Savings: The Overlooked Economic Function

A brief look at the relationship between savings and the production structure.

“The only source of the generation of additional capital goods is saving. If all the goods produced are consumed, no new capital comes into being.”
- Ludwig von Mises, The Anti-Capitalistic Mentality

As a practical matter, savings is a seemingly simple concept. Liaising this seemingly simple concept in particular and its role in the broader economy often receives little attention in classroom settings. And where it is discussed, students are often assured the impact of savings is negligible at best, or detrimental to economic growth at worst. In this article, we will discuss savings as a concept and share a brief review summary of the role a social increase of savings plays in the productive structure.

Savings

We will take as a starting point a monetary-based market economy. This is a society whereby buyers and sellers may exchange goods against a commonly accepted monetary unit at mutually agreed upon exchange ratios. Savings refers to the amount of goods that are not consumed or purchased in a period of time. It is the result of a reduction in consumption (page 48). Ludwig von Mises identifies two categories of “savings” for theoretical purposes, plain savings and capitalist savings (page 527):

            The aim of plain saving is later consumption; it is merely

postponement of consumption. Sooner or later the goods

accumulated will be consumed and nothing will be left. The aim of

capitalist saving is first an improvement in the productivity of effort.

It accumulates capital goods which are employed for further

production and are not merely reserves for later consumption.

From here we will move on to the considerations of savings in an economy.

“What impact does an increase in savings have in the economy?”

While savings sounds as though it’s a matter of personal preference for one person from moment to moment – what, if any, are the broad underlying economic implications from a societal increase in savings? Most Austrian writers contend that the determination between consumption vs. savings is purely a matter of time-preference – the discussion of which can itself be, and is, an entire book. Jesús Huerta de Soto has written Money, Bank Credit, and Economic Cycles, to discuss the history and overview of contractual conventions pertaining to banking, and the implications of these practices as relates to business cycles. He also discusses an in-depth overview of the business cycle from phase to phase. It is a fantastic book for someone who has just finished the treatises by Rothbard and Mises, and wants to explore a more in-depth treatment of the business cycle from the Austrian perspective.

De Soto asks the reader to suppose the members of a society have each decided to reduce their consumption expenditures by 25% per period (e.g., quarterly). And so it goes that various merchants of consumer goods receive less revenue than they anticipated from their prior outlay of wholesale goods they brought to market. The concern, and commonly assumed conclusion, to address is whether it follows that this loss will iterate upwards in the various supply chains to the net economic detriment of society as a whole.

Consider first as background the expenditures in the economy as a whole, not just consumption spending on final goods and services but all of the intermediate transactions that must precede this stage. A reader of Man, Economy, and State may recall Rothbard’s diagrams illustrating the stages of production (e.g., page 369 of MES). Our concern is inquiring on a reduction of the 100 monetary units on the last stage to 75 monetary units. Mark Skousen describes (page 179) the idea of the aggregate production structure, which looks not only at the 100 monetary units exchanged in the last stage, but the 318 additional monetary units that are the result of summing all preceding expenditures depicted in the diagram – these exchanges all matter and happen with the anticipation of realizing the 100 monetary units acquired in the consumption goods stage. With this framework of the economy’s 418 in monetary units of exchanges as a whole, it is apparent that the “consumption” stage does not comprise the majority of exchanges when accounting for all exchanges in the production process.

The reduction in revenues in the last stage does not pass through upwards in the production structure unchecked. The increase in savings results in an accounting loss to the impacted firms in the consumption stage. To the extent recognizable, entrepreneurs in higher stages of production, who have not yet had an impact on their expenses and whose revenues have not yet fallen have not yet been impacted. These entrepreneurs as always will continue to seek positive returns, with this recent change in consumer demand informing their decision-making. An option that has now become relatively more appealing in terms of anticipated profits is investment in improvements of the production process, rather than the repurchase of the resources needed to produce the same quantity of goods to the final stages of consumption. The signal coming from consumers, owing to the reduction in purchases, is that consumer goods are more likely to go unsold for a time – the time required for a return on these goods is lengthening. Investment expenditures, available now as a result of the preceding savings that have reduced the demand for consumption goods, are directed now towards other capitalistic processes. The increase in savings has created this opportunity through a relative discrepancy in accounting profits across the stages in production processes.

To get a sense of scale, De Soto comments in his example (page 323 of MBCEC) that an entrepreneur in stage 5 is able to nearly double the initial outlay of 18 monetary units in time t, to 31.71 monetary units in time t+1 (shown on page 320) where t represents an initial period and t+1 reflects the period with the increase in savings supposed earlier. Rothbard’s introduction of primary economic considerations in the early parts of Man, Economy, and State discusses Robinson Crusoe and consuming or saving a portion of gathered berries. His lesson is: because of previously saved berries, Crusoe can now devote time to finding and creating additional tools to gather yet more berries per period of production while sustaining his requirements in the meantime. Likewise in De Soto’s example here, it is because of the increase in savings that higher-order firms can now profitably expend money on projects with the intent of improving their production processes. If savings did not change, in accordance with consumer demands and thereby reducing the quantity demanded for the replenishment of these consumer goods, the money by which higher-order producers are now devoting to production improvements would not be available. The quantity of these consumer goods brought to the consumer market will generally slow down: consumers are indicating they do not want the same amount of goods per period, so producers will reduce the number of these goods brought to market per period.

There will always be ideas and projects that would allow producers greater returns per period. In periods of increased savings the producers are receiving signals of changes that need to be addressed, and, happily, the money to inaugurate these changes is now more readily available.

Conclusion

There are additional impacts of savings to money markets and the prices of capital goods, and the role of accurate economic forecasting is imperative to steering each producer’s ship on the least rough economic seas, though these important facets will not be gone into detail here. The above article describes a pathway whereby increased savings from consumers invites changes to the broader economy and briefly outlines the newly available capabilities for producers on the merits of this change.

Heraclitus once said everything is in a ceaseless flux. Our understanding of economics, and of any science, is facilitated in supposing certain circumstances that do not change while other specific facts do. Entrepreneurs, capitalists, producers, and consumers must address changes in real time with the anticipation of a future state of affairs that they then work to bring to present or prepare for. Savings is the economic foundation of this capability.

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