I just watched the following interview Econstories got Robert Skidelsky to do with them:
http://www.youtube.com/watch?v=ZRvaxUNDTKY
I feel Skidelsky makes a useful point at 7:47, relaying a skepticism Keynes had about the connection between savings and interest rates. When people make savings, they may either use this money to invest in the loan market or simply hold on to it and "hoard" it. According to Skidelsky, Keynes saw as a failure of classical theory that it failed to distinguish between the former and the latter, hence the connection between the savings rate and interest rate were not quite as clear as they seemed to be making out.
While I think Keynes' alleged belief about the lack of connection(or should I say connexion...) between interest rates as well as all other prices in the market economy, as reflected by changes in the purchasing power, and reduced consumption (and therefore "bidding"), or "hoarding", is naive and short sighted, I do agree that there is an analytical distinction between simply accumulating cash and putting it into loans to businesses, as well as the effects of the two. Am I wrong in making this distinction, and if so, why?
I also feel that the equivalence between the two is a little misleading in some Hayekian expositions of the business cycle, especially those like Garrison's relying on Jevons' triangle in a graphical framework. I remember telling this to Garrison at Mises University in 2009 and he agreed with me, but I don't think either of us at the time could see the full implications.
Any thoughts? Please do forgive me if anything I've said sounds stupid. I still need to get round to reading more works on monetary and business cycle theory in greater detail.
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Any thoughts?
My physics prof once said "Physics is the art of knowing what to ignore". he meant, for example, that when computing a formula involving an infinite series, it is an art to know when we can safely say that we need only consider the very first term of the series and ignore all the others, because they only change the answer by a trivial amount, but make the computations incredibly complicated.
You get the idea. The amount actually hoarded is, historically, trivial. Ok reread the first paragraph and connect the dots.
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I feel Skidelsky makes a useful point at 7:47, relaying a skepticism Keynes had about the connection between savings and interest rates. When people make savings, they may either use this money to invest in the loan market or simply hold on to it and "hoard" it. According to Skidelsky, Keynes saw as a failure of classical theory that it failed to distinguish between the former and the latter, hence the connection between the savings rate and interest rate were not quite as clear as they seemed to be making out. While I think Keynes' alleged belief about the lack of connection(or should I say connexion...) between interest rates as well as all other prices in the market economy, as reflected by changes in the purchasing power, and reduced consumption (and therefore "bidding"), or "hoarding", is naive and short sighted, I do agree that there is an analytical distinction between simply accumulating cash and putting it into loans to businesses, as well as the effects of the two. Am I wrong in making this distinction, and if so, why?
I think the point Austrians try to make (and I'm going by Rothbard's MES here) is that not necessarily an increase in "savings" improves the economy, but a lowering of time preference. A lowering of time preference means that individuals are spending more on investment goods (either buying factors or loaning out money) relative to consumption goods in comparison to their previous ratio. When this occurs, the well known lenghtening of the capital structure happens. An individual can certainly "save" money by hoarding it, but this "saving" (or "hoarding") is not guided by time preferences but rather their demand for money. The demand for money is unrelated to the interest rate, as an increase in cash balances may raise time preferences (spend less on investment goods) or lower them (spend less on consumer goods). Keynes' big problem is he considers the demand for money part of savings and that the demand for money determines the interest rate (but also treats it as being determined by the interest rate, a crucial problem of circularity). IMO, you are correct in asserting that there is a difference when the two types of "saving" occur, but one is guided by time preference and the other demand for money.
I also agree with you that the complexities of the structure of production cannot be graphically exposed without making some sacrfices. I think the "Hayekian triangle" is a good representation of the movement of circulating capital down a pipeline, but can't really show the creation of fixed capital and their own "structures of production". I think this leads to alot of confusion because people can then draw the erroneous conclusion that the "expansion of the higher orders" can only mean an "expansion in mining, refining, manufacturing".
I think the point Austrians try to make (and I'm going by Rothbard's MES here) is that not necessarily an increase in "savings" improves the economy, but a lowering of time preference. A lowering of time preference means that individuals are spending more on investment goods (either buying factors or loaning out money) relative to consumption goods in comparison to their previous ratio. When this occurs, the well known lenghtening of the capital structure happens. An individual can certainly "save" money by hoarding it, but this "saving" (or "hoarding") is not guided by time preferences but rather their demand for money. The demand for money is unrelated to the interest rate, as an increase in cash balances may raise time preferences (spend less on investment goods) or lower them (spend less on consumer goods). Keynes' big problem is he considers the demand for money part of savings and that the demand for money determines the interest rate (but also treats it as being determined by the interest rate, a crucial problem of circularity). IMO, you are correct in asserting that there is a difference when the two types of "saving" occur, but one is guided by time preference and the other demand for money. I also agree with you that the complexities of the structure of production cannot be graphically exposed without making some sacrfices. I think the "Hayekian triangle" is a good representation of the movement of circulating capital down a pipeline, but can't really show the creation of fixed capital and their own "structures of production". I think this leads to alot of confusion because people can then draw the erroneous conclusion that the "expansion of the higher orders" can only mean an "expansion in mining, refining, manufacturing".
Thanks for your response. I understand where you're coming from but would like to outline an objection. To me it seems that to make such an a priori distinction between saving in the form of hoarding money and perhaps "direct investment" is a little erroneous and misleading. All action is perpetuated by uncertainty and is future oriented, hence the aim of production being ultimate consumption.
What holding money does allow the individual access to is a resource in the framework of his action in a market economy that is the most convertible compared to all others in a market economy. Lack of capital convertibillity as one progresses further and becomes more commited along the structure of production is actually what creates the practical problem of a recession upon the onslaught of a credit fuelled boom. This is why the correction takes time.
To argue however that saving in the form of accumulating cash is not guided by time preference, would require an unmistaken prescience of the aims of acting man, which we cannot know until they are utimately revealed ex post facto. Hence when Robinson Crusoe accumulates berries on an island we cannot know for sure whether he is insuring himself against an uncertain event or accumulating capital to sustain himself as he devotes his labout entirely to building a stick, to use to improve his capture of berries. And as Rothbard notes, both are forms of capital accumulation.
Similarly, it seems odd to me that people still slate hoarding, ignoring its effects on the purchasing power of money. By increasing your cash holdings and raising your demand for money, the total demand for money (to use a price determination concept of Wicksteed's you'll recognise from MES) has been raised in comparison to its quantity, raising its purchasing power relative to other goods. Hence, while businesses have not benefitted from the direct investment they could have gained from savers looking to deposit their money in bonds and stocks, they have gained by having the prices for the factors of production they need to make certain investments reduced, when previously large lines of prdouction were unfeasible. The entire process then allows for a healthy reorientation of the economy.
This purchasing power argument in defense of hoarding I have not seen emphasised by many Austrians however.
Thanks for your response. I understand where you're coming from but would like to outline an objection. To me it seems that to make such an a priori distinction between saving in the form of hoarding money and perhaps "direct investment" is a little erroneous and misleading. All action is perpetuated by uncertainty and is future oriented, hence the aim of production being ultimate consumption. What holding money does allow the individual access to is a resource in the framework of his action in a market economy that is the most convertible compared to all others in a market economy. Lack of capital convertibillity as one progresses further and becomes more commited along the structure of production is actually what creates the practical problem of a recession upon the onslaught of a credit fuelled boom. This is why the correction takes time. To argue however that saving in the form of accumulating cash is not guided by time preference, would require an unmistaken prescience of the aims of acting man, which we cannot know until they are utimately revealed ex post facto. Hence when Robinson Crusoe accumulates berries on an island we cannot know for sure whether he is insuring himself against an uncertain event or accumulating capital to sustain himself as he devotes his labour entirely to building a stick, to use to improve his capture of berries. And as Rothbard notes, both are forms of capital accumulation.
To argue however that saving in the form of accumulating cash is not guided by time preference, would require an unmistaken prescience of the aims of acting man, which we cannot know until they are utimately revealed ex post facto. Hence when Robinson Crusoe accumulates berries on an island we cannot know for sure whether he is insuring himself against an uncertain event or accumulating capital to sustain himself as he devotes his labour entirely to building a stick, to use to improve his capture of berries. And as Rothbard notes, both are forms of capital accumulation.
I think that “saving” money in hoards does not require an insight into the actor’s value scale, but instead just the position that his demand for money increased. These “savings” are not guided by time preference but by an individual’s cash balance schedule, because these “savings” don’t deal with the ratio of money spent on consumption versus the money spent on future goods (loans/factors). In terms of money, time preference deals with the sacrifice in availability of present money (that could be spent on consumer goods) for future money (earned through the production structure). If demand for money was included in time preference schedules, then time preference would have no relation to the interest rate, as “savings” could increase (a lowering of time preferences) while the interest rate rises (if the funds come out of money normally spent on investment goods/supplied in the loanable funds market) As Rothbard says:
“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…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.” (Rothbard 39 America’s Great Depression).
Hmm... In that case I guess I must agree to dsagree with both you and Rothbard, as I don't think such a cut and dried distinction between demand for money and savings based on time preference must exist. there's the old saying "money isn't everything it's what you use to get everything else."
Hence if I were earning a wage and decided to save(hoard) at least 25% each annum. I save enough to buy an office for my business. Having the money to do this after four years let's say, I am "further along" the structure of production, than I would have been at the outset of my action. My choice of holding on to the money instead of putting it in funding another investment project through a loan or by buying stock, has been based on my evaluation of future uncertainties causing me to hold on to the money. I decide not to spend it directly on consumer goods, because I still want to save to buy the office space for my business, hoping to achieve a higher return eventually than if I had not done. This would still be investment, and it would not as you correctly point out necessarily be communicated by only looking at interest rates.
I think the distinction that you and apparently Rothbard seem to be suggesting would only be tenable in a world without uncertainty. In such case, it truly would be "foolish" to hold on to the money based on time preference as opposed to earning increased returns via interest. Yet in such a world "money" would cease to exist, as Mises points out with the imaginary construction, the ERE, becoming an ethereal "accounting unit."
Hmm... In that case I guess I must agree to dsagree with both you and Rothbard, as I don't think such a cut and dried distinction between demand for money and savings based on time preference must exist.
Surely, its the other way around, in a world of certainty you would not have to hedge against risk nor a 'pure' money demand from a lack of omnipotence as to who you can trade with and when to best achieve your goals... you would only have time-preference to lean on in your analysis.
However, since we live in a world of uncertainty we therefore need to understand that time-preference speaks to ones preferences for distributing ones income between consumption and saving, and that other factors which are cut and dried distinct from time-preference are required for analysis that hopes to explain the real world in which people have demand for money based on uncertainty and non-omnipotency ?
I can credit your allusion to the distinction not being 'cut and dried' in so far as the need to hedge against risk is surely a factor which would influence ones preferences for distributing ones income between consumption and saving. so there is some bleed over in precisely that way.
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Hence if I were earning a wage and decided to save(hoard) at least 25% each annum. I save enough to buy an office for my business. Having the money to do this after four years let's say, I am "further along" the structure of production, than I would have been at the outset of my action. My choice of holding on to the money instead of putting it in funding another investment project through a loan or by buying stock, has been based on my evaluation of future uncertainties causing me to hold on to the money (Your Demand for Money). I decide not to spend it directly on consumer goods, because I still want to save to buy the office space for my business, hoping to achieve a higher return eventually than if I had not done. This would still be investment, and it would not as you correctly point out necessarily be communicated by only looking at interest rates.
Lets say that you normally spent $50 of income on consumer goods, and $50 of income on investment goods. You get a raise, and decide to hoard your money to buy a new office. You hoard your money into a cash balance, and your demand for money increases.Your time preference (ratio between consumer goods and investment goods) has not changed. At the moment when you have enough to buy the new office, your demand for money decreases while your time preference is lowered (the proportion of money spent on consumer goods versus investment goods has gone down). Your time preference could go down at the beginning if you hypothetically never got a raise and instead "hoarded" that money by spending less on consumer goods (lets say only $30). Then your time preference would be further lowered when you make the investment, because you now are spending even more on investment goods in proportion to consumer goods. Time preference is not governed by the uncertainty of the world, as people would still have time preferences even in the ERE (where there is no uncertainty).
This would still be investment, and it would not as you correctly point out necessarily be communicated by only looking at interest rates.
By interest rate, Rothbard means the price spread on the structure of production (the loan rate is only a secondary manifestation of the interest rate), i.e, the premium obtained by capitalists by exchanging present goods for future goods. These future goods are then transformed over time into a good that can be sold for "future present money" further down the road. You bought the office by exchanging present goods (money) for future goods(the office) which you hope will enchance your production of goods to be later sold for future "present money" (Profit intertwined with interest in the real world, just the interest premium in the ERE).
Ah, I see. I think I understand what our differences were now.
You were basically talking about time preference and demand for money operating on two different levels. Hence how the increased "saving activity" withholding current expenditure for consumption was due to both a lowered time preference, but yet at the same time represented an increased demand for money right? I thought when you mentioned interest rate you were actually talking about the loan rate. Only the latter would be an easily observable phenomenon, that might certainly make for an erstwhile consideration when considering the efforts of naive econometricians trying to "test" the ABCT in a Garrisonian framework.
You were basically talking about time preference and demand for money operating on two different levels. Hence how the increased "saving activity" withholding current expenditure for consumption was due to both a lowered time preference, but yet at the same time represented an increased demand for money right?
An increase in savings (a lowering in time preferences) can manifest itself with an increase in the demand for money (decrease in consumer expenditures, ratio of consumer goods to investment goods is lowered). As far as I understand it though, the actual savings is not the increase in the demand for money but rather in the reduction of consumer spending (Since time preference deals with spending on investment versus consumption goods and not demand for money). The increase in savings was only the decrease in consumption (what provokes the decrease in the interest rate/price spread) while the increase in money demand was the hoarding of cash. Money demand is unrelated to time preference and deals with the uncertainty of the future. It is a restriction of consumption in the sense that the individual isn't using the funds for consumption, but the same analysis can also be applied that it is a restriction of investment. There is no sacrifice in the sense of purchasing investment factors/loaning out money, and as such does not relate to a time preference schedule*
I thought when you mentioned interest rate you were actually talking about the loan rate. Only the latter would be an easily observable phenomenon, that might certainly make for an erstwhile consideration when considering the efforts of naive econometricians trying to "test" the ABCT in a Garrisonian framework.
Measuring or quantifying the social rate of time preference, in conjunction with entrepreneurial profit/loss is near impossible. Aside from the difficulties in separating the praxeological concepts in an ordinary exchange, trying to record all transactions and "average" some sort of mean price spread would be ridiculous and completely misses the point. However, these concepts still exist though.
*As Rothbard puts it in a footnote "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". (Rothbard 386 MES)