Sunday, July 5, 2009
Wenzel v. Murphy: The Grand Finale
OK this will be my last post on this topic. Robert Wenzel struggles on, even though Stefan Karlsson has further demonstrated the untenability of Wenzel's position. Wenzel is spending 95% of his time trying to show that my arguments sound like the Keynesian position that Rothbard attacks in his treatise. I'm not going to get into that dispute. I don't think Rothbard would agree with what Wenzel is saying, but it would take too long to make my case.
I think that I have demonstrated the problems with Wenzel's approach. He has never really answered that challenge. But let me here take up his implicit (explicit?) claim that my view lines up with Keynes, whereas his (Wenzel's) view lines up with the Austrians.
First, look at Chapter XXV [.pdf] (p. 334) to see Hayek's views on income, saving, and investment in The Pure Theory of Capital. I can't give you a knockdown quote that settles the matter, since--after all--we're dealing with Hayek here. So you need to read five pages to get the context. But my point is, within the first few pages, it should be clear that Hayek thinks saving and investment are different things, and also that he defines saving as income minus consumption. (E.g. on page 337 he says, "The indirect method consists in comparing the increase or decrease with the supposed standard case where capital remains "constant", and thus arriving at the concepts of net saving (net income minus consumption) and net investment, and then placing these derived concepts in juxtaposition.")
Second, if you scroll near to the bottom of this link, you will see that Keynes in the General Theory actually "proves" that savings necessarily equal investment. Since Wenzel was so happy to find Rothbard saying the terms were basically interchangeable, and since Wenzel thought my own view in contrast was similar to the dreaded K-word, I thought this would be surprising. (I too was surprised when I first saw this, such that I bored my History of Economic Thought students to tears by going over it in class. But I had thought one of the big bugaboos in the GT was that investment would fall short of savings. Yet Keynes apparently says that is impossible.)
Third, I have saved the best for last. Here is Mises on the topic. Maybe we can all get along now, because Mises seems to unify us all. As I read the quote below, Mises is clearly saying that adding to your cash balances is a form of saving. However, Wenzel might say that Mises is also (apparently) claiming that it is also a form of investment.
I think that I have demonstrated the problems with Wenzel's approach. He has never really answered that challenge. But let me here take up his implicit (explicit?) claim that my view lines up with Keynes, whereas his (Wenzel's) view lines up with the Austrians.
First, look at Chapter XXV [.pdf] (p. 334) to see Hayek's views on income, saving, and investment in The Pure Theory of Capital. I can't give you a knockdown quote that settles the matter, since--after all--we're dealing with Hayek here. So you need to read five pages to get the context. But my point is, within the first few pages, it should be clear that Hayek thinks saving and investment are different things, and also that he defines saving as income minus consumption. (E.g. on page 337 he says, "The indirect method consists in comparing the increase or decrease with the supposed standard case where capital remains "constant", and thus arriving at the concepts of net saving (net income minus consumption) and net investment, and then placing these derived concepts in juxtaposition.")
Second, if you scroll near to the bottom of this link, you will see that Keynes in the General Theory actually "proves" that savings necessarily equal investment. Since Wenzel was so happy to find Rothbard saying the terms were basically interchangeable, and since Wenzel thought my own view in contrast was similar to the dreaded K-word, I thought this would be surprising. (I too was surprised when I first saw this, such that I bored my History of Economic Thought students to tears by going over it in class. But I had thought one of the big bugaboos in the GT was that investment would fall short of savings. Yet Keynes apparently says that is impossible.)
Third, I have saved the best for last. Here is Mises on the topic. Maybe we can all get along now, because Mises seems to unify us all. As I read the quote below, Mises is clearly saying that adding to your cash balances is a form of saving. However, Wenzel might say that Mises is also (apparently) claiming that it is also a form of investment.
If an individual employs a sum of money not for consumption but for the purchase of factors of production, saving is directly turned into capital accumulation. If the individual saver employs his additional savings for increasing his cash holding because this is in his eyes the most advantageous mode of using them, he brings about a tendency toward a fall in commodity prices and a rise in the monetary unit's purchasing power. If we assume that the supply of money in the market system does not change, this conduct on the part of the saver will not directly influence the accumulation of capital and its employment for an expansion of production.[18] The effect of our [p. 522] saver's saving, i.e., the surplus of goods produced over goods consumed, does not disappear on account of his hoarding. The prices of capital goods do not rise to the height they would have attained in the absence of such hoarding. But the fact that more capital goods are available is not affected by the striving of a number of people to increase their cash holdings. If nobody employs the goods--the nonconsumption of which brought about the additional saving--for an expansion of his consumptive spending, they remain as an increment in the amount of capital goods available, whatever their prices may be. Tho two processes--increased cash holding of some people and increased capital accumulation--take place side by side.
Comments:
Here's the best discussion by Rothbard on the topic that I could find. It lines up with the excerpts Wenzel was using (from America's Great Depression), but I think the link above (to MES) elaborates more.
I definitely understand why Wenzel thinks Rothbard agrees with him; in fact, Wenzel may have picked up his framework from reading Rothbard in the first place.
Even so, I am still pretty sure that Rothbard would say if someone takes $100 out of his paycheck that could be used for consumption, and instead adds it to his cash balance, that that is saving.
Remember, Rothbard is attacking the Keynesian claim that savings "leak" into hoarding, where they are no longer socially useful. But I too reject that.
What I am saying is that one form savings can take, is to add to one's cash balance.
Last point: Rothbard makes an interesting point that you can have people spend less on capital goods in order to increase their cash balances. Thus, Rothbard wants to show that an increase in time preference is consistent with an increase in the demand for cash holdings.
Now Wenzel takes that point as vindication. Yet not so fast. I could use the same thing to "prove" that buying stock in IBM isn't a form of saving/investment. After all, maybe I sold $100 worth of Kodak stock, in order to spend $50 on IBM stock and $50 on pizza and beer. Thus my overall time preference increased, and I reduced my overall supply of savings. Yet the specific action of buying IBM stock was still a form of saving/investment.
The same is true when I "invest" in an expanding cash balance. Quite clearly, I am refraining from potential present consumption, in order to expand my options for future consumption. If that's not saving (and maybe you want to call it investment too), then I don't know what is.
I definitely understand why Wenzel thinks Rothbard agrees with him; in fact, Wenzel may have picked up his framework from reading Rothbard in the first place.
Even so, I am still pretty sure that Rothbard would say if someone takes $100 out of his paycheck that could be used for consumption, and instead adds it to his cash balance, that that is saving.
Remember, Rothbard is attacking the Keynesian claim that savings "leak" into hoarding, where they are no longer socially useful. But I too reject that.
What I am saying is that one form savings can take, is to add to one's cash balance.
Last point: Rothbard makes an interesting point that you can have people spend less on capital goods in order to increase their cash balances. Thus, Rothbard wants to show that an increase in time preference is consistent with an increase in the demand for cash holdings.
Now Wenzel takes that point as vindication. Yet not so fast. I could use the same thing to "prove" that buying stock in IBM isn't a form of saving/investment. After all, maybe I sold $100 worth of Kodak stock, in order to spend $50 on IBM stock and $50 on pizza and beer. Thus my overall time preference increased, and I reduced my overall supply of savings. Yet the specific action of buying IBM stock was still a form of saving/investment.
The same is true when I "invest" in an expanding cash balance. Quite clearly, I am refraining from potential present consumption, in order to expand my options for future consumption. If that's not saving (and maybe you want to call it investment too), then I don't know what is.
If a person is convinced deflation is coming and goes into cash are they saving?
I think so.
I think so.
# posted by 
: July 5, 2009 at 9:29 PM
: July 5, 2009 at 9:29 PM
On one point I can agree on with Bob Murphy. His psot should be the Grand Finale in the series. That said, there is little else that I can agree with him on.
How Murphy can say, he thinks Tothbard would call adding to cash balances saving where he says the exact opposite is beyond me.
Mises doesn't make the verbal disitnction, but neither does he between price inflation and monetary inflation. But he clearly understands there is a difference between holding cash and buying capital goods, and that distinction is really what this debate is about. The difference between the two activities, which in my view makes sense to differentiate with different words.
No more evidence that a differentiation is needed than the comment following Murphy's left by von pepe. Where he writes that he believes holding cash during a deflation is investment. Now no one says there isn't necessarily benefits to holding cash, indeed that is why people hold cash, but holding cash is not resulting in the bidding up og capital goods, so something else is going on. "Savings", when used for increasing cash balances, is suddenly not about directing funds to the purchase of capital goods. Thus by using "savings" in this way, when we are told by the commerce dept that "savings" are up there is no way to no if the capital structure is being expanded or contracted and therein lies the problem with using the same word for two very distinct and very different activities.
How Murphy can say, he thinks Tothbard would call adding to cash balances saving where he says the exact opposite is beyond me.
Mises doesn't make the verbal disitnction, but neither does he between price inflation and monetary inflation. But he clearly understands there is a difference between holding cash and buying capital goods, and that distinction is really what this debate is about. The difference between the two activities, which in my view makes sense to differentiate with different words.
No more evidence that a differentiation is needed than the comment following Murphy's left by von pepe. Where he writes that he believes holding cash during a deflation is investment. Now no one says there isn't necessarily benefits to holding cash, indeed that is why people hold cash, but holding cash is not resulting in the bidding up og capital goods, so something else is going on. "Savings", when used for increasing cash balances, is suddenly not about directing funds to the purchase of capital goods. Thus by using "savings" in this way, when we are told by the commerce dept that "savings" are up there is no way to no if the capital structure is being expanded or contracted and therein lies the problem with using the same word for two very distinct and very different activities.
"But he clearly understands there is a difference between holding cash and buying capital goods..."
Was anyone arguing differently? The name for the first activity is "savings," and the name for the second is "investing."
Was anyone arguing differently? The name for the first activity is "savings," and the name for the second is "investing."
@BobMurphy
I just finished reading the Hatyek chapter. He is not talking about cash holdings at all.
No wonder you can't give a "knockdown quote that settles the matter."
This is like fishing in a bath tub.
I just finished reading the Hatyek chapter. He is not talking about cash holdings at all.
No wonder you can't give a "knockdown quote that settles the matter."
This is like fishing in a bath tub.
It takes a lot of linguistic contorting to say that saving money for later is not "saving". Any way you save the money for later consumption--savings account or piggy bank--it is savings!
Wenzel, you can define the word "saving" however you want--and you are right to make a distinction between investment and increasing cash balance--but the common use of the word "savings" means just that SAVING! It may be a broader definition then you like, but it is not fuzzy.
Wenzel, you can define the word "saving" however you want--and you are right to make a distinction between investment and increasing cash balance--but the common use of the word "savings" means just that SAVING! It may be a broader definition then you like, but it is not fuzzy.
OK now I better see where the problem is coming in. I am 99% sure I won't make Wenzel himself budge, but my clarification may help other readers who are on the fence.
Wenzel wrote:
Now no one says there isn't necessarily benefits to holding cash, indeed that is why people hold cash, but holding cash is not resulting in the bidding up og capital goods, so something else is going on. "Savings", when used for increasing cash balances, is suddenly not about directing funds to the purchase of capital goods. Thus by using "savings" in this way, when we are told by the commerce dept that "savings" are up there is no way to [know] if the capital structure is being expanded or contracted and therein lies the problem with using the same word for two very distinct and very different activities.
This is exactly the "problem" that Mises solved in the quotation I gave in the main post. It is this extra complication that I had in mind when I earlier said "you have to worry about" the case of hoarding. At the time you pounced on me, saying I was a Keynesian.
But no, I had in mind the kind of process Mises is talking about in the quotation. Wenzel, you are WRONG to say that households refraining from consumption doesn't help the economy become more roundabout, unless the households turn around and spend money (perhaps indirectly) on capital goods.
Ironically, your position is the Keynesian one, if anything. When a Keynesian talks about the paradox of thrift, the first move in the defense by the free market guy is to say, "Those savings might get borrowed by business, so the 'spending' doesn't disappear."
And then the typical Keynesian comes back with, "No no, we can't assume that the interest rate will fall enough to spur businesses to borrow all those saved funds. That money might sit in the bank, idle."
Note that this (typical Keynesian) move is what you are doing as well. Yet as Mises shows, the abstention from consumption adds to the capital stock of the economy, regardless of what households do with the money they thereby save.
Wenzel wrote:
Now no one says there isn't necessarily benefits to holding cash, indeed that is why people hold cash, but holding cash is not resulting in the bidding up og capital goods, so something else is going on. "Savings", when used for increasing cash balances, is suddenly not about directing funds to the purchase of capital goods. Thus by using "savings" in this way, when we are told by the commerce dept that "savings" are up there is no way to [know] if the capital structure is being expanded or contracted and therein lies the problem with using the same word for two very distinct and very different activities.
This is exactly the "problem" that Mises solved in the quotation I gave in the main post. It is this extra complication that I had in mind when I earlier said "you have to worry about" the case of hoarding. At the time you pounced on me, saying I was a Keynesian.
But no, I had in mind the kind of process Mises is talking about in the quotation. Wenzel, you are WRONG to say that households refraining from consumption doesn't help the economy become more roundabout, unless the households turn around and spend money (perhaps indirectly) on capital goods.
Ironically, your position is the Keynesian one, if anything. When a Keynesian talks about the paradox of thrift, the first move in the defense by the free market guy is to say, "Those savings might get borrowed by business, so the 'spending' doesn't disappear."
And then the typical Keynesian comes back with, "No no, we can't assume that the interest rate will fall enough to spur businesses to borrow all those saved funds. That money might sit in the bank, idle."
Note that this (typical Keynesian) move is what you are doing as well. Yet as Mises shows, the abstention from consumption adds to the capital stock of the economy, regardless of what households do with the money they thereby save.
One way to look it:
Imagine what happens when someone produces but never consumes anything, hoarding all the money he receives in exchange from his production.
This person is producing something that is wanted (consumer goods or capital goods) but is not consuming anything at all.
So the rest of economy is gaining from the fact that there is production without a real cost - he is hoarding money it´s a fact, but not costing nothing in real economic terms.
So, the increase of hoarding, relates to something being produced but no costing nothing (in what concerns human labour cost) in real terms. Prices will fall by the quantitative effect but also for its real economic.
When he stops hoarding prices will still be lower (less quantity of money) but he he starts to consume resources again, so prices increases in relation of what would be in the absence of this new consumption.
Imagine what happens when someone produces but never consumes anything, hoarding all the money he receives in exchange from his production.
This person is producing something that is wanted (consumer goods or capital goods) but is not consuming anything at all.
So the rest of economy is gaining from the fact that there is production without a real cost - he is hoarding money it´s a fact, but not costing nothing in real economic terms.
So, the increase of hoarding, relates to something being produced but no costing nothing (in what concerns human labour cost) in real terms. Prices will fall by the quantitative effect but also for its real economic.
When he stops hoarding prices will still be lower (less quantity of money) but he he starts to consume resources again, so prices increases in relation of what would be in the absence of this new consumption.
@Robert Wenzel
Let´s imagine now the opposite:
Hoarded money will be spent by somenoe that does not produce anything. He is just spending previously hoarded money, and quit working or producing.
New consumption appear in the market without increase in supply of labour.
The not so bad thing is that it will end sooner or later.
But not with banks printing money. No production but more money to spend.
That said, China should buy real assets instead of holding Debt money. I think they will. The great asset inflation will add to the great consumer inflation.
PS: Someday a war will start because one country will forbid or restrict the use of large reserves (let´s say USA will nullify dollars held by China...after all they are in accounts managed or supervised by the FED) owned by other. In the end, Central Banks will be the responsible for the last world war.
We all know that there is something evil in Central Banking. :)
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Let´s imagine now the opposite:
Hoarded money will be spent by somenoe that does not produce anything. He is just spending previously hoarded money, and quit working or producing.
New consumption appear in the market without increase in supply of labour.
The not so bad thing is that it will end sooner or later.
But not with banks printing money. No production but more money to spend.
That said, China should buy real assets instead of holding Debt money. I think they will. The great asset inflation will add to the great consumer inflation.
PS: Someday a war will start because one country will forbid or restrict the use of large reserves (let´s say USA will nullify dollars held by China...after all they are in accounts managed or supervised by the FED) owned by other. In the end, Central Banks will be the responsible for the last world war.
We all know that there is something evil in Central Banking. :)
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