categorical distinctions between money and claims to future goods (in any form you like) to make this argument. You’ve just added cash to your list of claims to future goods, which is rather strange since we know it is a claim to a present good. Bring back the categorical distinction and your counter argument falls apart. See my more elaborate ‘fresh’ comment below
“….I doubt anybody would continue to stubbornly deny that it makes sense to say people can save by buying bonds
knock on wood!
Well you could have a system where all money is kept in electronic bank accounts, and once per year the taxman comes through and reduces each positive bank balance by 1%, taking that money for tax. Then people might make an agreement between themselves to let someone else take the burden of the tax for a while if they had no particular use for the money right now.
Of course, it’s a bit of an artificial and contrived example, but then again you don’t typically find ATM’s growing on trees and people seem OK with those.
Tel, that wouldn’t count for the Austrians. They’d say other things aren’t equal. Just like if I trade 100 strawberries in the summer for 50 strawberries to be delivered in the winter, that wouldn’t be an example of preferring future goods to present goods for the Austrians. (Note I think this is silly; I’m just explaining how they would handle your example.)
I fully accept that all other things are not equal, and I accept that I’ve come up with a somewhat contrived example.
However, it’s interesting to contrast your example of the strawberries. Why don’t people use strawberries as money? Well they stain your pockets for starters, but more than that they don’t have a good shelf life, they are delicate and difficult to transport, their availability is seasonal, etc. Gold is of course much better in terms of shelf life, but still it is difficult to transport, difficult to easily assay, and so on.
What I’m getting at is that the money we use now (i.e. electronic bank accounts and cash notes) is a totally artificial construct that has by design the appropriate properties to make it different to strawberries, and thus make it convenient to use as a mechanism for exchange. There’s nothing natural about that though, it’s a product of human ingenuity, and there’s nothing particularly guaranteed about it either. An arbitrary government fiat could construct all sorts of alternative monetary systems with different special properties.
As for Austrian economics, the whole foundation is individual economic calculation — each man and woman knows what’s best for himself/herself and thus takes action in terms of trade. The whole idea of this is that it is flexible, and continues to operate even in the face of adversity (or outright sabotage). Thus, if some oddball government started insisting that all citizens start using strawberries as money** then individual economic calculation would continue to operate, and there would still be validity in the basic ideas of a profitable exchange, a contract between parties, etc.
FOOTNOTE:
** entirely possible that Krugman will suggest this in another two years when things are getting seriously bad.
Hey I’m gonna follow up my own post with some real-world examples of strawberries being used as money (or close equivalent)
First comes from Zimbabwe during the inflationary period when they put expiry dates on cash notes. In theory, the larege denomination bills would devalue as they got close to their expiry date so money would continuously bleed out of the system. Strangely, it didn’t actually fix their problems, but the idea remains intriguing.
This isn’t quite as fruitloop as it might seem at first blush. Consider that shops often sell gift vouchers with expiry dates, and they do this for the simple accounting reason that they don’t want open-ended liabilities sitting on their books. Other commercial instruments that have a cash-equivalent nature often also have an expiry date (e.g. mobile phone prepaid credits).
Another example is Krugman’s “inflation is your friend” postings attempting to enginer a natural interest rate that sits below zero. I know, some people think that’s crazy talk, but the point is many governments have aready taken advantage of inflation to implement their policy (be that a good or bad thing) and people found a way to deal with it.
Bob, You are being inconsistent in your position:
first, (1) Of course Rothbard endorses 100% the formula: savings=Income-consumption
But
(2) You said so yourself that adding to your cash balances does not necessarily add to one’s savings and certainly reveals nothing regarding how the total societal savings has changed, i.e., the totality of income-consumption. So why again do you say this:
” Rothbard’s position is untenable if he sides with Wenzel and thinks that adding to your cash balances isn’t really a form of saving.”
You said so yourself: savings is always income-consumption. Not some pieces of paper we call cash.
Income is value received from labor, interest or rental? Consumption would seem to be value spent with no redeemable value return? Savings would be value earned from income not yet consumed or spent with an expected return? This seems to be the only logical way to state in words the equation income – consumption = savings; assuming that income > consumption?
You either have to say increasing cash, gold, anything of value from income is savings or you are redefining savings. For example savings could be income – consumption = holdings + savings.
“if you say he would not be saving, then you would be saying that adding to one’s cash balance is not a part of the act of saving, but that is inconsistent with your declared position that savings takes place when one adds to their cash balance.” Major_Freedom.
I find this part of your argument incorrect. You seem to be saying that 10-6=(1+3) is different than 10-6=(3 + 1). income and savings were defined differently so savings interest would be more income and therefore more savings but savings principle wouldn’t be income because it has already been counted as not consumed.
Bob, Do you realize you are basically now claiming that money is an IOU by definition with your example of money acts just like bonds? I mean, you are now making NO distinction between a claim to a future good at a specified time frame in the future (IOU), and a “claim” to an immediate present good anytime, anywhere,…basically money. According to you, people may prefer cash over, say a corporate bond, just like maybe they prefer buying stocks over corporate bonds in another time…. no distinction. This is major major departure from anything remotely Austrian.
If you categorically kept money and IOUs separately the way they should be, then you wouldn’t be able to make that claim: “anything I’m saying about cash applies to bonds”. Consider all future good in one category, call it just an IOU for example (not bonds vs. houses or factories, etc….). Consider all present goods in one category, call it consumers goods (and not apples vs oranges vs…..), and then you have money in a different category of its own (neither future or present according to Mises, or present but special according to Rothbard, Hoppe, etc….). Now see that your claims about ‘claims to future goods and money act the same’ no longer apply. All other things being equal, any increase in holdings of these generic IOU’s (assume fixed value unit), is a clear act of savings. Any decrease is a clear act of dissavings.
Dan, and do you realize that you are saying even if I intend to use my cash to buy something in 50 years, that it should still be classified as a present good? How is that not nuts too?
Dan, let me try it this way: Suppose I have a stockpile of 1000 cans of tuna fish, since I watch Glenn Beck regularly and think the end is nigh. At any point, I could consume them if I wish. In that sense they are the quintessential present goods.
Yet if in my subjective plan I am allocating them to be eaten over a 3-year period–with that 3 years to start once the UN tanks start rolling through my neighborhood and I can no longer get to a grocery store–shouldn’t I classify them as future goods?
Or, if you want to come up with some other category, like “durable consumer good that gives a flow of option services in the present, but which can still give consumption services in the future,” that’s fine. But it would clearly (to me) be misleading to classify them as immediate present goods, and to say that I’m not saving out of my income when I accumulate them.
Bob, You cannot have both a claim to a future and present goods. This is logically impossible unless you would like to define present=future, which is nonsensical. Would you agree?
Now, it seems that you can either take one of two routes:
1. Mises – who says in TMC that money is neither future nor present, but special
2. Rothbard – present good, although a rather unique and special one.
And isn’t it you now who is forgetting this is a monetary economy and not a barter economy making direct comparisons between hoarded tuna cans and cash balances?
With money and I think you will agree on this, it’s ‘More then meets the eyes” (Transformers them now running….)
A theory of money must be logically consistent. I don’t see you resolving the logical contradictions that arise if I follow your line of thought.
Isn’t the difference in this discussion that saved money is not the same as saved resources? And MF, Wenzel etc want to outline that by strictly distinguishing between savings as invested real goods, and “savings” as hoarded money. I mean I can save up tuna fish by stockpiling it. Everybody would agree, that those are real savings. But if I save money by stockpiling it, I only save up “votes” which I can use to vote on what is to be done with the output of real goods (like tuna fish) if I actually really vote (=spending it).
So stockpiling votes means I am deferring my “right” to vote to a later day. I let others decide what is to be done with current real goods. And on a later day on which I want to use my relatively higher voting power I claim to have a bigger say about the use of current available real goods.
Whatever is or are the causes for the existence and height of interest, I at least think it to be useful to distinguish between those two entirely different types of savings. And up to now I was sure you would.
Redefined definitions (if done consistently and without inherent contradiction) should not harm any theory if the theory is correctly expressed (although this test doesn’t proof that the theory must be right. It just means it was expressed in consistent way).
Also Keynes theory of interest must be explainable with differently defined terms. So why not try and explain Keynes theory with the definitions of Rothbard, and see if it still makes sense. (And why not try it the other way around too). If it doesn’t make sense it either stems from inherently contradicting definitions or because the theory is flawed.
Also bob, just to be clear. I didn’t avoid your analogy between hoarding cash and hoarding tuna, because looking back it may seem that way. I just think it’s a false analogy. The hoarded tuna are way points to future consumer goods, therefore, they are future goods. Not so with the hoarded cash. Although the cash may enable you to consume more tuna in the future, the cash itself do not necessarily represent any way point to future consumer goods. To demonstrate this by example, what if everybody hoarded 10% of their income in the hope of consuming more goods 1 year from now, but without changing the total amount of real savings (you acknowledged that this is possible)? Now since the production structure remains the same, 1 year from now everyone will discover that no more consumer goods are available. The same amount of tuna cans are available for consumption.
Yet if in my subjective plan I am allocating them to be eaten over a 3-year period–with that 3 years to start once the UN tanks start rolling through my neighborhood and I can no longer get to a grocery store–shouldn’t I classify them as future goods?
In your treatment then, there can be no such thing as present goods, because there will always be a positive amount of time that elapses between receiving income (money, or tuna cans) in the present, and spending (the money) or consuming (the cans) in the future.
Why should 50 years be considered future goods, but not 50 seconds? Since everyone’s time periods between receiving income and consuming will be different, it is silly to pick a single time period of holding money (or cans of tuna) and say “t = 0 to time = ?, it’s a present good, whereas t = ? to t = one’s death, it’s a future good.”
Dan, and do you realize that you are saying even if I intend to use my cash to buy something in 50 years, that it should still be classified as a present good? How is that not nuts too?
You say it’s nuts to call a sum of money a claim to present goods if you intend to wait 50 years before buying consumer goods. Well, then I guess 49 years would be nuts too, and so would 48 years, and 47 years, as well as 10 years, 5 years, 1 year, heck, even 1 month, 1 day, 1 hour, 1 minute, 1 second, indeed any time at all. There is nothing in your position that requires me to stop at a specific time period before “nuts” turns into “not nuts.”
No economist has ever, to my knowledge, advanced the argument, that there is a “special” time period such that the same money will go from a claim to a future good to a claim to a present good.
Your logic however forces us to accept that as long as time of holding money is positive at all, then money cannot be a claim to present goods. If 50 years is a claim to future goods, then so is 50 microseconds. If you say 50 microseconds is not, then I’ll add a microsecond, and then another. I’ll keep doing that until you realize that there is no reason for either of us to even get to your conclusion that holding money for 50 years implies you are in possession of a claim to future goods. It seems easy to separate 50 years from 50 microseconds, but the devil is in the details, and there is no reason, no economic argument, that would compel us to play a sort of duck duck goose type game and say “duck!” for every microsecond added to the time period, where all of a sudden, at 50 years, but not 49.9999 years, we say “goose!” and the same money goes from claim to a present good to a claim to future goods. We’d have to say that the money was always a claim to a future good. But then we are the claims to present goods in your framework?
The more we dig, the more weird “cash holding is saving” gets.
Money is a claim to present goods, and only present goods. Money is lent out to others because of differing time preferences, where savers give away claims to present goods, in exchange for more claims to goods in the future, which eventually become present goods when the duration of the loan expires.
Money is ALWAYS a claim to a present good. It is by definition a medium of exchange. It doesn’t matter that you intend to wait 1 second, 1 year, or 50 years before spending it.
A loan, or forward contract, or other investments on the other hand, are claims to future goods, which is why they carry (contractual) profit/interest if sold in the present.
I think Dan (DD5) is right when he says that the same thing can’t be a claim to both future goods and to present goods at the same time. It has to be one or other. Money is that commodity that is a claim to present goods.
MF wrote:
In your treatment then, there can be no such thing as present goods, because there will always be a positive amount of time that elapses between receiving income (money, or tuna cans) in the present, and spending (the money) or consuming (the cans) in the future.
I have answered this before MF, and apparently you don’t like my answer. If the person is viewing it as “the present,” then it counts as the present. When Johnny gets his $20 for cutting the lawn, and thinks, “I’m going to spend this right now on getting a cold drink!” then we should make sure our time unit’s length includes the cash payment and the drink purchase in the same period. So then he didn’t save that portion of his income, he consumed it.
Johnny’s views cannot possibly determine whether money is a present good, future good, or neither… whether cash balances are savings or not, etc…
You’ve now reduced the argument over the nature of money to relative views and values? This is not a valid argument.
OK and you’ve just thrown subjectivism out the window. How do we determine if something is a capital good or a consumer good? Google it?
And if Johnny is viewing it as “the future”. Now money is transformed into a claim to a future good all of a sudden? Even though you know perfectly well that during all this time he’s holding on to the money, it is still really a ‘claim’ to a present good, just in case Johnny changes his mind. Which is it? And why is Johnny giving you and I economic lessons on the nature of money?
If the person is viewing it as “the present,” then it counts as the present.
So if I view my 30 year bond as a present good, it is a present good, because I can just consider the relevant time period as being 31 years?
Money is not a “claim” to anything. It is the most readily exchangeable good.
Gene. I agree with you. That’s why I put claim in quotes.
Ok, quick response on this. I’ll cheat and use Hoppe:
“The source of the utility of a consumer good is its direct and present serviceability, and the source of the utility of a producer good is its indirect future serviceability. Money, by contrast, is neither consumed nor employed in production. It is neither directly serviceable (as consumer goods are) nor indirectly useful as a way station to future consumer goods (as producer goods are). Rather, the utility of money must be that of an indirectly yet presently serviceable good”. (His emphasis)
From: “Against Fiduciary Media”, or “The Economics and Ethics of Private Property, p246-7
“OK and you’ve just thrown subjectivism out the window. How do we determine if something is a capital good or a consumer good? Google it?”
And you’ve just thrown out economic science and praxeology out the window. Can you incorporate subjective values into logical argumentation? Since when is praxeology, a value free science, derived on value statements? I’m anxious to get a response to this.
If the nature of money is a mater of subjective opinion and values, then there can be no theory of money.
Dan wrote:
Since when is praxeology, a value free science, derived on value statements? I’m anxious to get a response to this.
Sorry Dan, I need to pull out of this. This is a fruitless debate. I can’t possibly convince you on this narrow point, if you are arguing with me over things like whether praxeology is consistent with an actor’s subjective valuations.
But that is not what I’m arguing obviously. Values are recognized to be subjective, but the science itself, in this case, the praxeological mehtod, is not.
A logical argument cannot contain a value judgement. That is a logical fallacy. That’s all I was saying. But if you think that the nature of money is a matter of perspective, then you cannot put forward any argument regarding the nature of money. This is totally different from saying that people value money differently. We are arguing over what money is and not what its value is. You resorted to a value statement regarding the former (“It depends on how Johnny views…..” I pointed this out and you think I reject subjectivism now. really?
To determine if an apple is a consumer or a producer good, we need to consult the owner’s views about how he intends to use it, right?
So then when I say in order to determine if something is a present or a future good, we need to consult the owner’s views, how have I just violated praxeology?
But once the medium of exchange has been determined on the market and we assume it has, its nature and the laws that explain its use,… everything that a monetary theory should have.. cannot contain value statements. Would you agree that a scientific theory cannot contain value statements? Hopefully, yes. But then you must begin to define money and it cannot be both things at the same time. That’s impossible, and no johnny’s perspective can change that. That’s all I’m saying.
“But once the medium of exchange has been determined on the market and we assume it has, its nature and the laws that explain its use,… everything that a monetary theory should have.. cannot contain value statements. ”
Sheer assertion of nonsense. Says who?
Dan, do you think we cannot have any scientific capital theory because what is and isn’t a capital good depends on people’s evaluations? Because that is the equivalent of your stance on monetary theory. It’s about as un-Austrian position as I can imagine adopting.
“A logical argument cannot contain a value judgement. That is a logical fallacy.”
Total rubbish.
p1) All men are sinners.
p2) Socrates is a man.
c) Socrates is a sinner.
That is a totally valid argument and contains two value judgments.