A Ghost From Landsburg Past
It looks like Steve Landsburg and I will have this disagreement as an annual tradition now. He re-posted his thoughts on Ebenezer Scrooge, which include this line of argument:
In this whole world, there is nobody more generous than the miser—the man who could deplete the world’s resources but chooses not to. The only difference between miserliness and philanthropy is that the philanthropist serves a favored few while the miser spreads his largess far and wide.
If you build a house and refuse to buy a house, the rest of the world is one house richer. If you earn a dollar and refuse to spend a dollar, the rest of the world is one dollar richer—because you produced a dollar’s worth of goods and didn’t consume them.
Who exactly gets those goods? That depends on how you save. Put a dollar in the bank and you’ll bid down the interest rate by just enough so someone somewhere can afford an extra dollar’s worth of vacation or home improvement. Put a dollar in your mattress and (by effectively reducing the money supply) you’ll drive down prices by just enough so someone somewhere can have an extra dollar’s worth of coffee with his dinner. Scrooge, no doubt a canny investor, lent his money at interest. His less conventional namesake Scrooge McDuck filled a vault with dollar bills to roll around in. No matter. Ebenezer Scrooge lowered interest rates. Scrooge McDuck lowered prices. Each Scrooge enriched his neighbors as much as any Lord Mayor who invited the town in for a Christmas meal.
Saving is philanthropy…
Of course I understand the point Steve is trying to make here, but this train of thought just doesn’t sit right with me. A major difference between saving and philanthropy is that with the former you can undo your “generosity” once you consume. So for Steve’s accounting to work, a saver is being altruistic, while a consumer is being greedy.
There’s a certain logic to that, but it seems contrived to me. Consider the following scenarios:
(A) Jim earns $100 at his job. He uses the money to buy a steak dinner ($100) today for himself.
(B) Jim earns $100 at his job. He uses the money to buy two pasta dinners ($50 each) today for a date and himself.
(C) Jim earns $100 at his job. He uses the money to buy a ticket to the Superbowl, which won’t occur until next year.
(D) Jim earns $100 at his job. He uses the money to buy a ticket entitling him to two steak dinners (for him and a date) but it won’t become active until next year.
(E) Jim earns $100 at his job. He buys a one-year bond at 100% interest and then a year later, uses the $200 to two steak dinners for himself and a date.
How does altruism/selfishness play out in the above scenarios? (Oops! This is confusing, I just realized. Don’t worry about him and the date being selfish or altruistic; I mean, is Jim being altruistic toward the rest of the world, versus Jim spending money on his own narrow interests.) For example, would Landsburg say Jim is more altruistic for 12 months in (C) compared to (A), at which point the selfishness kicks in? I would rather say there is the same level of selfishness in both transactions the whole time; in either case, Jim is using his income to buy the consumption good he prefers. It just so happens that the flow of services from the Superbowl ticket doesn’t start for a year. Why is buying future consumption morally different from buying present consumption?
I would say Jim spending $100 now on a steak dinner that won’t physically be consumed until 15 minutes from now, and Jim spending $100 now on a Superbowl ticket that won’t physically be consumed until one year from now, are two acts of present consumption. (I define acts of consumption as expenditures not for the purpose of making subsequent sales). The actual physical act of consumption tends to always be delayed by some positive period of time after the expenditure (or the contractual agreement where payment is delayed, as in a restaurant).
But I think Landsburg is getting at another point. He isn’t talking about mere delaying of consumption. I think he’s talking about a Scrooge producing and earning money, say $100, but never consuming out of that money. Someone who earns $100 is assumed not to spend that $100 on his own consumption. He keeps it as cash, or he invests it. As long as this is the case, the Scrooge is, in Landsburg’s judgment, a boon to others. I agree with that. I look at the physical production and consumption and abstract away from the money. To the extent that someone produces more than they consume, they are helping others.
It’s why we are all today physically benefiting from all the capital that has accumulated for centuries. The miser hoarder capitalists have produced so much capital that it has extended beyond their lives. They did not consume their capitals. They produced more than they consumed, and because of that, we’re all living pretty prosperous lives. If everyone since the dawn of mankind consumed exactly what they produced, then we would all still be living in caves (or the Garden of Eden, depending on how you want to look at things).
What you are doing when debating Landsburg on this point is emphasizing the fact that the human intention element is important. Landsburg says “Scrooge is a boon to others when he sells stuff but does not consume with the income.” You reply and say “Hey wait a minute, what difference does it make if Scrooge consumes now or later? If he consumes at all, even 10 years from now, he isn’t really acting altruistically the way Landsburg says he is. We have to keep in mind the element of intentions, so that we don’t get sloppy and say “Jim is altruistic because he isn’t going to physically consume out of that $100 for another year.”
You’re both making good points, you’re just making slightly different points. I think to match up what you’re saying with what Landsburg is saying, you should add a 6th example:
(F) Jim earns $100 at his job. He uses the money to stuff his mattress.
To the extent this is Jim’s actual intentions, you and Landsburg should agree.
I haven’t read it in the original: do we know what Scrooge does with his money? Do we know he invests it? Obviously he has a stock of houses/apartments he owns – so he’s invested some. But do we know he invests what he earns from that?
The point about Scrooge McDuck is interesting. Yes he lowers prices – but he also lowers quantity demanded!
Yes he lowers prices – but he also lowers quantity demanded!
Not necessarily. Prices can fall and the same quantity demanded can exist. Lower nominal demand does not imply lower quantity produced, supplied, or demanded.
In fact, as Jesus Huerto De Soto has explained, reducing consumption and cash hoarding the difference can actually end up expanding the capital goods sector by making capital goods production relatively more profitable than the consumer goods sector, which will tend to redirect capital towards more capital goods, which in the long run will boost the productivity of labor, and hence boost the supply of both capital and consumer goods. Since these goods can be sold at lower prices, we can say that the quantity demanded can increase with more Scrooge McDucks!
What you are doing is conflating money spent with quantity demanded/supplied. This isn’t all that surprising to me, because it is orthodox Keynesianism. Keynesians constantly conflate spending with production.
So we should force him to buy something he doesn’t want?
Of course not. Keynesians are much more slick. They want OTHERS to receive newly printed money, so that their spending “offsets” Scrooge’s hoarding. Scrooge ends up being forced to pay for it by depreciated money, which is very hard to detect, and the very reason is it used.
We fully agree, of course. I take the word “miser” to mean someone who saves *for the sake of saving*, not for the sake of future consumption. I believe this is pretty much how everyone uses the word. If you eat frugally because you’re saving up to buy a Porsche, I don’t think anyone would call you a miser.
So…given that Scrooge is indeed a miser — that he saves for the saking of saving, and not for the sake of future consumption, then of course he’s got to be a boon to the rest of it. The way that boon is delivered depends on Scrooge’s particular habits: If he lends at interest, he lowers interest rates; if he puts money in his mattress, he lowers prices. But the boon is there, and so has to be delivered *somehow*.
But you know all this, of course. I know you know this secondarily because it’s all right there in your post, but primarily because I know you’re a smart guy. And smart guys know that in situtations like this, it always pays to follow the goods and not the money.
Steve Landsburg wrote:
I take the word “miser” to mean someone who saves *for the sake of saving*, not for the sake of future consumption.
Ah shoot, I forgot that’s what you said last year too. (I’m being serious.) I’m not sure about that move, but I wish I had remembered it before writing up my post. I guess now the issue is, what does Scrooge do in his will? And then yes, I guess I can see the philanthropic nature of it–at that point, he either explicitly concentrates the gift on some recipient, or he destroys his cash and then gives it to everybody who holds money-denominated assets.
Ahhh, but how could miserliness evolve?
heh
If he lends at interest, he lowers interest rates
I will quibble on this point. I know you’re just using the loanable funds theory of interest, which is pretty standard. I disagree with that theory, but I want to focus on the boon to others when Scrooge lends. I will argue that the boon doesn’t derive from lower interest rates. This is because lower interest rates are not inherently a boon to people! Interest rates should not be considered a “cost” of money, in which case a lower interest rates means a lower cost, and a lower cost means higher net gains, ceteris paribus. Interest rates should instead be viewed as a reflection of time preference, of the information concerning people’s preferences for goods over time.
Scrooge McDuck, who lends money, is actually a boon to others to the extent that he is making available funds to others that allow them to acquire more real goods in the present than they otherwise could have acquired without those loans and Scrooge spending the money himself.
You said it yourself: In these situations it is better to follow the goods and not the money.
Mises went to incredible lengths to show that lower interest rates are not inherently a benefit to society, and he went to even lengthier lengths to show how it can mislead people into thinking that monetary policy that lowers interest rates can bring prosperity to people, but why it ends up with a crash.
We can even see how lower interest rates are not inherently a boon to people on your own terms. While the borrowers pay less interest, we have to assume that prices are lower too, on account of Scrooge’s not spending that money on consumer goods or capital goods or labor. So consumer goods prices, capital goods prices, and labor prices, in whatever combination, will be lower to the extent Scrooge refrains from spending money, and the lower resulting spending is attenuated by the rest of the economy in the form of a new lower aggregate price level for all things.
So we have to assume that the borrower’s receiving prices (wages, goods sales, etc) are lower because of Scrooge’s abstention from spending. (Yes, this assumes relatively flexible prices, but that was the context all along, so I’m just sticking to that context for now). So while the borrowers pay less out of pocket money on interest payments, they are receiving less income from Scrooge.
You had good advice. Follow the goods through and through.
And even if we did consider lower interest rates as an inherent boon to borrowers, there are still the lenders who will end up earning less interest.
Scrooge is as much of a damage to people’s savings as he is a boon to lenders. If the Scrooge money drives down interest rates, it will tend to displace other money as each person’s individual time preference makes them decide to consume their savings.
Interest rates don’t determine time preferences. Interest rates are a function of time preferences.
Steve, this isn’t really important, bu I think in common language, someone who saves up for something specific wouldn’t be considered a miser, but someone who saves up so that he will be able to get whatever he might want in the future would be considered miserly.
The psychic reward in each case is initiated at the same time, time zero. The actual event or good, that is, what Jim is “buying”, may occur at time zero or be delayed.
In each of these cases, Jim is laying claim to some opportunity at time zero. Jim is using time zero to make a decision regarding the use of a good or experience. The point is that there is only one time zero. The actual occurence of what has been “reserved” may be further down the time line; however, it is as if Jim has made an “appointment with destiny” by making a decision (any decision) at time zero. At time zero, he rests assured that he will have spent his money on a particular thing. If that thing is later rather than sooner or immediate, Jim is still satisfied that what he has decided upon, at time zero, will occur and he rests secure and enjoys the anticipation in the meanwhile.
Is there not a difference between someone who saves and someone who does not want to spend money (and therefore saves)?
In the first case, let’s say Mark decides to withhold current consumption in anticipation of future consumption. That future consumption could be for a Jaguar. Or, Mark could even decide to save not knowing what type of car he would like to buy. He might even decide that he knows himself well enough that he just isn’t sure what type of car he wants to buy yet. So he’ll save some more, maybe hoping next year’s model has an improved electrical system, or that he even better save up enough to buy two, since one will always be in the shop.
Unlike Mark, Jane simply does not wish to partake of any particular purchasing experience. In fact, she may reject buying anything unnecessary and winds up accumulating money, but without any explicit anticipation of future acquisition. Saving is her null task, as opposed to her goal, even though her behavior may outwardly appear the same as Mark’s.
Mark we might call thrifty (because he is on a budget with an end goal of releasing some savings at some time in the future). Jane resembles what I think of as a miser. It involves the deliberate self-deprivation of experiencing a trade.
From my perspective the difference is one of commitment.
If Mark signs an order with the Jaguar dealer, that he will buy a Jaguar in two years then the dealer can tell the factory he has an order, the factory can get supplies ready, and be sure that Mark gets his car in perfect condition on the prescribed day.
If Jane doesn’t particularly know what to buy, then she is making no particular commitment and thus at best, someone might guess what she wants but really no one knows. No one can plan for Jane’s eventual purchase, so the physical infrastructure might be put under pressure at some random future time. It is a more difficult problem to efficiently cater to Jane’s needs than to Marks’.
To take your point one step further, I am not sure it is anything but folly to try to plan for Jane’s needs. Imagine trying all sorts of enticements (that others WILL respond to) in order to coax a cent out of Jane (beyong those few very basics for life).
Maybe the scrooges are at the extreme end of the bell curve (some percentage of the population that is roughly constant) and not worth catering to, due to the market distortions and externalities coaxing would cause. I don’t say that to be mean (or miserly!) but the point is, there will be scrooge behavior in any economy/society and like background noise, it is probably best written off, or accounted for to the extent it can be detected within the data.
Money isn’t a public good, and no one is entitled to someone else’s property.
Yay for misers!:
Defending the Undefendable (Chapter 15: The Miser) by Walter Block
http://www.youtube.com/watch?v=x4XSEVJLrdY
Kay: Your distinction between the thrifty Mark and the miserly Jane is exactly on target (as is everything else in your two posts).
Is there a difference between cash hoarding and reducing the monetary supply?