Carpio: Why do economists in general not teach the role of saving for the economy?
Hoppe: I agree with your assessment: In the economics profession today very little attention is given to the role of savings and very much, indeed overwhelming importance is attached instead to the role of consumption. This is a very curious situation. For while it is true that the ultimate goal of all human activity is consumption, there can be little or no consumption without prior production, and there can be no production without prior saving. To explain: Nature on its own provides us with only very few consumer goods, such as apples growing on trees or berries on bushes. For anything more and above this nature-given level of possible consumption, we must first
produce the goods that we then afterwards can consume. That is, we must first devise and construct tools, instruments or machines – in economic terms: indirectly useful producer goods – which help us increase the supply of nature-given consumer goods (such as apples and berries) above their natural level or which help us bring about entirely new consumer goods, i.e., goods not found in nature at all (such as houses or cars). But: to devise and construct these producer goods (such as knifes, buckets, nets, hammers, bricks, steel plates, etc.) always requires some time, and to bridge the time to complete the construction of these goods, i.e., to eat and drink while working on them, prior savings of food and drink are necessary. Without prior savings and the “investment” of such savings in the production and accumulation of producer goods, then, no increase of future consumption is possible.
Why, then, economists pay so little attention to saving despite its enormous importance, is a question concerning the psychology or sociology of the economics profession. Naturally, the answer must be somewhat speculative.
The most apparent reason is the dominant influence gained by John Maynard Keynes and his so-called new “Keynesian economics” since the late-1930s, first in Britain, then, promoted in particular by Paul Samuelson in the US, and subsequently throughout the entire western world owing to the rank of the US as the world’s foremost superpower and its policy of military, monetary and cultural imperialism and hegemony. Characteristically, Samuelson’s Economics has been translated into all major languages and was for many decades the worldwide bestselling economics textbook.
However, the more fundamental reason is another one. It concerns the immediate follow-up question as to why Keynesian economics could possibly achieve such extraordinary success. The answer: Because what Keynesianism teaches is exactly what state-governments want to hear. And saying and preaching what governments like to hear in order to “scientifically” legitimize what they want to do all along anyhow brings rich rewards within a system of “public education,” i.e., within a school and university system almost totally controlled and tax-financed by government.
And what, then, is it that the “high priests” of Keynesianism, ensconced everywhere in the most prestigious and well-paying academic positions, teach and preach and that all governments love to hear? That all economic problems (stagnation, recession, depression, or whatever) are the result of under-consumption; and never ever are they, as plain common sense would suggest, the result of under-saving or under- production. And how to fix the problem of under-consumption and stimulate consumption? By taxing the rich (because they supposedly spend too little of their income on consumption and too much on savings) and giving it to the poor (who spend almost all of their income on consumption), by printing and spending more government paper-money, by the expansion of government paper-money credit, and by increasing government debt.
Rightly, Ludwig von Mises has characterized and ridiculed this economic “stimulus program” as the vain attempt of performing the biblical miracle of turning stones into bread.
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JFC: Anything to add on the topic of saving?
HHH: Yes, first this: As important as savings are for economic prosperity and rising living standards, they are not enough. We can save as much as we want and pile up increasingly larger amounts of saved-up, i.e., non-consumed, consumer goods, but if we don’t have any idea how to invest these savings, i.e., how to convert them into productivity enhancing producer goods or new and better consumer goods, not much improvement will come of it. We also need the idea of a net, a boat, a hammer, a house, a car, a calculator, etc., and the knowledge how to realize and manufacture these things. And this requires human imagination, intelligence, ingenuity and skill. Hence, any society intent upon improving its own material conditions should acknowledge the importance of these human qualities and talents and honor those individuals that display them. Not by rewarding inventors and innovators with any legal monopolies, of course, as this would delay and distort the spread of human knowledge, but by public recognition and praise.
And this: Recognition and praise should likewise go to entrepreneurs and entrepreneurial talents. For it is not enough to have only savers and ingenious designers and constructors of new and better producer or consumer goods. In order to best satisfy consumer demand and increase material living standards, it is also necessary that all products being produced are produced in the least costly or most economic way, such that the production of no one good comes at the expense of the non- or less-production of any other, more highly valued good. Here is where the profit-seeking - and loss-risking – entrepreneur and entrepreneurial talent come into play. The entrepreneur saves or borrows money from savers (against promise of repayment plus interest), he hires and pays inventors, technicians and other laborers, and he buys or rents land, raw materials and producer goods to then proceed to produce whatever final product he has chosen to produce. He does so in the hopeful anticipation of a monetary profit, a surplus of money received from the sale of his final product over money expended on its production. His profit would indicate that he had successfully transformed a socially less highly valued input into a socially more highly valued output and hence, that he had not only increased his own welfare but social or consumer welfare as well.
The business of a profit-seeking entrepreneur is risky, however. The entrepreneur has no control over the potential buyers of his products. They may not be willing to pay the price asked or they may only buy a smaller quantity at this price than the quantity produced and to be sold. Hence, also the constant threat of a monetary loss exists, a surplus of money expended over money received, which would not only be a personal loss, but also and at the same time a loss of social welfare due to economic waste.
But neither is entrepreneurial success or failure a matter of mere good or bad luck, as in a lottery. Success depends on a correct assessment and understanding of future consumer demand for one’s product, and the human talent to correctly identify potential buyers and their future willingness to pay for one’s specific product is not distributed evenly among all people. Most people show little or no talent in this regard and accordingly do not even try their hand at entrepreneurship, and even among those who try, most fail and disappear quickly from the ranks of entrepreneurs. Only very few people have sufficient entrepreneurial talent to be continuously, again and again successful and stay in business for long. They, above all, should be publicly recognized and hailed (and never be envied), if one is intent upon improving the material condition of mankind.
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Our Obsession with Consumption — while Ignoring Saving and Investment — Is a Big Problem, June 13, 2018
Context‘..there must be prior savings and investment..’