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
- The writer is indebted to
Alexander M. Goldfinger for having pointed out that capital does
not necessarily come from savings.
- 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.
- 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.)
- 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.
- Economic Education Bulletin,
Vol. XX, No. 3, March, 1980 American Institute for Economic
Research, Great Barrington, MA.
- Keynesians would call this the
'liquidity trap.
- 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.
- 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.
- 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.
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