The Great Cash Balance Debate of 2011: Answering the Critics
[UPDATE: I tweaked the example to have Bernanke pay Jim to perform a service, rather than giving an outright gift. I don’t want us to get bogged down over whether a gift should be counted as “income” since that’s not essential to the argument.]
We have made unbelievable progress. Major Freedom hasn’t thrown in the towel, but he has given an extremely conciliatory concession and admits that he can’t follow Wenzel down the path he has forged.
At this point, I think most people see the logic of my position on cash balances and saving. In a series of posts, I want to now disarm the critics who (I think) can’t follow me yet, because they have one or two apparently decisive objections to my approach. In other words, they can agree that my approach avoids some of the thorny tangles into which Wenzel’s leads, but it looks like I avoid those problems only to march us off a cliff.
So let’s take on the one that is rhetorically the most damning:
“Murphy, if you’re right that a person can “save” by hoarding more cash, then you have to admit that Ben Bernanke can increase someone’s “savings” by printing up money and handing it to him.”
Yes, I admit it–my position forces me to say that. But if we think it through, what else can we say? Consider the following:
Bernanke prints up $100,000 and hands it over to Jim as payment for the service of Jim singing “Sweet Caroline.” Jim takes the cash and buys a bunch of pizzas, goes on cruises, takes his lady friends (he’s got a lot now) out on the town, etc. etc. After a few months go by, Jim has blown through the $100,000.
Question: Did Jim really consume $100,000 worth of goods and services during the period in question? I think he most certainly did.
Question: Absent a libertarian revolution, with a Nuremberg Trial conducted by Walter Block, did Jim’s net worth go down as a result of these actions? They certainly need not have. (Assume Jim doesn’t do a bunch of cocaine and degrade his future earning potential, etc. You get what I’m saying.)
Question: When Jim’s accountant runs the numbers at the end of the year, how can he explain Jim’s $100,000 in consumption, coupled with no obvious reduction in his other assets or increase in liabilities owed to others? The accountant will have to say that Jim’s income was $100,000 higher, because of Bernanke’s $100,000 payment for the performance.
I see no way around this: If Bernanke prints up $100,000 and you spend it on consumption, then your income and consumption are both truly $100,000 higher. This is true even though it’s not morally legitimate (from a Rothbardian viewpoint), nor economically efficient (from various perspectives). In the same way, the mafia don’s accountant can run the books, and keep track of how much income they “earn” from fencing stolen goods, extortion, etc.
Now it’s true, if we want to be “macroeconomists” and step back, we can see that there is a sense in which Jim didn’t really produce $100,000 worth of services. So other things equal, the purchasing power of money has fallen. The $100,000 Jim spends on consumption isn’t the same batch of real goods and services that a legitimate (non-inflationary) $100,000 would have been. And of course, everybody else who holds dollar-denominated assets is a little poorer because of it. So the community hasn’t necessarily seen an increase in consumption (depending on how the hit is absorbed among them), but Jim certainly has.
If we are still with me, it’s an easy tweak to now say: Suppose Jim takes the $100,000 Bernanke gave him, and uses it to buy a factory. Jim clearly invested that money. As before, he clearly had $100,000 in extra income. So how could he have invested it? Why, he first saved it. Rather than buying pizzas, cruises, and nights on the town with his lady friends, he directed that purchasing power into the acquisition of a productive factory that will yield future income to Jim.
So yep, when Ben Bernanke gives you $100,000 and you sit on it, you have saved and invested in higher cash balances. This isn’t morally legitimate or economically equivalent to non-inflationary saving, but you did save in a nominal accounting sense.
Surely the answer is merely wealth transfer… Bernanke does increase the savings of whoever gets the handout, but all other cash savings decrease (due to inflation) by an equivalent amount. Well actually, prices don’t adapt to the new money instantaneously so there’s a ripple effect outwards from the epicentre of the cash injection and everyone along the ripple makes a small loss to compensate.
I think you are missing the key point. Having money means the ability to make decisions (where to spend the money, or what sort of savings/investment vehicle to choose for that money). In a world without Bernanke, Jim does not get the option of making these decisions, in a world with Bernanke, Jim does find himself in a position to make spending decisions. What Bernanke has really done is bestow upon Jim the ability to make decisions about the future of the US economy (and proportionally taken away those decisions from some other people).
Ignoring any question about moral legitimacy (and frankly, there’s no point of discussing Ben Bernanke and moral legitimacy anywhere on the same page) the decision-making control of the economy has passed from one group of people to another group of people. That’s the whole effect of the transaction.
Murphy: ” Suppose Jim takes the $100,000 Bernanke gave him, and uses it to buy a factory. Jim clearly invested that money. As before, he clearly had $100,000 in extra income. So how could he have invested it? Why, he first saved it. Rather than buying pizzas, cruises, and nights on the town with his lady friends, he directed that purchasing power into the acquisition of a productive factory that will yield future income to Jim.”
I don’t know what to say any more after this post. I thought we were arguing over real savings, but now I find out you are talking about temporary nominal aggregates that appear in accounting statements? We all know already that injecting new money via credit markets lowers the interest rate temporarily on account of the false signals they send regarding savings, but what does this have to do with the natural rate of interest, which is a function of real savings and not some nominal savings? This is what started this whole debate, no?. You implied that demand for money affects the interest rate and the pure time preference theory somehow doesn’t seem all that correct. Surely, you were implying the natural rate of interest and not the temporary nominal interest rate. We are all familiar here with the Austrian Business cycle already.
Obviously, Bernake has created no real savings. The factory built with the new money is built by bidding resources away that already existed. I really don’t understand the point of this post. When you say cash balances=savings, you don’t mean real savings? Maybe I haven’t followed the debate from start to finish,, but when I object to the equality above, I am talking about real savings.
“Murphy, if you’re right that a person can “save” by hoarding more cash, then you have to admit that Ben Bernanke can increase someone’s “savings” by printing up money and handing it to him.”
What about the more serious challenges? Here is one of them again:
How do you save by hoarding (I’m talking about real savings) when every act of hoarding is offset by an act of dishoarding, which would result in the opposite action of dissavings, and therefore no real savings could ever be increased by merely hoarding?
Just to be clear again on what it is possible, it is obvious that you can hoard by savings (I think this is what is tripping you), just like you can hoard by dissavings, just like you can hoard by neither.
OK Dan I’ll tackle that one next. And I thought this was a very serious challenge! In terms of rhetoric, it’s very bad that I have to say Bernanke can allow you to save.
BTW, once again WordPress decided blogging was too important to be left to the economists, and shut down all the comments. Let me know if they are still locked up on any previous threads.
Why would every act of hoarding be offset by an act of dishoarding?
Assume two people: Paul & Bob. The total money stock consists of one gold coin and this gold coin is in the possession of Bob. Bob pays Paul to mow his lawn with that one gold coin. Paul decides to go on a hunger strike and to hoard that coin. How can Paul’s action be offset by Bob’s dishoarding? With what is Bob supposed to dishoard?
In Murphy’s framework, Bob dishoarded the one gold coin by paying Paul to mow his lawn. Paul could not have hoarded unless Bob dishoarded.
Fair enough, so when a (central) bank creates money, the bank ‘dishoards’? What happens according to your framework in this situation?
If the central bank holds the newly created money for any length of time at all prior to giving it away, then the central bank is “dishoarding” upon giving it away. If it does not, then the central bank is not “dishoarding.” The “hoarding” and “dishoarding” takes place on the part of those who receive and spend the new money afterwords.
In practice, the central bank doesn’t create new money hold it and then give it away. It accepts treasuries and other securities from the banking sector and just credits the seller’s accounts with new (reserve) money that did not exist before. The central bank does not come to own the money it creates in this way.
I don’t think my framework differs from Murphy’s on this particular point, I just use different words to refer to the same events.
I am puzzled, when bob pays paul to mow his lawn bob has dishoarded. When the central bank creates money and buys treasuries, it does not dishoard?
So when bob would mint his own gold coin and paul would accept that gold coin as money for mowing the lawn, bob would not have dishoarded because he has created money?
A central bank cannot dishoard money it hasn’t created yet.
Individuals who don’t have a printing press and who deal with each other, will hoard in a way that requires an accompanying dishoarding from someone else.
This is I think the fundamental reason why central banking messes up economic calculation. It results in individual choices that would have otherwise put into motion market forces signalling to other individuals what they are doing, to those signals not being made.
For example, if the central bank increases the amount of loans without there being an accompanying voluntary real savings on the part of the public, then that will send distorted signals to investors who will invest in a way that requires more real savings that actually exists.
Only closed markets (that is, markets without a non-market entity mucking about) can work properly.
I know I kept harping on the point about this particular implication ( and hence it might be my point you were addressing) but I am afraid it doesn’t disarm me 🙂 because my main objections are (and still remain)
1. If all cash hoardings belong to someone or the other’s cash balance at any point in time (which I think it does), then the aggregate savings in the form of cash cannot be influenced by individual acts of ‘saving’ by hoarding. That further means that the total savings in the form of cash hoards is always and forever equal to the total money supply. I fail to understand how an unchanging level of savings can have any influence at all on the rate of interest.
2. Money is a present good. I am still unable to buy your argument that the holding of money for a certain period makes it a future good because the role of money is primarily (or rather solely) as a medium of exchange (a point contained in the very idea of labelling it as money). Irrespective of the period one holds it for, it can only be exchanged for other present/future goods. Unless you say that a person receiving money in exchange for a consumers’ good could be receiving a future good, I am unable to see money in hoards as a future good. Money is different from other consumers’ goods because by virtue of the fact that unlike them, it is never consumed but only exchanged for other consumers’ goods or producers’ goods.
3. Money performs a valuable service while in the cash balance of an individual, i.e., the service rendered in the management of uncertainty, a service that only money, being the most marketable commodity in a society, is capable of delivering. At any instant while it is in the cash balance, money can be exchanged for other present goods, it being the final settlement of the transaction, thus enabling its function as the ‘manager of uncertainty’.
Given all this, I am unable to see money in hoards as a form of savings, i.e., an exchange of present goods for future goods. I would be glad to see you address these objections.
I’ve been doing some more thinking on this, and I think I finally have a way to settle this (and I’m right, BTW).
First, it looks like no matter which position of the two that one takes, one is compelled via logical implication to conclude things that the other side would consider crazy. For example, you think that it’s crazy to deny that accumulating cash over time is saving, others (including me) think it’s crazy to deny that Bernanke printing off dollars is not saving, or, in other words, others including me think it’s crazy to argue that printing off dollars is saving.
I don’t think you took your logic far enough when it comes to inflation, Bob. It gets even crazier on your side. Suppose that instead of Jim singing “Sweet Caroline” for Bernanke in exchange for Bernanke printing off $100,000, imagine that Bernanke just printed off the $100,000 for himself and then Bernanke bought pizza, cruises, and nights out with lady friends. Your position would compel you to admit that Bernanke earned an income, saved, then consumed pizza, cruises, and parties. Did Bernanke save? Did he abstain from consuming in order to make available purchasing power to….consume? No, he didn’t abstain from consuming at all. He just printed off new dollars and consumed with them. Your position would compel you to say that by printing off new dollars, Bernanke saved, that is, he did not consume with the dollars. But the dollars did not exist prior to him printing them off in the first place. So you can’t say that he abstained from consuming his income, saved, than consumed. He didn’t “abstain” from consuming at all. He just positively printed off money, then positively consumed with it. Do you see the craziness? By your logic, we’d have to say that Bernanke was abstaining from consuming $100,000 prior to him printing off $100,000!
Now, you’ll probably come back and say that in between the time Bernanke printed off the $100,000 and the time he consumed with it, he abstained from consuming. But then the question becomes, is it possible for him to NOT abstain from consuming…in order to consume? The answer is obviously no. Thus your position seems to be nothing but a statement of economic logic, that is, the statement that in order for someone to consume at time = t, they had to not consume prior to time = t. You are just calling all the periods of time that people are not making consumption expenditures, to be “saving”.
Moreover, I find this statement you made to be very revealing:
So how could he have invested it? Why, he first saved it. Rather than buying pizzas, cruises, and nights on the town with his lady friends, he directed that purchasing power into the acquisition of a productive factory that will yield future income to Jim.
The above is my position on saving, virtually word for word. Saving in my view takes place when one abstains from consuming and makes an investment expenditure instead. But in your other posts before, you were compelled to say that in order for a person to consume, they have to save. So your position makes you say that in order for someone to consume, invest, indeed, make any expenditures at all, they have to save first. This is exactly why I just call what you consider to be saving, to just be holding (owning) money.
Now I know in response to this you will say that there is no problem, because yes, while one does have to abstain from consuming in order to invest in a factory, such saving is not necessarily unique to productive investments, because one also has to abstain from consuming in order to “invest” in cash balances.
But then I will respond with: Why should accumulating cash balances even be considered an investment at all? Why can’t accumulating money be an accumulation of a consumer good that just so happens to be universally accepted in trade? Like cigarettes in a prison? Doesn’t money have to be by its nature, via Mises’ regression theorem, a consumer good? Doesn’t money ARISE out of consumer goods in barter that become universally accepted as mediums of exchange? It’s almost like you are stacking the deck in your favor from the outset.
When a homeowner buys a car, or a microwave, or a stove, or a couch, or a computer, or an office chair, or canned food, or a television, these are all consumer goods. They are all purchased for consumption, because they are bought not for the purposes of making subsequent sales. The homeowner is “accumulating consumer goods.” I am sure that you will agree that this person is NOT “investing” in consumer goods. It would be a contradiction in terms. One can only invest in capital goods.
Even if it is in principle possible that these consumer items can be sold for money by the homeowner, should they be considered an investment? If not, then neither should holding money be considered an investment. Money holding should just be considered like owning a durable consumer good that just so happens to be accepted by many people, like a personal computer that is so highly valued, everyone would accept it in trade.
Economics is a purely deductive science. This is why we have to keep digging back and back to make explicit all of our prior assumptions. Your position is that you consider holding cash to be an investment. If we all agree that holding cash is an investment, then OF COURSE those like me who connect savings with investment expenditures and only investment expenditures, will be compelled to go down that road with you and agree that accumulating cash, because it is an investment, therefore requires saving one for one. But, and here’s what I initially alluded to at the start, which is what I am finally getting to: Your position leads to such craziness, that no logical person would accept it. If the above hasn’t convinced you, the following will. I can ding you the same way you dinged Wenzel:
At the end of each of the following statements, answer whether it is saving, or not saving:
I earn $10,000,000 and then someone gives me their factory in exchange for the $1,000,000, to settle the trade.
Someone gives me a factory priced at $10,000,000 and then I allow them to go into my basement and operate my money printing press to print $1,000,000 in new dollars, to settle the trade.
Oops, that last sentence should read:
“Someone gives me a factory priced at $10,000,000 and then I allow them to go into my basement and operate my money printing press to print $10,000,000 in new dollars, to settle the trade.”
And the second last should read:
“I earn $10,000,000 and then someone gives me their factory in exchange for the $10,000,000, to settle the trade.”
I have one more comment. Bala touched on it, and I talked about it before, and I think it is crucial enough for you to consider.
It appears that in your framework, present goods do not even exist. As long as anything has future potential serviceability, or utility, then it is an investment in your framework. Even if a good is a consumer good, then as long as it “lasts” for more than zero time (which is all consumer goods), then it is an “investment” to own that good.
For example, you called stockpiling boxes of dried foods (consumer goods) in a shelter an “investment”. But that is not an investment in my mind, because you bought the food not for the purposes of making subsequent sales.
I think the confusion is due to you flip flopping between real goods phenomena, and dollar transactions phenomena. In my mind, the concepts of saving, investing, consuming, abstaining from consuming, have different meanings depending on whether the context is a non-monetary self-sufficient economy or a division of labor, monetary economy.
In a monetary economy, the concepts of saving, investing, consuming, abstaining from consuming, etc, in my mind all reside in a monetary exchange framework. If someone is saving, then in my mind, they must be doing something in an exchange framework that is considered to be saving. Clearly the times in between making exchanges is external to the monetary exchange framework, and so when you say “saving”, you refer to those in between times, where as I only refer to the times when exchanges are being made.
That way, it is possible for us to distinguish saving from not saving, that is, consuming from investing. In your worldview, not saving is impossible for anyone to do in a monetary economy. Everyone saves as long as they take part in the division of labor, and not only that, but people are saving whenever they are not physically consuming anything either.
Really, if you think about it, in your worldview, saving is taking place whenever anyone is not in the process of physically destroying a consumer good. In other words, ascetic monks who minimally interact with the physical world, are the world’s biggest savers, because they are consuming the least, and thus living lives that contain the most saving.
So why aren’t ascetic monks producing like gangbusters? Why aren’t their high “savings” rate translating into high economic growth?
It’s only in my view that an explanation can be made. In my treatment, ascetic monks are NOT saving very much. They are consuming with very high time preference. They are making next to no investments, which means next to no savings, and that is why they are producing very little.
Your position would require you to go through all kinds of twists and turns to explain why their very high “savings” rate is not translating into economic growth. You’d have to make the Keynesian argument that they are not saving very much because they are not earning very much income.
You’d then have to say that savings can increase only when income increases first.
You’d then have to say that governments can increase savings by deficit spending, which raises people’s incomes.
You’d then have to say that governments can stimulate investment by fighting wars and spending oodles of money on pork projects.
You’d then finalize your decent to the dark side. It will be bye bye Bob it was nice to know you, good luck abandoning sound economics and say hello to Krugman and Galbraith on your way to the Death Star.
Your last four paragraphs summarise my fear fairly aptly.
No, any IOU note can do exactly the same thing. We are really arguing about who should be allowed to sign IOU notes.
The thing is, in the short term government stimulus does create investment. The real question is whether that investment becomes self-sustaining, to produce a nett benefit in the long term. For example, it is hard to deny that the Federal Mortgage scheme did not stimulate investment in the building industry and thus got a lot of people into houses. More than that, it got people into very big houses (much bigger than they needed) and stimulated the banking and mortgage industry to boot… *short term*. We are just starting to see the long term fallout, as Fannie Mae puts hand out for yet more trillions of government money to cover their losses.
So the Austrian position is that you only make a choice whether to sacrifice short term benefit for longer term gain or vice versa, sacrifice the long term future for a short term boost. Keynesians claim you can get the best of both.
It all comes down to whether government control over investment decisions gives a wiser selection than individual control over investment decisions. Austrians say “no”, Keynesians say “yes”.
“The thing is, in the short term government stimulus does create investment.”
He does not create investment in the short term unless by sheer freak accident that do not come at the expense of other investments. To create investment you must free up resources by real savings. And the whole point of the Austrian business cycle is that since no capital is made available on account of the new money, entrepreneurs begin to invest in higher order goods at the expense (emphasis on “at the expense”) of lower order goods.
I can think of a whole list of methods by which the State can unlock capital that would not be otherwise offered by a private individual. The most obvious is just brute force.
For example, here in Sydney there is quite a high percentage of real estate (both commercial and residential) that sits empty because the building owner does not want to offer low-rent. The government could simply insist by hitting building owners with an empty house penalty, or by instructing the police not to evict squatters. In the short term, this would immediately put more real estate on the market and drive down rents.
Another example is governments have massive borrowing power. If I went to China and asked to borrow a few million for my pet project I would be regarded with great suspicion. However, those same Chinese will throw many billions into US treasury bonds. That’s just how it is… government bonds are perceived as low risk.
Yet another limitation on private investors is that a private investor must always balance risk against return. Private capital will search for investment opportunities where the long term risks are reasonably knowable, and where profits are reasonably likely. On the other hand, government is not constrained by the need to make a profit, and since they are investing other people’s money they need not be overly concerned about risk either (especially long term risk, where that government will be gone, and anyway they can blame someone else if needs be).
Beyond that, government has the advantage that it can bypass its own rules and regulations where that might be convenient. Private investors don’t get that option.
Consider for example the “National Broadband Network” that is under construction in Australia. Our ALP government paid Telstra (the incumbent owner of legacy copper lines) to sign a no-compete agreement, thus ensuring that the cheaper copper based DSL services would not undercut the newer investment of NBN fiber services. If two private companies had signed such a blatantly anti-competitive agreement they would have been whacked hard with fines. When government does the same they start trotting out “national interest, blah, blah” and other excuses.
All of these reasons (and probably others) enable government to mobilize capital in ways that private enterprise simply cannot do.
I was reading this debate and I think it would be helpful to think about market vs. individual experiments and also to do think about the market for some consumer good–like shoes.
Naturall, I take the orthodox position that income less consumption equals saving, and so, if income is earned in the form of money and not spent on anything, that is saving.
If we think of someone accumulating more money, that isn’t necessarily more saving, because maybe they are purchasing fewer other assets–like stocks or bonds.
And, of course, people can sell other assets for money and hold it, and that doesn’t impact saving at all. (It isn’t dissaving either.)
Anyway, that is an individual experiement.
Given the purchasing power of money, relative prices, interest rates, income, wealth, and so on, someone plans to purchase a variety of consumer goods, finanical assets and accumulate money. The financial assets accumulated plus money accumulated over the period is planned saving for that person. The purchases of this or that consumer good is individual demand for each of them. And adding it all up is consumption demand for that persion.
NOTHING SAYS THAT THIS PLANS CAN BE COMPLETE!
For example, if this person plans to purchase consumer goods, and all sorts of other people plan to buy them, and the total amount they want to be is more than firms together want to sell, then somebody is going to be frustrated. Something must give. But that doesn’t mean that it wasn’t really the individual’s demand for shoes. It was.
While I am not sure why the some folks have assumed the quantity of money is aways fixed, if it is, then not everyone can accumulate more money at once. Well, if the quantity of shoes supplies were fixed, then that would be true was well. Not everyone could actually buy more shoes at once. And in the more usual case, they can all buy more, but no more than someone else is willing to sell.
Suppose we add up how much Apple stock people want to buy, and it so happens that Apple isn’t going to issue any more during the period. All those folks that planned to accumulate more Apple stocks really wanted to save by doing that, but they can’t all do it. So?
Now, for the market experiment, what happen when the purchasing power of money, interest rate, or the relative prices of particular consumer goods change? Well, the usual notion is that they adjust to bring plans into coordination.
So, the notion that people can only save by accumulating more money all at once if something changes (like the purchasing power of money) is no different than any other aspect of the economy.
Perhaps I haven’t been clear enough, but demand isn’t the same thing as actual purchases. Supply isn’t the same thing as actual sales. It has to do with planned or desired purchases and sales at some constellation of prices. This is how we understand shoes. And saving with finanical assets is the same. And, it can work with money too.
Nice comment, Bill. I was going to make a lot of these points in my next (big) post on this issue.
“So, the notion that people can only save by accumulating more money all at once if something changes (like the purchasing power of money) is no different than any other aspect of the economy.”
I simply pointed out the obvious undeniable fact that money is always part of some cash balance. It does not circulate (in the literate sense as Mises pointed out). It is always hoarded. All of it! It is constantly [instantly] exchanged between individuals, but all this does is change the cash balances among individuals. It simply becomes nonsensical to say that cash balances are savings.
This is the problem with this debate and why it is somewhat frustrating. For some reason, it is assumed here that if one claims that cash balances are not savings, or demand for money is not demand for future goods, then this means that people cannot hoard by savings. Obviously this is nonsense. saving (forgoing consumption) is one way to raise your cash balance. There are two other possibilities (dissavings and neither).
But here is the critical point to understand. When people hoard by savings, it is not the increase in their cash balances that represent all the capital made available for investments on account of their actions, for the simple and obvious fact that other cash balances have been decreased on account of their actions. The total aggregate cash balance has NOT changed. So what does represent all these new savings and fresh capital when people employ their savings for accumulating cash? The same as when savings are employed for direct investments when people reallocate their spending between present and future goods. Employing savings to accumulate cash also changes that allocation between future and present goods. That’s your savings right there. The Austrian theory of the interest rate accounts perfectly for this situation. Demand for money is time neutral. People employing their savings to accumulate cash are also lowering their time preference. Time preference, not cash balances, still determine the interest rate.
Dan wrote:
I simply pointed out the obvious undeniable fact that money is always part of some cash balance. It does not circulate (in the literate sense as Mises pointed out). It is always hoarded. All of it! It is constantly [instantly] exchanged between individuals, but all this does is change the cash balances among individuals. It simply becomes nonsensical to say that cash balances are savings.
For a company that isn’t splitting shares or buying them back, we can use the exact same argument and “prove” that a household’s holdings of IBM stock aren’t part of its savings (or investments), right? I mean, the only way a household can invest in IBM stock, is if some other household disinvests from it. So it’s nonsense to say that shares of corporate stock are part of savings or investments, right?
Not at all bob. Your example is completely irrelevant. Sure, two people cannot be the exclusive owner of one and the same thing at the same time. So if we both want to invest in the same machine (without sharing it 50/50), and I already own it, then I must sell it and you must buy it, and no new machines were added. But the machine represents previous real savings, and that’s precisely the point here: The machine is the savings and not some cash balance sitting in someone’s bank account. New machines can be added on account of real new savings (and we can print new paper owner’s titles to signify this increase in capital), but answer this Bob, who’s cash balance in the economy can we point to and say: Here this $10000 in Mr X’s bank account is the savings invested in this or that machine?
Sure, if you employ savings to increase your cash balance (which is how Mises phrases this type of action in that quote from HA), then your actions can lead indirectly to a new machine, but then it will be that new machine and its corresponding new property tittle that signify the savings that had occurred, and not the cash balance which had only shifted from one account to another.
OK Dan that’s fine, but you’ve completely switched your argument. Before you were thinking it was crucially important that one person’s hoarding was matched by another’s dishoarding. I pointed out that that is true of corporate stock, so you punted that argument and switched to a new one, which is that pieces of paper aren’t physically productive.
OK, that latter argument isn’t bad, but I’m just pointing out it’s completely different from what you said at first. You’re a moving target.
Anyway, I’m going to do a post (soon) explaining why altering your spending patterns in order to (try to) accumulate larger cash balances really does free up real resources. I’m going to say the same thing Mises did in the quote you sent me over email; I don’t see why you think there’s something special about pieces of corporate stock paper but not pieces of green cash in that respect.
I don’t think I switched my argument. Perhaps you understand me better now, and that’s a good thing.
But obviously, the point about bonds you make is invalid precisely because I thought it is actually you who has reduced everything to just pieces of paper to show that the same argument could be made for bonds as with cash. But this is a sort of a logical “trick” by you, which is why I’ve tried to convince you that your argument does not resolve the logical problem of equating cash with [real] savings. If you just treat future goods in the abstract for which you associate pieces of papers signifying proofs of ownership (call them what you want: bonds, IOUs, etc….), then this “trick” is revealed and you can no longer make this argument that claims to future goods suffer from the same logical problem as cash. Cash then is revealed to be something entirely different.
I completely agree, there is no point in having an economy where everyone undertakes the same activity all at once (regardless of the activity). The whole point of an economy is complementary exchanges and division of labour.
However, with electronic bank accounts it is perfectly possible for everyone to think they are saving money in the form of numbers in a computer clicking higher and higher. Provided no one goes to spend those numbers, the banks have no problem. On the day they all want to spend at the same time, the banks have a big problem.
If all those people trying to save were attempting to save by buying up stacks of shoes, or buying up Apple stocks, then the price movement would send a signal to the buyers (and they would buy more because they think they are getting richer, thus inflating the bubble). What the bank does is hide this price signal when people save in electronic bank accounts. Effectively there is an unlimited buffer of virtual money that cannot be spent all at once.
Just to finish up I’d like to point out that most people “hoarding cash” in Krugman’s eyes are merely paying back debt, trying to get back to zero. They are not hoarding anything, they are fulfilling their previous promises.
Keynes once argued that there should be no stock market. People should be married to their shares, presumably earning dividends and passing down shares to their heirs.
In the real world, people can sell their shares when they want funds to purchase something else–bonds, capital goods, other shares, consumer goods. (Or hold money.)
Now consider all the people currently holding shares. It is conceivable that each and every one of them plans to sell off all of their shares and use the proceeds to fund a big vacation trip.
Can they all really do this?
Almost certainly not.
They will only be able to do this to the degree that there are other people willing to buy the shares.
Does that mean that when they accumulated those shares, they weren’t saving?
The term “savings” isn’t standard. The standard term is “wealth” which means
net worth. And the question would be whether or not the stock (or a cash balance) counts as
part of an individual’s wealth, that is, contributes to net worth.
Anyway, does that mean that those shares are not an asset and they don’t count towards the individual’s
wealth?
I have never had much use for general equilibrium theory, but rather than standard credit markets for saving, there is often dated goods. To “save” is to sell some resource like labor, now, and purchase now an apple to be delivered in 2015. Then, they add risk to make all of these purchases conditional on the state of the world. (And actual purchases and sales at any time don’t really matter.)
Just as Keynes (perhaps jokingly) said that people should be married to their shares, I think some of the comments here are insisting that for something to be saving, (or real saving) it has to be something like this GE conception.
The real world situation where people can save for just as long as the want, but that means that there is no guarantee that the consumer goods they want will really be there, is what you find troubling.
Well, I think the GE world is a fantasy, and Keynes’ marriage proposal would cause more harm that good (and violate economic freedom to boot.)
I think this is also very relevant to those, like Block, who have taken their criticism of fractional reserve banking to a criticism of any maturity transformation. (But, of course, I think the cirticisms of fractional reserve banking are misplaced because it is just a maturity transformation.)
There is no way to know whether people’s current desired saving is to fund the demands for particular goods at particular future times. And so, entrepreneurs can make errors by planning to produce for the more distant future when people are saving to fund purchases of consumer goods in the nearer future. The question is who bears the risk.
The stockholders above bear the risk. When they all try to sell to fund the vacation, they suffer capital losses and can no longer pay for the vacation they expected.
If bank depositors all try to buy consumer goods at once, the bank’s stockholders get wiped out, but then the bank depositors will take a loss, and they can’t buy as much as planned.
If people held gold in a gold standard, and they decide to all consume at once, then the purchasing power of money would fall–the prices of the consumer goods would rise, and they couldn’t buy as many as they planned.
Making this impossible requres that we go into the GE world, where people commit to buying specific goods in the future now. Then, production can be organized to efficiently produce each good at each future date, using the
most appropriate round about method. No malinvestment in that world!
So, trying to define saving to make it real saving so that no malinvestment is possible, is a fools errand. I think the orthodox approach makes perfectly good sense. Saving is that part of income not spent on consumer goods and services. It includes income not spent on consumer goods and just accumulated in the form of money.
One final point.
In personal finance, saving is risk free and investment is risky. In economics, income used to purchase risky assets is saving as well as income used to purchase “risk free” assets. Having a special category for government bonds and FDIC insured deposits–saving, and then stocks, real estate, or corporate bonds being investment, is not the way it is done. In my opinion, all assets are risky, and they only question is who bears the risk. Treating the accumulation of bank deposits as saving (and not investment) because the taxpayer covers the risk–seems wrong.
By the way, I use the term investment in the orthodox way–spending on capital goods like machines buildings and equipment. And I presume part of the discussion here involves whether accumulating gold in a gold standard world counts as investment and this somehow ties to liquidity preference, and Murphy’s new-found Keynesian tendencies. (Just kidding, Bob.)
“The term “savings” isn’t standard. The standard term is “wealth” which means
net worth. And the question would be whether or not the stock (or a cash balance) counts as
part of an individual’s wealth, that is, contributes to net worth.
Anyway, does that mean that those shares are not an asset and they don’t count towards the individual’s
wealth?”
I am currently reading Say, and I am coincidentilly at his chapters about Money. And there I found following quote:
“Wherefore, it would be wrong to subscribe to the opinion
of Garnier, (a) who lays it down as a maxim, that, ” so long as silver
remains in the shape of money, it is not an item of actual wealth
in the strict sense of the word; for it does not directly and immediately
satisfy a want or procure an enjoyment.” There are abundance
of values incapable of satisfying a want, or procuring an
enjoyment, in their present existing shape. A merchant may have
his warehouse full of indigo, which is of no use in its actual state,
either as food or as clothing; yet it is nevertheless an item of
wealth, and one that can be converted, at will, into another value fit
for immediate use. Silver, in the shape of crown pieces, is, therefore,
equally an article of wealth with indigo in chests. Besides, is
not the utility of money an object of desire in civilized society ?
Indeed, the same writer elsewhere admits that, ” specie in the
coffers of an individual is real wealth, an integral part of his substance,
which he may immediately devote to his personal enjoyment
; although, in the eye of political economy, this same coin is a
mere instrument of exchange, essentially differing from the wealth
it helps to circulate.”* I hope what I have said is quite sufficient
to show the complete analogy of specie to all other items of wealth
Whatever is wealth to an individual, is wealth to the nation, which
is but an aggregate of many individuals; and is wealth also in the
eye of political economy, which must not be misled by the notion
of imaginary value, or regard as value any thing, but what all the
members of the community, individually, as well as jointly, treat as
value, not nominal, but actual. And this is one proof more, that
there are not two kinds of truth in this, more than in any other
science. What is true in relation to an individual, is true in relation
to the government, and to the community. Truth is uniform;
in the application only can there be any variety.”
Say – Page 228 – Treatise on Political Economy
As I understand this quote, Say is with Murphy. Is this applicable for this issue?
“Can they all really do this?
Almost certainly not.”
I don’t get the sense you fully understand the argument you are objecting to. At least the way I presented it. I would not argue that people cannot increase their cash balances by savings. It is obvious that they can. But the cash balances themselves cannot logically represent those savings.