Saving is the use of revenue or income by a business or individual for purposes other than expenditure on consumers’ goods (or consumers’ services). It is revenue or income that is not consumed.
Because what is saved is not spent by the saver for consumption, a popular fallacy has grown up that saving is synonymous with hoarding—i.e., with the retention of money in the manner of a miser. This fallacy is not so difficult to understand when committed by people with limited education, who thus know little beyond their own personal experience. Most such people are wage earners, who normally do not personally make any kind of expenditures but consumption expenditures. In the absence of wider knowledge, it is easy for such people to confuse consumption spending with all of spending and thus to conclude that what is not spent for consumption is simply not spent. But the fallacy is also prevalent in the press, which persists in equating an increase in the rate of saving with a decrease in the spending for goods. For example, whenever it is reported that some increase in the rate of saving has taken place, the press concludes that the effect must be economically dampening at the very least.
Worse still, the fallacy that saving is hoarding is prevalent among professional economists—notably the Keynesians and neo-Keynesians—who routinely describe saving as a “leakage†from the “spending stream.†(Such economists have taught the fallacy to the members of the press.)
Indeed, so complete has been the intellectual severance of saving from spending that for several decades it has been routinely taught in college and university classrooms not only that what is saved simply disappears from spending and depresses the economy, but also that what is invested virtually comes out of nowhere and financially stimulates the economy. This is a state of confusion that would be comparable to believing that the seeds a farmer scatters simply disappear, and that the crop that later comes up, comes out of nowhere. Yet such a state of confusion is the corollary of believing that saving is hoarding. If one recognized that investment comes from saving, one would have to recognize no less that saving goes into investment—that the two are merely different aspects of the same phenomenon. In that case, one would not view saving as depressing, nor investment as stimulating.
The Hoarding Doctrine as an Instance of the Fallacy of Composition
It should be realized that while any particular individual might save in the form of adding to his cash holding—that is, in the form of “hoardingâ€â€”it is not possible for the economic system as a whole to do so. Indeed, the belief that the economic system as a whole can save by means of hoarding is an instance of the fallacy of composition—the same fallacy encountered in connection with the belief that not only an individual industry or group of industries can overproduce, but that the economic system as a whole can overproduce.
The reason that an individual can save by means of hoarding cash, while the economic system as a whole cannot, is because whatever cash an individual adds to his holding, some other individual has had to subtract from his holding. If I sell my goods for $1,000, say, and decide to retain that sum in the form of cash, it is true that I increase my savings in the form of cash by $1,000. But in the very same period of time, the individuals to whom I have sold my goods have had to reduce their cash holdings, and thus their accumulated savings in the form of cash, by that very same $1,000. I have $1,000 more in savings in the form of cash, but they have $1,000 less in savings in the form of cash. Adding up the change not only in my position, but in theirs as well, it thus turns out that in the economic system as a whole there is no increase whatever in savings in the form of cash holdings. What some individuals save by means of adding to their cash holdings other individuals have had to dissave.
The situation of students in a classroom provides an excellent illustration of this proposition. At any given time, the members of the class have just so much cash in their possession. If the doors to that classroom were locked and that class became a “closed economic system†for an hour or so, with its members carrying on some form of production and buying and selling from one another, any individual student might increase his savings by adding to his cash holding over that interval of time. But then the rest of the class must decrease its savings in the form of cash holdings to exactly the same extent. There is no way that the class as a whole can increase its savings by increasing its holding of cash.
It follows that if there is to be saving in the economic system as a whole—that is, an increase in the savings of some or all members of the economic system that is not compensated for by a decrease in the savings of other members of the economic system—the only way it can take place is in the form of an increase in assets other than cash. The increase in the savings of the economic system as a whole must take the form of an increase in its capital assets, such as business plant, equipment, and inventories.
The only exception to the principle that the economic system cannot save by means of adding to its cash holdings exists insofar as there is an increase in the quantity of money. If, over a period of time, the quantity of money in the economic system increases, then, to that extent, there can be an increase in the holding of cash that does not imply an equivalent decrease in the holding of cash by others. But this is the only exception, and it obviously does not reduce spending. Moreover, it is inescapable inasmuch as the new and additional money must be added to the cash holdings of someone and in that capacity will constitute part of their savings.
This article is adapted from pp. 691-693 of the author’s Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996). The article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author’s web site www.capitalism.net is included. (Email notification is requested.) All other rights reserved. George Reisman is Pepperdine University Professor Emeritus of Economics.
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Prof. Reisman,
Thank you for another brilliant economic analysis. Your analysis of economic matters, and the comments people make about them, some insightful, others obviously misreading you, is one of the reasons I keep coming back to this blog.
Excellent. This is exactly the kind of argument that demolishes the fallacy of hoarding. I didn’t expect it to be that simple
Don R,
Did you even read Reisman’s article?
Don R.,
Inquiring minds want relevance. How is it that you perceive Reisman asserts in his article that “hoarding” is in any way synonomous with “saving”?
‘Cause the article I read pretty much dismantled the idea of hoarding as a myth (and one that was central to Keynsian economics).
On October 13, I posted the below comment in a different thread, and I believe it is worth repeating here. My comment impacts the same topic and is in agreement with Professor Reisman’s analysis, although I approach the issue in a slightly different manner in that I utilize the demand for money.
“This issue comes up repeatedly in threads involving money and banking, namely that many commentators, and I would add many economists (Keynes included), confuse the demand for money, i.e., the propensity for individuals to hold cash balances, with the propensity to save. The demand for money and the propensity to save are not the same. Savings involves foregoing current consumption. In addition, the term ‘hoarded’ is scientifically meaningless, since all money is always in someone’s cash balance at any point in time.â€
“In addition, the term ‘hoarded’ is scientifically meaningless, since all money is always in someone’s cash balance at any point in time.”
That’s exactly what the author was getting at by stating his classroom example. Watch a No-Hold-Em poker tournament on TV sometime–you’ll see the same thing going on with chips acting as money.
If the game is perpetual (like humanity), and no one rigs things with inflationary socialism, this general rule scales well up to billions of people.
Increased savings makes us richer
China is still a very poor country. Productivity is very low so wages are, therefore, also very low. Productivity and wages goes hand in hand. For an example, go to; http://www.rieti.go.jp/en/china/02083001.html. Once, a long time ago, I was in Hong Kong*, and wages there were among the highest in Asia. Real wages increased about 10% per year, for the reason that productivity per hour work increased that much. Unions were very weak and had no influence, but wages increased anyway, because of competition between employers. As productivity increases, cost per employee gets lower and, therefore, the demand for labour increases and wages goes up. Productivity goes up for the reason that increased savings leads to ever higher capital investments per employee. That is the recipe for high wages and all Western countries have gone through that process.
Wages and living standards in China are higher than ever, but compared to the western countries, extremely low. In poor countries the average worker wants to work more hours than the average workers wants to do in the Western countries. Why? Isn’t that obvious? If your wage barely can support your family, life will be easier if you can work and earn more. We must remember that. Japan, Taiwan, South Korea, Hong Kong and Singapore once were very poor countries and today are better off, China also, will in the future, be richer and the living standard higher. Working hours will then be a lot shorter. There is no “short cut†for a higher standard of living and for a shorter working week. Many companies are “forced†by market forces to invest in countries like China. Consumers have a tendency to buy the cheapest goods and if they are not produced in those countries where they are produced for the lowest costs, they can’t compete. It is no point in accusing businesses for being greedy, they are, but so are we consumers.
Today Hong Kong is even richer than Sweden. Hong Kong has accomplished in a much shorter time a higher GNP per capita and also a higher life expectancy than Sweden. The Swedish economic growth rate was also higher relatively to other countries when the economy was more free market oriented in the period before 1970. Sweden has also avoided two world wars.
For some information about Hong Kong, go to;
http://www.answers.com/hong+kong?gwp=11&ver=2.0.1.458&method=3
And for some information about Sweden, go to;
http://www.answers.com/sweden?gwp=11&ver=2.0.1.458&method=3
If China, 50 years ago, had chosen the same path which it is now following, living standards in today’s China would probably be about the same as it is in Hong Kong. The Communist religion is really, the very cause of long working days and low wages in China.
Björn Lundahl
Göteborg Sweden
* Hong Kong is a free port with no tariffs on imports and is probably the most free market oriented region in the world.
Don Robertson,
when I was reading Henry Hazlitt’s Economy in One Lesson, chapter ‘Assault on Savings’, one of the point made was: saving is investment. Some people condemn hoarding, though hoarding in large scale is rather unfrequent, it might be detrimental to the society, but we will not discuss it.
Obviously, this doesn’t answer the question, whether hoarding really is or isn’t problematic. I had some idea, that there are going to be some changes in prices, but try to explain it to the layman. This article explains it perfectly.
Bjorn:
It’s not quite correct to find the origin of China’s poverty in its socialism. More accurate would be to blame it for poverty’s perpetuation:
it is at least a reasonable assumption that, had Chiang prevailed rather than Mao, China would have had an earlier start on the path to prosperity.
Don Robertson:
“Hoarding” is merely a word–one with pejorative connotations–for saving of an amount or in a form of which some others disapprove.
The fellow who holds or adds to a cash hoard has reasons of his own for so doing. For starters, he may feel precluded from using the services of a bank because his income derives from “under the table” sources he avoids making visible; these may (but need not) be criminal in nature; even such criminality is often the type resulting merely from avoidance of one or another type of taxation. Or, he simply may not (or not entirely) trust banks. This may seem “primitive” to some but less so to others, especially those who actually understand banking and, particularly, understand such things as the size of the fund securing the FDIC guarantee and the banking regulations (regarding the limitations on the banks’ obligation to pay on demand). Though these are eventualities unlikely at any specific time or even over the lifetime of any particular depositor, it is presumptuous to ridicule another’s stewardship of his own property simply because of one’s own estimation of the remoteness of that eventuality. No one is obligated to the “economy” to treat of his property in any other manner than prescribed by law. And the fact that just what is prescribed by law is subject to change (and sometimes quite quickly) is another reason some may feel better if their stash isn’t where someone else is constantly counting it and including it in various aggregates and indices– almost as if it were their own.
The principal reason that I believe animates objectors to “hoarding” is, I believe, one that is less than honest in its motive.
The placing of a cash sum into a hoard tends toward perpetuation of the current price level (as a philosopher, you’ll hear “ceteris paribus” whispered gently when such statements are made); the funds are not available to underwrite loans to enterprise and consequent rearrangement of existing price relationships.
Given the deposit basis of the fractional reserve system and the reality that at least some of the entrepreneurial debtors under that system are misled–into capital-goods expenditures they wouldn’t have made otherwise–it is easy to understand that those preferring (for one reason or another, including that is is profitable for them, personally) an inflationary regime should wish to disparage every tendency to save outside the banking system (and to say things amounting to “the only thing we have to fear is fear itself”).
Don R,
You don’t understand the difference between productive consumption and non-productive consumption. Investment in factories is productive consumption, while using resources for plasma televisions is non-productive consumption. Productive consumption is one of the things you get from savings (the forgoing of non-productive consumption). However, there are people on this site far more knowledgeable than myself that can teach you.
Gene Berman
Thank you for your comment. You wrote;
†It’s not quite correct to find the origin of China’s poverty in its socialism. More accurate would be to blame it for poverty’s perpetuation: it is at least a reasonable assumption that, had Chiang prevailed rather than Mao, China would have had an earlier start on the path to prosperity.â€
All Government interventions, no matter how small they are, are steps towards socialism. Without mentioned interventions or steps towards socialism, a free market would have prevailed. In other words, Chinas poverty has the origin in its socialism.
Apart from this, I think you are on the right track.
Björn Lundahl
Göteborg, Sweden
Andy
Any sharp and sudden change in the market can cause problems. This has no more connection to hoarding, than to consumption or savings (investments).
I quote from Man, Economy & State, and page 853;
“Sometimes sharp changes, such as a sudden burst of hoarding or a sudden raising of time preferences and hence a decrease in saving, may arrive unanticipated, with a resulting crisis of errorâ€.
http://mises.org/rothbard/mes/chap11e.asp
Björn Lundahl
Göteborg, Sweden
Don R, you wrote:
. . .for Profesor Reisman has not bothered to even begin scratch the surface of a proper analysis by considering the history of economics as a social science, its vast failures, and the even more notable trend in that history of seemingly forever being a continued failure as should be noted by reading other economists’ works on economics that trail discouragingly back to the beginning of the Enlightenment.
Simply put, it’s not enough to disagreee with Hamilton and Marx et al, it’s also imperative to know why these economists failed in their eras to avoid the same trend of failure in ours.
I can’t speak too much to Prof. Reisman’s writings, not having read them, but I am fairly confident that he could tell you exactly why and how it was that Hamilton and Marx went wrong as economists. Did you try reading any of his relevant material on the subject or did you only read the introduction to his work?
Reisman aside for the moment, given the massive body of Austrian literature on how other economists have failed (a good deal of which I have read), I wonder how it is that you cite this as a weakness. Then again, I’m not sure what exactly your critique is, since it hasn’t been laid out in any clear format.
Could you provide a coherent, concise, philosophical critique that doesn’t rely on metaphor–or some assumed premise (i.e. any connection between an idea and the Enlightenment causes the idea to lose its merit)–to make an argument? We could probably get somewhere by starting with that.
A very interesting debate on this topic of saving versus hoarding! Don Robertson, while I admire your Tarheel-ian philosophical stance, I can’t help but interpret a mis-alignment between your perception and Reisman’s statements.
I should say that I acquired Reisman’s tome – Capitalism – a few years back and have found it to be a breath of fresh air in an economic world often clouded by the philosophical equivalent of environmental pollution. To be sure, Reisman’s style of writing is comprehensive & logical, often discarding the vacuous irrationality proferred in common journalism and education. But a comprehensive discussion/debate of Reisman’s well-written tome would require more pages than the book itself – not an option in this forum.
To the point of Reisman’s original post and the subsequent dialogue that follows…savings versus hoarding. Reisman has succinctly dressed down the common misconception of savings equating to hoarding – he’s pointed out that contrary to popular belief the two are not synonymous. I agree.
There are perhaps minor variances in the form of hoarding, such as:
- The simpleton who stuff dollars into a mason jar and buries them across the back 40 according to a self-drawn treasure map.
- The physician (or any other professional of your chosing) who maintains a safe at home and keeps an extra $1,000, $5,000, $20,000 cash on-hand for incidentals and emergencies of one sort or another.
Likewise, there are variances in the form of savings, some direct & others more indirect in nature, if not intent:
- Joe average who maintains a savings account of $X a the local 7th national bank. The savings is really intended from his perspective to be “his” savings, at some point in the future utilized for “his” rainy day or “his” expenditure whatever it may be. Very likely, this “savings” represents only a delay in “non-productive consumption” of some sort. Meanwhile, thousands if not millions of Joe’s are supporting the fractional-reserve banking scheme within which we all work and play – so the banking system is utilizing Joe’s $X towards financing (expanding) various capital assets – physical plants, inventories, etc. – very clearly the point that Reisman makes in terms of what savings represents and the only way that savings can truly expand. Obviously, at this level of savings, the Joe’s of the world are not intentionally providing the banking system with their hard earned dollars in order to finance economic expansion.
- More intentional forms of savings, which are not necessary to discuss in detail are active investment in securities: stocks, bonds, etc. In these instances, the individual saver is making a conscience decision to participating in savings – to increase the savings in the economic system as a whole.
As I reflect on Reisman’s original essay, the illustration is one oriented towards defining what savings really is versus hoarding, defining how savings occurs versus hoarding and ultimately how these two dissimilar concepts have been warped in the miseducation of many thousands of otherwise intelligent students over the years.
To assert that Reisman and Paul Samuelson are one and the same is ludicrous at best and blasphemy at worst. I don’t think the two men could be more different in their respective economic philosophies. Indeed, I believe that Reisman has adequately illustrated that the nature of hoarding v savings as taught by the Samuelson’s of the world is the problem. Reisman’s corrolary to farming and the discord that some would have us believe in the cause-effect relationship between seed planting and crop production is quite illustrative of how the lines between hoarding-saving have been blurred by overpaid professors.
Don R., perhaps a more broad reading of Reisman’s text will provide the benefit of context to the specific points made in his essay posted earlier. Likewise, I plan to follow your hyperlinks and read some of your writings and make a more informed interpretation of your perspectives.
>No one in this day and age hoards cash.
Don Robertson is basically correct. And neither is the average American “saving” money. He is gambling it on the stock market. In the bad old days people invested in in good companies that turned a profit by selling good products. These days people put their money in companies that have never turned a profit in hopes that they will have bet on a winner or that their computer can out guess the other person’s buy/sell program.
Except for IPOs, money put in the stock market does NOT supply exmansion money for companies because all it does is buy existing stock from someone who has given up on that particular company.
Mr. Lundahl:
I think a slight language difference is responsible for (also slight) misunderstanding.
I only meant (originally) to point out that poverty is an ancient, more or less “original” condition of mankind. In the long and continuous struggle to achieve better living conditions of several sorts, the differing types of social regimes have shown differing potentials for
either enhancing or retarding “progress,” the achievement of the aforementioned struggle.
We agree that socialism of all sorts is a drag
(or a brake) on the hoped-for (and, under free-market conditions, entirely and justifiably expected) progress; my only point was that it (socialism) was not the “origin” of poverty.
My motive in “picking nits” is intended as constructive (and entirely Misesian). Equally sharp-eyed opponents of freedom and free markets are adept in discovering the slightest imprecision or ambiguity in language or expression and more than equally adept in exploiting such as wedges meant to defuse or discredit otherwise solid positions.
Don R.
Unless you’re a liar, you’re a certifiable idiot. How in the world could you know what portion of people keep what amount of cash outside of banks?
About the closest you could know would be from personal experience and (at a degree of separation) from what others tell you of their own practice. Furthermore, by your own description, your circumstance is rural (that is, statistically speaking, atypical–somewhat other than usual).
I live in a somewhat rural area, though not far from a large city. I don’t have a particularly wide circle of associations, despite living here for 35 years but, even among the dozen I know fairly well and a few others, I’d say that (at least from what they’ve told me) that about half have what you would call a “hoard” of currency (and, in some cases, precious metal). None of these people are exceptionally wealthy but all have, for years, willingly foregone what they could have garnered in interest in the next-most-secure-and- accessible form of a bank account. None of these are kooks afraid of banks–just people wishing to prepare somewhat for various eventualities in addition to whatever they’ve deposited in their accounts. In the case of two, I even know the location and approximate amount in these “hoards” (and what they want done in the case of death, incapacity, etc.).
Of course, I can’t generalize from my personal experience any more than can you but my own certainly indicates that you are quite far “off the mark.” There’s even another possibility–that some of those among those you know DO have something of a “stash” but have their own specific reasons for not revealing that to you. It’s not a compliment, bud, but you’ve apparently become so dense (from all that philosophizing) that you hadn’t a clue as to the secondary conclusions readers might logically deduce from your all-knowing statements.
George Reismans explanation is reasonable and clear, but culturally “hoarding” can be a product of an ethic that put focus on this-world achievements. If you would talk with a religious person from such ethical tradition, the focus in a simple discussion would not be on investment or planning for the future, but the focus would be on a simple feeling and sense of pride and happiness. For some people nominal value is greater and more important than what is produced. If you can show that you have worked hard, and have salary with higher nominal value than plumber joe or a White Trash person who lives in a mobile home, you can feel fine and rejoice over the fact that you do not belong to the filth of the world.
Sad but true, but that is only one vision from all the visions that is possible in this world.
George Reismans explanation is reasonable and clear, but culturally “hoarding” can be a product of an ethic that put focus on this-world achievements. If you would talk with a religious person from such ethical tradition, the focus in a simple discussion would not be on investment or planning for the future, but the focus would be on a simple feeling and sense of pride and happiness. For some people nominal value is greater and more important than what is produced. If you can show that you have worked hard, and have salary with higher nominal value than plumber joe or a White Trash person who lives in a mobile home, you can feel fine and rejoice over the fact that you do not belong to the filth of the world.
Sad but true, but that is only one vision from all the visions that is possible in this world.
Of course, I can’t generalize from my personal experience any more than can you but my own certainly indicates that you are quite far “off the mark.” There’s even another possibility–that some of those among those you know DO have something of a “stash” but have their own specific reasons for not revealing that to you.
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