Sunday, July 05, 2009

Defining Savings

Robert Murphy and Robert Wenzel have a dispute over the definition of savings. Wenzel appears to define savings as "demand for capital goods" while Murphy defines it in the traditional sense, as preserving (saving) a right to consume. In Wenzel's definition savings is thus defined as capital expenditure, whereas in Murphy's definition it is defined as refraining from consumer spending. The practical difference being that holdings of physical (paper/metal) cash and even bank deposit holdings that the banks don't lend isn't considered as savings under Wenzel's definition whereas it is considered as savings under Murphy's definition.

Murphy is clearly right on this subject. "Savings" means uhm well saving, (or preserving if you will) something, in this context meaning the claim on consumer goods. That is something that can be achieved by any act that refrains from consumption, including for example holding paper money, holding gold, holding stocks or holding bonds or bank deposits.

But isn't there a difference between putting money in a jar and using it for capital expenditure. Yes, but that's why you have words like "investment" and "capital expenditure", to differentiate between different forms of savings.

As Murphy points out, Wenzel's definition creates the absurd situation where someone who has deposited money in a bank really doesn't know whether or not he has saved until he knows whether or not it has been lended. And indeed that's not really sufficient, as he also must know whether or not the loan has ceteris paribus causally made the borrower invest in capital goods. It furthermore would imply that if the borrower didn't use it for capital expenditures, but for consumer expenditures, then people who saves their income really aren't saving. What is really going on is that the people lending (depositing) money to the bank are saving while the people borrowing from the bank are dissaving, but if you define savings as "capital expenditure" you would not be able to understand that these transactions involved some people saving and other people dissaving.


Blogger Flavian said...

I think that the following definition of savings is the best definition.

A person who runs a surplus in his personal balance of payments is saving. The same does of course apply to a group of individuals who run a surplus in their collective balance of payments.

However, under a gold standard it is "catallactically" significant whether the saver holds his/her savings in the form of claims to gold or in physical gold. If the saver holds hold his/her savings in the form of physical gold he/she is not lending his savings and does therefore tend to strengthen the purchasing power of gold more than the saver who lends his gold. We can call the person who holds his savings in the form of physical gold a hoarder. Hoarding is saving, but saving is not always hoarding.

A spendthrift is a person who runs a deficit in his/her personal balance of payments without making any meaningsful investments. Investments are here understood as purchases meant to generate future returns. Sooner or later the creditworthiness of the spendthrift will be questioned and in order to offset the previous deficit in his/her personal balance of payments he/she will be more or less forced to run a surplus in his/her balance of payments. The same is of course true with regard to a collective of spendthrifts which, for example, could be a nation misguided by inflationist monetary policies. A former spendthrift running a surplus in his/her balance of payments in order to correct the previous deficit catallactically equals a saver though of course it is significant whether the means he/she pays off is recirculating as new credits or not. Both scenarios are possible.

An investor could in this context be described as a person running a deficit in his personal balance of payments but spending the money he/she is borrowing in meaningsful business enterprises with a reasonable prospect of future returns. If such a person is proven to be a clever businessman he/she will improve his creditworthiness and will become able to borrow even more. Since an investor is increasing the production capacity of the society he will in the long run just like the saver tend to increase the purchasing power of the monetary unit.

Credit expansion is a situation where aggregate nominal expenditure is growing due to the issuance credit without any new savings corresponding the increased issuance of credit.

However, one should perhaps differentiate between credit expansion and pure inflation since under the early stages of credit expansion nominal expenditure is growing without any significant price inflation with regard to consumer goods with the result that there is an illusion of prosperity. In the long run, however, price inflation will wipe out the expansionary effects of credit expansion. Under pure inflation prices are increasing in antecipation of future monetary inflation with the effect that adjusted for priceinflation there is a credit contraction. Pure inflation can only occur under a pure paper currency.

Credit contraction is a situation where money lenders suffer losses due to a general unability to service debts with the result that aggregate nominal expenditures will tend to decrease. Credit contraction might be accentuated by increased hoarding of physical gold due to general uncertainty.

On a free market such a situation will be corrected by an increased profitability of gold mining counteracting the general depression. Vice versa gold mining will become less profitable during a period of credit expansion under a gold standard.

However, under a gold standard an inflationary tendency could originate either from credit expansion or new and easily extracted mines. The same does of course apply to a deflationary tendency in the manner that the deflationary tendency could originate either from credit contraction or the fact that the most fertile gold mines have already been extracted and that thus an increased purchasng power of gold is necessary in order to stimulate gold production.

12:18 PM  

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