The Economics and Ethics of Savings and Investment

4 Sep

savingsBy Thomas J. Michie VII

Dedicated to Dr. Robert Higgs, W.H. Hutt, and Hunter Lewis, who have all been unbelievably instrumental in my studies of economics and history.

According to Keynesian models the key to economic growth is consumer and government spending, especially in a recessed economy, which inevitably leads to the supposition that savings and investments only thwart growth and, in the event of a recession, economic recovery. Unfortunately for those who ascribe to such models, we know this to be a flawed perspective. Indeed, the bane of the Keynesian’s very existence is the Austrian School of Economics. Below we will discuss the economical and ethical consequences of adopting policies which promote a higher average propensity to consume rather than save, and the effect this holds on creating mal-investments, booms, and busts. But first we will take an in-depth look at the beginnings of human civilization, and if or what economic catalyst led to the genesis of society in the first place.

Before doing so we must define savings and investment. W.H. Hutt defines them as such in his book The Rehabilitation of Say’s Law:

The process of (a) replacing, partially or fully, the real value of that part of the stock of assets and the flow of services which is exterminated by consumption, in whatever sector of the economy the extermination occurs, or (b) adding to the stock of assets.

Savings. The net accumulation of value, i.e., the magnitude of the excess of value created (production) during a period over value exterminated (consumption) over that period.

Investment. The entrepreneurial process of choosing the prospectively most profitable forms in which services are embodied into assets for replacement or accumulation, “human capital” (the composition of the stock of muscles and skills) included. That is, in this essay, “investment” is not conceived of as a magnitude. The relevant magnitudes are (i) “savings,” or “net accumulation,” and (ii) “dissavings” or “decumulation” (Hutt, p. 16-7).

Now, let us travel back in time, roughly 50,000 years ago, when the first anatomically and behaviorally modern man is believed to have evolved from its simpler ancestor, which was only anatomically modern. The behaviorally and anatomically modern man is, of course, what we more commonly refer to as our hunter-gatherer ancestors. Hunter-gatherer societies, as defined in The Complex Structure of Hunter-Gatherer Social Networks (Hamilton et al. 2007), are ones which harvest resources from their natural surroundings to meet their basic metabolic and material needs. Group population and hierarchical structures often adjust in response to spatial and chronological variations in the allocation of resources. These societies led nomadic lifestyles, hardly less primitive then there Homo habilis ancestors from over 2 million years prior. Hunter-Gatherer societies had very basic communication skills within their respective groups, along with organization, hierarchy, and the ability to move and, later, hunt game. Surely, subsistence in these times was perilous, trying, and pitiless.

These primitive but burgeoning societies were strictly consumer based, much to the dismay of most modern economists who have overlooked anthropology entirely. Until approximately 12,000 years ago, individuals and groups lived in a demand based economy, so to speak. There was little to no production whatsoever, only consumption. This made resources scarce in many areas, requiring the groups to travel across expansive amounts of land, and even continents. Earlier human ancestors migrated as well, but not with the organization or the ferocious winner-take-all mentality of the hunter-gatherers who essentially had armies and no understanding of property rights. This is not because they were communists (obviously), it was because property and property rights were not imaginable or even comprehensible for such primitive minds. As the economist Ludwig von Mises wrote in his treatise on economics Human Action:

Deadly foes of one another, irreconcilable rivals in their endeavors to secure a portion of the scarce supply of means of sustenance provided by nature. Each man would have been forced to view all other men as his enemies; his craving for the satisfaction of his own appetites would have brought him into an implacable conflict with all his neighbors. No sympathy could possibly develop under such a state of affairs (Mises, p. 144).

Approximately 12-13,000 years ago this began to change. The complex hunter-gatherer society (nomadic) began a pivotal transition to an agrarian society (stationary). In the anthropological study of this shift The Transition to Agriculture: Climate Reversals, Population Density, and Technical Change (Dow et al. 2009) it is said what led to this change was sudden changes in the climate:

…after a lengthy period of favorable environmental conditions during which regional population grew significantly, an abrupt climate reversal forced people to take refuge at a few ecologically favored sites. The resulting spike in local population density reduced the marginal product of labor in foraging and made agriculture attractive. Once agriculture was initiated, rapid technological progress through artificial selection on plant characteristics led to domesticated varieties. Farming became a permanent part of the regional economy when this productivity growth was combined with climate recovery

Something remarkable happened following the transition from a hunter-gatherer society to an agrarian society: human cooperation ensued. The transition left a winner-take-all and demand based society behind, and replaced it with a mutual trade and supply based society. It was no longer the motive of tribes to migrate in order to meet their demands, instead they saved and invested in their future by harvesting seeds from consumable vegetation (saving) and planting them into the ground for future harvests (investing).

Savings and Investments not only permitted mankind to remain stationary, it also commenced the building of stationary societies, which inevitably led to civilization as we now know it. Violence and the winner-take-all mentality between nomadic tribes shifted to peaceful trade arrangements between tribes, thus vindicating the words uttered many thousands of years later, “When goods don’t cross borders, soldiers will.”[1] Economist Hans-Hermann Hoppe elaborated on why cooperation overtook the previously preferred methods of violent overtakings in a footnote of The Great Fiction:

Indirectly, this insight into the irreconcilable antagonism between the members of different tribes within the framework of hunter-gatherer societies also provides a first clue as to the requirements for peaceful cooperation among men. In order for members of different tribes to view each other not as enemies but as potential collaborators, there must be genuine production of consumer goods (above and beyond the mere appropriation of nature-given consumer goods) (Hoppe, p. 33).

Not only has the ethnographic and anthropological phenomena of culture shifting to an agrarian, supply based society a vindication for the theory of trade and peace, but also private property and peace, and Jean-Baptiste Say’s Law, or the law of market (production is the source of demand).

The rise of civilization continued with the advent of savings and investment in livestock. The reproduction of owned livestock and the subsequent consumption down the road, at a sustainable rate, made hunting obsolete and further solidified the establishment of property rights. Land was clearly marked for private farming within tribes. Barbed wire was nowhere near existence at this point so they often used stones or other inanimate objects to clearly mark boundaries. With the unremitting rise in civilization, and the ever increasing supply chain, the rise of lending came into the picture.

Approximately 5,000 years ago, lending (debt) became a common practice within tribes and between neighboring tribes. What this basically means is individuals began investing in other individuals with the promise of a returned favor in the future. It is a common misconception that the barter system came about when, say, one man had a spear, and another man had a hammer. As the story goes, they both wanted what the other had so they traded. This was widely believed by most, including Anthropologists, until fairly recently. In a post-hunter-gatherer society, trade is inevitable because it is the most peaceful means of attaining a good or service, and avoids conflict. However, direct trade between two parties at one particular moment in time is not optimal or preferred. If a man desperately needed a spear, but had nothing his neighbor (who had several spears) really wanted, this man would be completely out of luck. Not only would a direct barter system be inherently un-egalitarian, but it would also be incredibly inefficient. A more efficient way of attending to the immediate need of a spear for this man would be for his neighbor to give him a spear with the expectation of repayment in the future, when needed (credit). The barter system as it actually happened, essentially, marked the beginning of an elaborate credit system which we still use and rely on today (Graeber, Debt). Such credit, 5,000 years ago, could have only been possible with the arrival of savings and investment in the modern human society prior.

What must be deduced from all of this is savings and investment are the very cornerstones for which civilization is founded upon. We owe everything to savings and investments. Without them we would still remain a primitive, hunter-gatherer society surviving on the production of the earth and nothing else. Our very livelihood would depend on the weather. A drought would cause mass death. Property rights would still remain non-existent and a violent winner-take-all mentality would dominate our relationships with other tribes rather than mutual trade. There would be no system of credit to invest in individuals’ futures. Worst of all, if the transformation from demand based economy to production based economy had never occurred, we would have no place to call home. We would be wayward drifters, nomads, and slaves to Mother Nature’s production. Like the evolution from infant to adult, where the child only consumes until it is old enough to save and invest for itself, mankind grew up and grew out of its childish and primitive consumption based lifestyle and began saving and investing for itself. We must then assume any public policies of today and tomorrow-year which seek to increase consumer demand are (unbeknownst to policy makers) inherently anti-civilization.

What then does this mean for modern macro-economists like John Maynard Keynes, Alan Krueger, Paul Krugman, and Federal Reserve Chairman Ben Bernanke? Chairman Bernanke and the Federal Reserve governors have held interest rates at nearly 0 percent since shortly after the great recession’s initial downturn, whilst also instituting multiple rounds of Quantitative Easing (including the current “Quantitative infinity” round which involves purchasing $85 billion in bonds each month – with no expiration date), and are flooding the market with an increased money supply, all in the desperate attempt to increase private consumption. This is all backed by the academic approval of Keynes’s General Theory, and Keynes’s modern mouthpieces, Krueger and Krugman.

Keynes, for instance, writes this in his book The General Theory of Employment, Interest, and Money:

[T]here may well be some sort of rough relationship between the national income and the quantity of money required to satisfy liquidity-preference…. There may be, for example, some fairly stable proportion of the national income more than which people will not readily keep in the shape of idle balances for long periods together, provided the rate of interest exceeds a certain psychological minimum; so that if the quantity of money beyond what is required in the active circulation is in excess of this proportion of the national income, there will be a tendency sooner or later for the rate of interest to fall to the neighborhood minimum. The falling rate of interest will then, cet. Par., increase effective demand, and the increasing effective demand will reach one or more of the semi-critical points at which the wage-unit will tend to show a discontinuous rise, with a corresponding effect on prices. The opposite tendencies will set in if the quantity of surplus money is an abnormally low proportion of the national income….For when money is relatively abundant, the wage-unit rises; and when money is relatively scarce, some means is found to increase the effective quantity of money (Keynes, p. 306-07)

One would imagine Keynesians like Krueger and Krugman would agree with Keynes, and it is almost undeniable that Chairman Bernanke would as well, considering he is currently doing this and more. Though Keynes presented a fresh case for government intervention in markets, he was not the originator of such thought. He was merely adopting and evolving mercantilist thought which has plagued America since its onset with similar government policies as those advocated by Keynes. But, as was made clear, Savings and Investments are what built civilization, and demand is what kept mankind in a perpetual state of hunting and gathering. We must then assume policies advocated by Keynes and his followers are nothing short of disastrous for civilization, and we must then encourage savings and investments in order to allow civilization to recover and grow at genuine rates. This can be exemplified by making it clear, despite constant overlooking by modern macro-economists, private consumption returned to pre-recession levels in the fourth quarter of 2010, and has continued to grow since then (Higgs, Consumption). According to Keynesian models, which dictates that consumer spending will bring full employment back, the United States economy should be at pre-recession unemployment levels as well. This, of course, is not true. The economy has not returned to pre-recession levels (healthily anyways) because genuine private savings and investment have been stagnated for years by government policies which encourage spending, reckless lending from banks, and mal-investment. Likewise, the economic recovery from the Great Depression did not happen until private savings and investments recovered (Higgs, p. 101-23).

As made abundantly clear above, it was savings and investment which led to the formation of civilization in the first place, but it is also what led to the productive means for a territory without a military like the thirteen British Colonies of America to direct resources more efficiently towards wartime production and defeat what was considered the greatest military in the world at the time. Paradoxically, territories or countries with more laissez-faire economies historically have more victories in war over the less laissez-faire countries. This is because greater savings and investments allow for greater flexibility of resources and production, should the dire need arise (Hoppe, Paradox).

To underline the importance of savings and investments in society even more, as if them being the foundation for civilization is not enough, Hunter Lewis writes in his critical analysis of Keynes’s prescriptive methods:

Do savings often sit idle, clogging up the economic system, reducing the Demand that allegedly drives economic growth? There is no reason to expect this to happen. People generally save in order to earn money on the savings. They do this by investing it. If savings are converted into investments, the money will be spent on business expansion – on new employees, new equipment, new facilities – and thus will flow back into the economy. As it flows back into the economy, it can be used to buy products that investment brings us. This in turn will bring employment, profits, and more savings (Lewis, p. 124).

Despite all the historically verifiable evidence dating as far back as 12,000 years which clearly states savings and investments do indeed drive an economy, Keynesians still advocate for the destruction of the economy with artificially increased consumption and demand, and artificially decreased savings and investment. These policies, which are also historically verifiable time and time again, lead only to the boom-bust cycle. Low interest rates, credit expansion, expansion of the money supply, and government legislation adding enticing incentives to invest in certain sectors by offering subsidies, special tax breaks, guaranteed loans, price ceilings, capping interest rates, etc., etc., all lead to massive amounts of speculation and money being funneled into one particular sector, leading to an economic boom. This inevitably becomes unsustainable and an economic bust, or recession, occurs. Federal Reserve and Government solutions for the bust are often, ironically, to reconstruct another bubble elsewhere. This is precisely what occurred after the dot-com bubble burst in the early 2000’s. In response to that economic downturn the government and the Federal Reserve directed their attention towards the housing market to soften the bust, leading to the housing bubble. It is no coincidence that nation-wide economic depressions did not happen until after the centralized government began manipulating the currency, and legislating bad economic policies. Prior to the Panic of 1829, recessions were only very local, short, and relatively painless. This is because no central figures were manipulating the consumer’s average propensity to save, thus invest. Perpetual growth occurred because of this, in fact, growth of civilization occurred because of this. Keynesian and mercantilist policies, since the founding of the United States, have only contributed to the unraveling of economic stability and genuine growth in America.

Jesus Huerto de Soto explains this so-called phenomena, though it is hardly considered a phenomena within academic circles that understand Austrian Business Theory. Those who do understand the Austrian Business Cycle see the boom-bust cycle as a predictable consequence of central planning, and the depletion of savings and investments. In Money, Bank Credit, and Economic Cycles, Huerto de Soto writes:

No economic crisis and consequent recession hit when the lengthening of the stages in the productive structure, a process we studied in the last chapter, results from a prior increase in voluntary saving, rather than from credit expansion banks bring about without the backing of any growth in real saving. Indeed if a sustained rise in voluntary saving triggers the process, this saving prevents all of the six microeconomic phenomena which spontaneously arise in reaction to credit expansion and which reverse the artificial boom that credit expansion initially creates. In fact in such a case there is no increase in the price of the original means of production. On the contrary, if the loans originate from an upsurge in real saving, the relative decrease in immediate consumption which this saving invariably entails frees a large volume of productive resources in the market of original means of production. These resources become available for use in the stages furthest from consumption and there is no need to pay higher prices for them. In the case of credit expansion we saw that prices rose precisely because such expansion did not arise from a prior increase in saving, and therefore original productive resources were not freed in the stages close to consumption, and the only way entrepreneurs from the stages furthest from consumption could obtain such resources was by offering relatively higher prices for them (Huerto, p. 397-98).

What must be done, is we must dismiss Keynesian, mercantilist, and demand-side economics altogether because they are the antithesis of growth. Genuine economic growth, and civilization as a whole, depend on savings and investments. Anything which seeks to minimize savings and investments must be seen as a purely archaic method. If consumption and increased consumer demand truly drove an economy, the United State would have been out of the great recession three years ago. If a consumer based society was responsible for economic growth than humanity would not have lulled in a ruthless hunter-gatherer society for tens of thousands of years. Savings and Investments provided the foundation for which property rights, trade, and credit stand upon, and nothing else. No government, central bank, or macro-economist can take credit for what human ingenuity in the early years of civilization has brought us. We owe our very existence as we know it to savings and investments made thousands of years ago, and it all began with monoculture farming – a seed placed in the ground.

——————————————————————————————————–

[1] The quote, “When goods don’t cross borders, soldiers will” is often attributed to Frederic Bastiat although no evidence, that I am aware of, exists to suggest Bastiat actually said this. Nonetheless, he most certainly would have agreed with the assertion.

Dow, Gregory K., Clyde G. Reed, and Nancy Olewiler. “The Transition to Agriculture: Climate Reversals, Population Density, and Technical Change.” Journal of Economic Growth XIV.I (2009): 27-53. Print.

Graeber, David. Debt: The First 5,000 Years. Brooklyn, NY: Melville House, 2011. Print.

Hamilton, Marcus J., Bruce T. Milne, Robert S. Walker, Oskar Burger, and James H. Brown. “The Complex Structure of Hunter–gatherer Social Networks.” Proceedings of the Royal Society B: Biological Sciences 274.1622 (2007): 2195-202. Print.

Higgs, Robert. Depression, War, and Cold War: Studies in Political Economy. Oakland, CA: Independent Institute, 2006. Print.

Higgs, Dr. Robert. “One More Time: Consumption Spending HAS Already Recovered.” Web log post. The         Independent Institute. The Independent Institute, 09 Sept. 2011. Web. 4 Sept. 2013

Hoppe, Hans H. “The Origins of Private Property and the Family.” The Great Fiction: Property, Economy, Society, and the Politics of Decline. Baltimore, MD: Laissez Faire, n.d. 33. Print.

Hoppe, Hans H. “The Paradox of Imperialism.” Weblog post. Ludwig Von Mises Institute. Ludwig Von Mises Institute, 04 June 2012. Web. 4 Sept. 2013.

Huerta, De Soto, Jesús. Money, Bank Credit, and Economic Cycles. Trans. Melinda A. Stroup. 3rd ed. Auburn, Ala.: Ludwig Von Mises Institute, 2006. Print.

Hutt, W. H. A Rehabilitation of Say’s Law. Athens: Ohio UP, 1975. Print.

Keynes, John M. The General Theory of Employment, Interest, and Money. Orlando, FL: First Harvest/Harcourt, 1964. Print.

Lewis, Hunter. Where Keynes Went Wrong: And Why World Governments Keep Creating Inflation, Bubbles, and Busts. Mount Jackson, VA: Axios, 2009. Print

Mises, Ludwig V. “Human Society: Human Cooperation.” Human Action: A Treatise on Economics. Auburn, AL: Ludwig Von Mises Institute, 2008. 144. Print.

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Follow

Get every new post delivered to your Inbox.

Join 38 other followers

%d bloggers like this: