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SCI LIBRARY

Libertarian Land Philosophy:
Man's Eternal Dilemma

Oscar B. Johannsen, Ph.D.



BOOK III: Banks, Saving and Investment

Chapter 2 - Savings and Investment



Probably man has always recognized the necessity of providing for the future. Certainly after having nearly starved to death when fish and game were elusive, the wisdom of saving must have teen indelibly imprinted upon his mind. What he saved was wealth which was available.

Saving is immediately available wealth set-aside for future use.

Man's first problem is survival, and the means necessary to attain that end are his primary consideration. As it is impossible to foresee what emergencies will eventuate, men save some of the wealth they produce. Primitive men probably saved the absolute necessities of life, particularly those that could be preserved for some time. With an advancing civilization, however, inasmuch as such necessities are readily obtainable throughout the entire year, saving tends to be wealth of a more durable nature. Such wealth can easily be exchanged for the particular goods desired.

Even before man saved durable goods, it may have been customary to loan some of the necessities of life to a neighbor who was in dire need of food or clothing. At first, probably only the return of an equivalent amount of wealth was expected. However, in time it was customary to add some extra wealth when the goods which had been lent, or their equivalent, were returned.

When durable goods became the usual mode of saving, it was natural inasmuch as capital largely consists of durable goods, that much of the saving would be capital. Possibly this is the reason for the assumption, so prevalent today, that capital comes from saving. So tenacious is this belief that it is often dogmatically asserted that saving must precede capital. But capital, that is tools, did not come into existence because men save. Capital arose to help men produce wealth. Capital will always be produced whether men save or not, for without tools men can produce little.

It is because men require capital, and because in civilized societies the saving of the necessities of life is usually not necessary that men have put so much of their surplus wealth into capital. If anything, it is putting the cart before the horse to say that capital comes from saving and that saving is the sine qua non of capital.[1]

Although the terms saving and investment are often used interchangeably as though they were synonyms, it is this writer's conviction that they should be carefully distinguished for a distinction arose as men started to lend some of their savings.

Wealth set aside to be immediately available for future use is saving. Investment, on the other hand, is wealth which is loaned.[2]

Usually the purpose of lending is to obtain an incremental return but not necessarily so.

Investments do not have to come from savings though quite possibly most of them do. Men may invest without first having accumulated savings by simply producing wealth and then immediately loaning it. A native who tears a limb off a tree and thereby produces a tool, which tool he immediately lends to another is making an investment directly without having first saved wealth. A producer of tables, who as soon as they are made, lends them out is making an investment without first having saved them. Whether a return is expected or not is immaterial. A native, who had set aside all the wealth he wished to save, and still had a surplus might be only too happy to lend this extra wealth to a neighbor. The only condition might be that it be returned in the same condition in which it was lent. Indirectly he is receiving a return. Since wealth deteriorates, the borrower is paying something in whatever is necessary to maintain the wealth in the condition in which it was lent. In modern parlance, this means the borrower takes care of the depreciation. This can be a substantial indirect return to the lender. For example, in the depression of the 1930s, it was well worth while for factory owners to let others have the use of their plants gratis on condition that they kept then in good condition, for maintenance of idle buildings can be an expensive item. Ordinarily, however, the purpose of investment is to obtain a return.

The distinction between saving and investment has been blurred. It is, therefore, worthwhile to note some of the differences. Saving yields no return. This may appear surprising as usually everyone thinks of saving as something on which an income is earned. However, as saved wealth is in your own possession, obviously it yields no return. Investment, on the other hand, ordinarily yields an income. Another essential difference is that in the case of investments you give up your rights to the use of the wealth for the period you loaned the wealth. This could mean the difference between life and death. Remember; the purpose of saving from the beginning of time was to have wealth immediately available to meet not only foreseeable but unforeseeable needs. It does a starving man no good to have bread stored in a place where he cannot get it. In making an investment, in effect, a man stores wealth in a locality where he cannot get it at any time he wishes. He has given up his right to it for the time being and even if he is starving, ethically he has no right to it until the loan matures.

Usually, it is only in times of stress that people appreciate the difference between saving and investment. In the 1930's people thought they had savings in banks, but when the banks went bankrupt they discovered that actually what they had were bad investments.

The reason few make any clear distinction between saving and investment is due to the fact that in our economy it is so easy to change investments into savings, and vice versa. Therefore, as a practical matter, savings do tend to approximate investments. A man depositing $1000 in a savings bank considers that money his savings. Actually, it is an investment. It is quite likely, however, that at any time that he wishes to withdraw the money he can, so he considers that deposit as very liquid savings. Of course, such are not very liquid at all. As mentioned earlier, if too many depositors wished to withdraw their money at the same time, it simply could not be done. At such times, the depositors become painfully aware that they had made investments.

One of the difficulties in studying savings and investments is that any analysis is clouded by man's world of abstractions. People forget or do not realize that savings are actual wealth whereas investments may or may not be wealth. They think in terms of figures and pieces of paper. They note the figures in their savings bank book and the number of bond and stock certificates they possess. As today few have ever seen a gold coin, much less handled one, to them money consists of the beautifully engraved pieces of paper that the government prints which they carry in their wallets. Any connection between these pieces of paper and wealth is rarely considered. People do have some awareness that bond and stock certificates represent actual wealth, but little or none of any connection between "paper money" and wealth.

It is a question if the average office worker is aware that he is actually aiding in the production of wealth, some of which he consumes, some of which he saves, and some of which he invests. The factory worker knows he is producing something but often so minute is the division of labor that he may not clearly apprehend what he is producing. He receives a piece of paper at the end of the pay period which is a check representing his wages. He deposits it in a bank, and draws other checks on it to purchase goods, possibly to buy some securities and possibly to put some in his savings account. What has transpired was that he produced wealth which was bartered for the goods he finally consumes and saves or invests. This may be lost sight of, or at least is not too clear, due to the intricacies of the paper world that has been built around him. That paper world is a necessity for the efficient bartering of the goods he produces for the goods he desires. It operates smoothly, efficiently, even beautifully when not interfered with by the government, but it does tend to hide from man what he is actually doing.

In the 17th century, merchants in England learned the hard way that the gold which they thought they were saving was actually being invested. They had most unwisely put their gold in the Tower of London for safekeeping, suffering from the delusion that the king was an honorable man. However, that royal brigand, Charles I, coolly appropriated the gold for his own use. It was this theft which led to the English merchants placing their gold with goldsmiths. They found out that wealth which is not immediately available is not saving. Of course, by placing their gold with the goldsmiths they were still making an investment, but it was not as risky as one with the king. Businessmen must be honorable if they wish to remain in business. Kings remain kings regardless what they do until the people's philosophical and psychological outlook changes.

It may appear picayune to quibble over whether an individual is saving or investing. However, an elaborate literature has arisen on the relationship of saving and investment and its effect on the economy, particularly by the Keynesians and neo-Keynesians .[3]

The reader may question if saving can comprise only wealth. Obviously, it could be money, but then money is wealth. There are only two other things that saving might consist of -- land and labor.

As regards labor, all that man has is his physical and mental energy. It is impossible to save human energy - the most one can do is to rest so as to be in condition to expend energy later.

As for land, it is indestructible. It is there to be used. Man can alter it, change its fertility, denude it of some of its raw materials, but be can never destroy it. Saving involves a conscious act of a human being. Man does not set aside land. He cannot. It exists no matter what he does, consciously or unconsciously. Sometimes people assume that by practicing conservation, they are saving land. Actually, they are merely making a special use of it, a use which they think will be advantageous in the future.

The fact that land may be purchased in many societies with one's surplus wealth does not make land saving any more than the fact that before the Civil War one could purchase human beings with one's surplus made such slaves saving.

If the laws which permit the private ownership of land and of slaves are abolished, what do you have? Merely land and human beings, that is land and labor. And it has already been shown that neither constitutes saving.

It is obvious that under this writer's definition of saving many articles of wealth which people usually consider to be saving actually are not. A house or an object of art may not be. If you are using the house as your home and enjoying the work of art as a decoration, you are enjoying these items now. You are not putting them aside for future consumption. It is true that ultimately you may sell your home or the painting, possibly even for more than you paid for them. But all you have done Is to exchange an article of wealth for other wealth. It is no different than if you purchased a hammer, used it a few times, and then sold it. It happened that the article you were consuming was not completely worn out so you were able to sell it.

People purchase items, as works of art, not only to consume them but to have something which they can sell in the future, hopefully at the same or a higher price. They consider this a form of saving. But all articles of wealth can be sold at any time. If they could not be exchanged, they would not be wealth. The furniture in your home is being consumed. When you sell your home, you may be able to sell the worn furniture, but you would hardly consider that to be a part of your savings. If you do sell the furniture, you probably figure it is just so much velvet. Your home is in the same category, the only difference being that it is a large amount of wealth which usually lasts more than a lifetime. One may spend an immeasurable amount of time splitting hairs over such borderline cases without affecting any fundamentals. What is important is that saving constitutes wealth put aside for future use, and in order for it to be savings, it must be readily available.

The " sourdoughs" who spent the winter in the Klondike saved wealth in the form of sour dough to be eaten during the winter when they were isolated from the world. That was the reason for their picturesque name. Most of the dough was kept in a corner of the cabin where it was readily available because the snow would get so deep it was impossible to leave the cabin for weeks. However, many miners also stored dough in a shed close by. This raises an interesting point. As long as there was little or no snow, the food in the shed was available and could be considered to be saving. When the snow made it impossible to reach the dough it ceased to have the character of saving. At such time it was an investment on which no return was earned.

Why split hairs over an item like this? Because it helps to understand the difference between savings and investment. Inasmuch as we are dealing with natural laws, these simple physical examples give a clue to the more complex phenomena, which are easily misunderstood because of their intricacy.

From experience, man knows that he must prepare for the future. He knows that as he ages he will become incapable of working as well as he did in the prime of life. He may become utterly incapacitated . Whether able to work a little or not, he knows that with advancing age, he will not be able to produce as much as previously. Thus, he sets aside wealth to provide for those days. But, it is almost impossible to set aside savings for such an event. Even if one could preserve the food required, or the clothes which might be needed, it would be a difficult task to store it all not to mention the impossibility of deciding how much to set aside and for how long.

Instead, it would appear that investments are a means by which man is able to care for his old age and maintain that independence so characteristic of men who are free. By investing their surplus wealth, men are able to have the wealth they need when they are old. At the same time, they can obtain a return on the wealth. The income they receive may be sufficient to take care of them without working, or at least will enable them to live at somewhat near their old scale of living.

Investment has a double effect. Not only does it enable men to earn an income when they are unable to work, but it enables the working generation to obtain what might be termed a head-start on life. This is because investment puts into the hands of the workers, tools which enable them to produce more wealth than if they did not have them. It is as though a young man is saved the necessity of making a lot of tools, as hammers, axes, etc. with which to help him obtain the things he wishes to consume. He can immediately go to work with all the advantages that these tools afford him so his production of wealth is much greater than it possibly could be if he had to start fresh without the loan of this equipment.

It all seems to dovetail. The young need the tools to produce the wealth, and the old need the earnings which the loan of the tools will give to them. Of course, investments of the elderly are not only in capital but in consumer items, as homes and apartment houses. And these investments provide the young with places of residence which they can lease or buy over a period of time. As a result of investments, then, the young have not only the tools they require but the use of consumer items, as homes, which they could not afford to purchase outright.

The reader may dismiss this short digression as merely a quixotic view of this writer for there certainly is no evidence that Nature has created any such design. But there is so much harmony, so much which apparently works so beautifully for man's good if man would only let the processes of Nature control, that this writer surely may be excused this flight into fantasy, if such is the case.

A question may arise whether money-aids are savings or investments. As men treat money-aids as though they were money, would hoarding them constitute savings? They would be immediately available and under ordinary circumstances could be used as readily as money. But, they are debts of a bank. Their worth depends upon the bank. When needed, it could very well be that the bank nay have gone bankrupt so the banknotes would be worthless. Money, as it is wealth, does not suffer from this defect. Even if the issuer of the money disappears, it is still good. Coins of governments which have long since gone out of existence are still traded on the basis of their gold or silver content, if not numismatic value.

Money-aids do not constitute savings. Holding banknotes is no different from holding the debts of an individual or a corporation. It is an investment in debts on which no return is received. A demand deposit is also a non-interest bearing investment.[4]

Money certificates also are not savings. Even though they represent money, this money is not readily available as it is stored in some safe. They are investments in money on which no return is received. Tokens, however, are savings as the material ordinarily is a metal. Exchanges can be made on the basis of the metallic content.

With the growth of civilization, the difference between savings and investments tends to narrow. Investments can be so liquid that they are almost as readily available as savings. It is only when circumstances are not ordinary, when conditions are quite extraordinary, as in wars or other disasters, that the difference between savings and investments becomes more apparent At such times for example, even though you may have investments in the form of banknotes or demand deposits, you may not be able to exchange them for the wealth you want. All or most of the deposits may be frozen by governmental decree, and the banknotes may require some kind of stamp to be adhered to them.

In such instances, one recognizes that the wealth which is stored in the cellar or conveniently accessible place constitutes savings, while other surplus wealth consists of investments of one type or another. It is a known fact, that when war threatens people tend to convert some of their investments into savings. They obtain food and other articles which they expect will be in short supply and hide them in cellars and attics. An investment does them no good when they are hungry and cold if they cannot liquidate it. When the emergency is over, it may be possible to convert it into savings but until that time it is of little use.

It is impossible to state how much is being saved. It is probably greater than most assume for when emergencies occur people seem to have wealth saved which enables them to carry on much longer than any might have thought possible. And when the emergency is over, people often have the wealth at hand with which to rebuild.

Because so many investments are in the form of capital and because so much of it comes from savings, it has been taken almost without question that capital depends on savings. But, as pointed out previously, this is not true as capital will be produced whether men save or not. What does occur is that because men learned that they could invest surplus wealth, they tend to produce more than they require for immediate use. Since one of the most effective ways of investing is in capital, the tendency exists for more capital to be produced than would probably otherwise be the case. This means that new and more efficient capital is constantly being produced for the purpose of earning a return on it.

Even though laborers may be perfectly content with the tools at their disposal, new and usually better ones are constantly being offered to them. Thus, not only is the primary motivation to produce capital at work, i.e., the laborers' need for tools, but an additional motivation exists. This stems from the capitalists. They desire to produce ever better tools to lend to labor for the return which will be earned. Is it any wonder that the western nations are called the capitalist nations? This extra motivation does not exist in socialist countries for no one is permitted to own capital. Thus, socialistic countries are always short of capital, no matter what expedients are adopted to increase the amount.

Parenthetically, it might be pointed out that the Europeans probably as a result of sad experiences with inflation have quite unconsciously adopted this writer's differentiation between savings and investments, Comparatively speaking, not too many Europeans possess what are ordinarily considered in the United States as prime savings, such as life insurance, government bonds and savings accounts. Instead, they hoard gold, that is, they save actual wealth. This is not to say that they do not invest some of their surplus wealth, but for developed societies as highly developed as most of the European countries are, the investments would be much greater were it not for the people's lack of confidence in the exchange media of their respective countries.

Americans have yet to learn the lesson, which the Europeans know by heart for all signs point to a sad awakening in the not too distant future. As of now, it has been estimated that Americans have accumulated savings in the form of savings and time deposits, life insurance, pension and annuity reserves, trust funds by governmental agencies, United States, state, municipal and corporate debt securities, money market fund shares, currency and checking account balances, and miscellaneous financial assets, including mortgages, from the period of 1940 through 1979 of almost $6 trillion (expressed in 1980 dollars). Of this amount more than half represents the loss of real wealth due to the inflation of the so-called money supply resulting in the depreciation of the purchasing power of the " paper-dollar".[5]

That is why some of the more knowledgeable are now investing in common stocks, real estate, monopolies, and also In foreign exchange and assets of' countries with relatively stable currencies, as Switzerland. While these are not true savings, they represent a form of Investment which may suffer less erosion than the usual items commonly classified as " savings" .

It might not be amiss to emphasize that while savings represent actual wealth, investments night represent claims which may never be redeemed in wealth. Elaborate statistics are cited attesting to the tremendous savings which are said to have taken place in the form of investments, inasmuch as most consider savings and investment practically synonymous. But this creates an illusion. For example, owners of government bonds consider them to be savings, and since the government debt is well over $900 billion it would appear that there is a huge amount of wealth in existence represented by this debt. But that is not so. Most of the wealth which the government obtained in exchange for its debts probably has been dissipated. It may have been destroyed in the wars the country has fought The battleships, destroyers, tanks, airplanes, ammunition -- most of these instruments of war-- probably have either been destroyed or dismantled. Much of the debt represents wages and social security benefits which have been paid. The fact is that back of the government's debt may be relatively little wealth. What is back of the debt is the government's ability to tax. To pay the interest on the debt, it taxes. It does not amortize its debt. It rolls it over, that is, as its obligations mature it issues new bonds for the old. Only in the 1920s did it reduce its debt. Now its debt goes in only one direction -- upwards.

While there is a legitimate question how much wealth is back of the government's debt, this is not true of the debts of private companies. For the most part, those debts are secured by actual wealth.

It was pointed out previously that inasmuch as investments can be made in consumptive wealth as well as in capital, such does have an effect on the interest paid for the loan of capital. This is because it reduces the amount of wealth which would otherwise appear on the marketplace as additional capital.

It will be recalled that interest is the return received for the loan of capital (tools).

The question that arises is what is the rate for lending consumptive wealth? Inasmuch as money is almost invariably consumptive wealth, and probably the one most often lent, the question boils down to what is the rate for lending money, and what is the relationship between that rate and interest? In order to differentiate this rate from interest, the writer has labeled it money-interest.

Possibly the simplest way to approach this problem is by an example.

A man has produced 1000 widgets over and above that which he needs to exchange for any wealth and services he desires. He has two choices. He can save the widgets, that is, put them where he can easily obtain them, or he can invest them. He elects to invest them.

He now has two more choices. He can exchange them for capital, or for some form of consumptive wealth. He elects to exchange them for consumptive wealth, and that especial kind - money. He sells the widgets for $1 a piece, so he has $1000 to lend. He knows he could have exchanged the widgets for capital, say a lathe, which had a price tag of $1000. If he had done that, he could have lent it, and assuming that the average interest rate was 5% per annum, he would receive $50 annually as interest.

As that is the case, be will want at least the same return for lending the $1000, so the rate he would charge would also be 5%. Thus, the money -- interest rate is the same as the interest rate on capital.

If it were more advantageous to lend capital as its interest rate happened to be higher, more wealth would flow into capital and away from money. This would tend to force the interest rate on capital down and the money -- interest rate up until they were both the same, all other things being equal.

If there should be a sudden, large influx of money, the increased supply of money would tend to depress the money -- interest rate if demand remained the same. This would also tend to bring about a drop in the interest rate for money would flow into capital. With a greater supply of capital, all other things being equal, its rate would drop too.

But, and this is an important question, how far can the interest rate drop?

If there is so much money in existence that the money-interest rate would tend to zero, it is quite likely that those holding money might not consider it worthwhile to lend it out. The cost and bother of lending might be greater than the return. There would tend to be some point above zero, below which the money-interest rate is not likely to fall. [6]

Inasmuch as the money--interest rate falls to this point, the interest rate on capital would also tend to fall to the same point. However, while it might do that temporarily, it would not stay there in the long run, if that point was below what the interest rate would be, based on the demand for and the supply of capital.

The important fact which must not be forgotten is that a laborer needs capital in order to produce regardless how high or low the interest rate is. As long as he gains something by using capital, he is willing to pay interest.

An investor, on the other hand, is not under the same compulsion as is the laborer. He does not have to invest in capital or in money. If the return is negligible, he may decide ether to save his surplus wealth or consume it. [7]

The inexorable fact is that a laborer wants and needs capital whereas an investor does not. If the return is so low that it does not pay the investor to lend capital to the laborer, then the laborer must make his own capital.

For the most part, it is the interest rate which determines whether a laborer will make his own capital or not. If the rate is very low, a laborer would prefer to borrow tools rather than make them. On the other hand, if the rate is very high, a laborer would prefer to make his own tools, as it would pay him to do so.

If a fisherman catches five fish a day, he might be willing to pay two fish to borrow a fishing pole. If the capitalist asks for three fish, as interest, the laborer may decide it is more advantageous to spend part f his time making the pole himself. Now, if outside influences should cause the interest rate to drop to one fish, the capitalist might decide it does not pay him to lend the pole. But, the laborer wants and needs it to fish. As he has been in the habit of paying two fish for its loan, and will only go to the trouble of making a pole himself when the rate rises to three fish, he is perfectly willing to raise the interest rate from one fish to two in order to borrow the pole. At this point the capitalist comes back into the market and lend him the pole. So, although an outside influence temporarily forced the interest down to one fish, it could not stay there.

This is analogous to the situation where the money-interest rate is driven down by an excess supply of money, bringing the interest rate on capital down with it. The money-interest rate is the outside influence which, for a time, brought the interest rate down. The interest rate cannot stay down if that point is below where laborers would prefer to pay interest than make their own capital.

To what point the interest rate goes will depend upon the higgling and haggling of the capitalists and laborers. It may go back to the rate which existed before the influx of the money, although the presence of so much money might prevent it from reaching that point, particularly if it changed men's valuations.

The reason for this lengthy and most inadequate discussion is to demonstrate the absurdity of nations attempting to reduce the interest rate by monetary manipulation. Despite the lessons of history, politicos assume that low interest rates encourage entrepreneurs to acquire capital, and this is expected to aid employment as laborers go to work to produce it.

Increasing the quantity of money may have a tendency to decrease the interest rate somewhat. Wherever money-aids are treated as though they were money, they too may aid in decreasing the rate. This has resulted in the following hypothesis that is treated as though it were revealed truth.

Increase the quantity of money-aids to drive the money-interest rate down. This will drive the interest rate down. Entrepreneurs will be encouraged to acquire more capital and men will be employed to make this capital and politicians will be re-elected.

But it does not work quite that way. If increasing the quantity of money-aids does indeed lower the money-interest rate, and thus the interest rate on capital, it might reach a point where it discourages investors putting their surplus wealth into capital at all. Whether they realize it or not, the monetary manipulators have been looking at capital from the laborer's viewpoint, not the investors. The laborer is delighted to have low interest payments, and no doubt will increase his demand for capital. But the capitalists want high interest payments. If the interest rate is at a point where it does not pay investors to invest in capital, the supply will tend to drop. And, of course, the laborer needs tools. Rather than build them himself, he would prefer to borrow the tools and pay interest There is a high and low point between which the interest rate will fluctuate. The high point would be where labor prefers to produce the capital rather than borrow it The low point would be where capitalists are just willing to lend capital .[8] Natural forces are at work. Monetary manipulators delude themselves when they think such powerful forces can be controlled by tinkering with money.

Though they are unaware of it, their fundamental assumption is in error. Their premise is that in order to maintain employment the production of capital must be stimulated. Even if it were correct, to reduce the interest rate discourages the production of capital for it discourages investors from hiring labor to produce capital which they can then lend.

As mentioned previously, there are two motivations for the production of capital. The primary one is the need which laborers have for tools. That needs no encouragement -- necessity is incentive enough. It is the secondary motivation for capital which needs encouragement. This is the desire of investors to own capital so they can obtain a return for lending it . But this motivation is discouraged by low interest rates. The investors want high rates. So, the monetary manipulators by striving to force interest rates low are discouraging the production of capital. They, thus, discourage the employment of laborers to make the tools which investors might otherwise have ordered to be produced.

This confusion between means and ends is probably due to lack of precision in defining terms. Capital is broadly defined to be not only tools, but land, money and other items. Interest is probably considered to be a return for lending not only tools, but land, money and money-aids. It is hardly likely that any policy based on such a broad category of diverse elements can hope to be successful.[9]

Fundamentally, no one really wants capital; for that matter, no one really wants to work. But to acquire wealth, we must work, and to live in circumstances above that of the lower animals, we must produce capital. But we cannot labor to produce capital or consumer goods unless we have access to the land. If nations wish to stimulate employment, the principal action to take is to remove the restrictions on access to the land.


Recapitulation


Savings are immediately available wealth set aside for future use. Investment is wealth which is loaned. Saving is not necessary for investments to exist, but it is because men save that investments evolved.

As men have found that they can obtain an incremental return by putting their surplus wealth into investments, the result is that in a market oriented society the motivation to produce capital is two-fold. On the one hand, is the age-old motivation of the laborer to have a tool to make it easier for him to produce wealth. On the other hand, is the motivation of the investor to produce ever better tools for the return he can receive by lending them to the laborers. Thus, the motivation of the capitalist reinforces that of the laborer with the result that even if laborers are satisfied with their present tools, the capitalists are constantly offering them ever better ones.

A market oriented society, thus, tends, if anything, to be over-supplied with capital, whereas a socialistic oriented one tends to be a capital-scarce society. This is because in a socialistic society, this second motivation does not exist as the private ownership of capital is forbidden. In addition, the primary motivation --- that of the laborer's need for tools --- is of low intensity. Since most of the advantage of using tools goes to the State and not to the individual laborers, they are relatively indifferent whether they use capital or not. What they really desire is consumer wealth. Thus if the use of tools does not increase the quantity of consumer items they receive, they do not care whether they use the capital or not Therefore, it is not surprising to find that in Russia hundreds of examples exist of expensive machinery, as reapers and sowers, rusting in the fields and massive tools in factories remaining idle.


NOTES


  1. The writer is indebted to Alexander M. Goldfinger for having pointed out that capital does not necessarily come from savings.
  2. Certainly this was true when men first started to invest. However, with advancing civilization, due to the elaborate financial system which developed, investments may or may not be actual wealth. The purchase of a bond is the investment in an IOU, which may or may not be backed by actual wealth.
  3. John Maynard Keynes, " The General Theory of Employment Interest and Money" (Macmillan & Co., Ltd., St. Martins Press, New York, 1960)It is futile to attempt to reconcile this writer's definition of savings and investment with those of the Keynesians. This writer's definition of saving amounts to the hoarding of wealth, with investment being the lending of wealth. Keynes said that saving is 'the excess of income over consumption' (p.62) and investment is really saving for saving and investment are " merely different aspects of the same thing" (p.74) and " necessarily equal" . (p.74) However, subsequently he contradicts himself for he gives the impression that increased saving may result in decreased investment (p.210), an impossibility if they are the same thing. His devotees have explained this inconsistency as meaning that ex ante (before the act) saving and investment may be unequal, but ex post (after the act) they necessarily must be equal. By this is meant that intended saving and investment may be unequal but actual saving and investment must be equal. (For an excellent, if caustic, analysis of Keynes' magnum opus see " The Failure of the 'New Economics" by Henry Hazlitt.)
  4. At least in the United States, no return may be received, as such is prohibited by law. Someday the prohibition will have to be repealed, at which time, banks may offer a small return to encourage deposits. The government's interference has tended to divide deposits into two types. Individuals and corporations keep a minimum in their regular deposit accounts. An additional amount, which might otherwise be a part of these deposits, is placed in time deposits of one kind or another, as certificates of deposit or commercial savings accounts. Thus, this foolish law has been partially circumvented.
  5. Economic Education Bulletin, Vol. XX, No. 3, March, 1980 American Institute for Economic Research, Great Barrington, MA.
  6. Keynesians would call this the 'liquidity trap.
  7. As noted before, under extraordinary circumstances, as a depression, investors presently owning capital may lend it gratis on condition it be kept in repair. This, however, cannot continue indefinitely and does not bring new capital into existence.
  8. In a sophisticated society, when interest rates rise to relatively high levels, this process is reflected in companies ceasing or at least slowing down the purchase of new capital. Instead, they repair or improve their present capital. Firms producing capital (tools) find their business for new capital falls. Their business for repairing and restoring old capital may rise.
  9. There are almost as many theories of interest as there are economists. Henry Hazlitt has noted that probably the three theories which predominate are (1) Theories based on productivity (2) Theories based on time-preference or time discount, and (3) Theories based on a combination of the other two. Time discount theories are predicated on the fact that goods in the present are ordinarily valued higher than goods in the future. Interest, then, is the discount of future goods as against present goods. It is interesting to note that Bohm Bawerk presumably had proved the fallacies involved in productivity theories, However, Ludwig von Mises charged that when Bohm Bawerk evolved his own theory, it was based partly on productivity, although in a subtle form. To read the excellent discussion of the theories or interest by Henry Hazlitt, see his book, "The Failure of the New Economics", Chapter 15.
Preface and Introduction

BOOK 1

Chapter 1 * Chapter 2

BOOK 2

Chapter 1 * Chapter 2 * Chapter 3 * Chapter 4
Chapter 5 * Chapter 6

BOOK 3

Chapter 1 * Chapter 2

BOOK 4

Chapter 1 * Chapter 2

BOOK 5

Chapter 1 * Chapter 2

BOOK 6

Chapter 1 * Chapter 2

BOOK 7

Chapter 1 * Chapter 2 * Chapter 3

BOOK 8

Chapter 1

BOOK 9

Chapter 1 * Chapter 2

BOOK 10

Bibliography