Saving, Investing, and Hoarding

Suppose that Crusoe gathers berries with his bare hands. In order to increase his productivity he can make a stick with which he can shake down trees and bushes and get many more berries and even other fruit. But producing the stick takes time, and Crusoe cannot do it unless he has accumulated a sufficient stock of berries to sustain him during the production of this capital good, that is, an intermediate good used not for direct consumption but as means of acquiring further goods. In other words, he has to save, and what he saves are consumer goods. In so doing he sacrifices present consumption either of berries, if he goes to sleep half-hungry, because, for example, he reduces consumption to the bare minimum necessary to keep him alive and saves the rest, or, say, leisure or building a hut or whatever, if he works harder gathering berries. There is no such thing as a free lunch.

But what is saving in the modern economy? We don't save consumer goods. I don't hoard stuff in my apartment. And neither is saving accumulating paper dollars or even gold coins under the mattress. Saving is inseparable from investing and means simply a redirection of resources from the existing shorter production processes which make the presently available consumer goods to new, longer, and as yet nonexistent, setups. The number of consumer goods produced and sold temporarily declines, and there occurs a disinvestment away from current producers of the consumer goods and the capital goods used to make them into longer production processes. Greater savings indicate lower time preferences and lower interest rates, and so the costs of doing business for every firm engaged in comparatively longer production processes decline, making many of such ventures profitable.

Now Crusoe saves first, then consumes what he has saved while working on the stick. He does not collect berries in the meantime. What he could also do is to work while at the same time consuming less. He could cut the time during which he gathers berries in half and use that time for making the stick. That's exactly how things work out in the modern economy. In simple terms the consumers buy fewer goods being produced. As a result, there is excess capacity in the later stages of the production structure. The competition there (that is, between companies which operate closest to final consumption) will intensify, and the marginal firms will go out of business, releasing their factors of production. If these factors are specific, then their price will drop in the later stages of the capital structure, because the demand for them there has decreased and they have nowhere to go. If they are nonspecific, then they will then be reallocated and re-employed in the earlier stages of novel and more circuitous endeavors. The structure of production in general will lengthen – the money that used to accrue to the factors in the later stages of production and no longer does (because the consumer decisions to curtail buying the present goods are transmitted up through the structure until a certain point in the form of decreased income to factors) has to go somewhere, and it will go into the new earlier stages of new production processes. (Or, to be more precise, the production structure will narrow in the later stages, widen in the early stages, and deepen in terms of the number of the stages.)

An increase in savings does not entail that there are too many consumer goods – there can never be too many consumer goods – but that there are too few future goods as compared to present goods from the point of view of the time preference and interest rates of the moment.

The sacrifice of present consumption occurs when the money in the hands of the public is channeled into capital goods used in more roundabout, longer production processes. But precisely because they are longer and new, they take time to set up. While that is going on, the same effort results in few consumer goods. To be sure, the sacrifice is worth it, because in the end, perhaps months, perhaps years, there will more and better goods out there than there were before, in obedience to the new consumer time preferences. But in the meantime, consumers are, by their own choice, shortchanged.

I mentioned that saving is inextricably linked to investing. Saving means buying capital goods rather than consumer goods, and an increase in saving means buying capital goods of the highest orders rather than consumer goods or capital goods of lower orders. But don't by saving we often indeed mean increasing our cash balances? What are the effects of hoarding, of keeping the income earned under the mattress? These seem to be:

Greater security for the hoarder, since one of the functions of money is a "store of value." In other words, it is a shield against the uncertainty of the future and against unforeseen future expenses.
Lower prices, because the demand for money increases as the hoard enlarges, which causes the purchasing power of other people's money to increase and prices to fall, given constant money supply.
Lower (nominal) income to the factors of production, as a direct consequence of (2).
Higher real wages, because the hoarder keeps working to increase his hold but himself does not spend any of his money, thereby benefiting others though not himself. Thus, Scrooge McDuck of Duck Tales, who keeps his gold in a "money bin" and enjoys swimming in it, is a benefactor of his fellow man, because he supplies goods and services to others but consumes little.

March 29, 2008

Dmitry Chernikov [send him mail] is a graduate student in philosophy at Kent State University. See his website.

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