Sunday, July 5, 2009

Fireworks: Wenzel versus Murphy

Who needs the Macy's fireworks display when you have Murphy and Wenzel slugging it out?

Bob Murphy has responded to my latest comments on my preference for making a clear distinction between "demand for cash" and "savings".

I have read his response a couple of times and as best as I can determine he is against more precision, is in favor of more confusion and has become a Keynesian.

Let's take a look at his response.

After a very rigorous opening attack:

I thought that was silly...
Murphy continues:

...if you go Wenzel's route, you're going to end up with some awkward situations.

For example, let's say I go put $1000 in my savings account. I ask Wenzel, "Hey, did I just save $1000?"

If I'm reading Wenzel correctly, he would have to say, "I'm not sure. Let me call the bank and see if they've lent that money out to a borrower. If it's still just sitting there in the vault, then no, you haven't yet saved".
Now, if I am reading Murphy correctly. His attack is that my definitions are not precise enough and that therefore the option should be to fallback to an even less precise definitions and more confusion, rather than becoming even more precise.

Consider the case of inflation that I use in my article, where I argue that using the terms monetary inflation and price inflation are more precise than simply using inflation. Now, one could argue that even price inflation is not precise enough since although, say, in the 1920's while consumer prices were not going up, assets prices, e.g., stock prices and real estate prices, were going up. So if one argued that even price inflation is not precise, I would agree and would support the added preciseness of differentiating between consumer price inflation and asset price inflation when it would enlighten a discussion (which would be often). Now, Murphy, if we follow his form of thinking on the "demand for cash" versus "savings", on the inflation question would argue,"Ah hell, it's much more complex than just price inflation. It could be a reference to consumer prices or asset prices, so lets just junk the whole thing and stay confused at an earlier level by just using the term inflation."

Curiously, Murphy then goes on to provide the answer to why the "savings" versus "cash on hand" is not a problem in the point he raises:

Maybe he would say, "Yes you saved, but then the bank's demand to increase cash balances withdrew your savings from the economy."
Murphy, then sees another "problem" with my argument:

Another problem: Wenzel seems to be forcing savings to equal investment by definition. In other words, I don't see what the distinction is between savings and investment in his worldview.
Murphy is correct about my "worldview". And, I have to say that by not agreeing with me, Murphy simply has to be ranked as a Keynesian.

By confusing "demand to hold cash" with "savings", he runs into the problem of savings not equalling investment. But since all cash is always held somewhere, there is always a "demand to hold cash" and Murphy like Keynes will thus find himself in the never ending "crisis" of "savings" (in their confusion of lumping true savings and demand to hold cash both being "savings") as never being equal.

For me, savings and investment are two parts of the same transaction, for them not to exist simultaneously, would be like saying the buying of a gallon of milk is occurring but the selling of a gallon of milk is not. Naturally, if the buying of a gallon of milk is going on and the selling is not, then you have a Dali like world that to date has only existed in the minds of Keynes and Keynesians.

If someone is putting money to work by saving it, and by that I mean buying capital goods directly, or through an intermediary (such as a bank), then investment is occurring at that point. The only confusion comes in when someone is holding cash, and calling that saving!

Murphy then writes:

I think the basic problem here is that Wenzel overlooks that a given act can be both saving and an increase in cash balances. Look, suppose I spend $20 on a DVD. I both (a) consumed and (b) reduced my cash balances. Right? Surely Wenzel would agree with those two descriptions.

So, going the other way, if I take $20 out of my paycheck and put it into my piggy jar, I both (a) saved and (b) increased my cash balances.
He just simply missed my point when I wrote:

Now some may try to argue that money put in a jar may be put there until enough is accumulated to be put into a savings bank. This really doesn't change any of the dynamics at all. Money put in a jar is still a demand for cash. In this particular case, since the demand for cash can be for any reason, it can be a demand for cash to eventually turn it into savings at a bank. Remember the cash in the jar is cash sitting there, once it hits the bank, it doesn't sit there any more, it is loaned out, bidding for goods and services, that's when it becomes savings, in my book.

You can certainly go about using a term in any sense you want, but for the preciseness by which an economist should use terms in his own field, using the terms "demand for cash" and "savings" in very precise ways, will eliminate a lot of confusion (and bad theory) in the long run.
And then he gets real Keynesian on us again (My emphasis):

It's true, there are things that you have to worry about when someone saves by hoarding cash, versus saving by giving the money to a financial intermediary. But that doesn't change the fact that devoting some of your income to increasing your cash position is a form of saving.
Murphy then concludes parenthetically in Keynesian like fashion again:

The exact definition of saving for me is to consume less than one's income. And then if you ask what income is, it is how much you can consume without impairing your capital. I'm pretty sure I got these basic definitions from Hayek's Pure Theory of Capital. I would be very surprised if Wenzel found an Austrian who said that adding to cash balances wasn't a form of savings, but I am ready to be corrected on that score. Maybe they do somewhere, but again, I'd be surprised to see it.
Now, I happen to think that Ludwing von Mises, Murray Rothbard and Friedrich Hayek were geniuses, but just because they write something doesn't mean it's true. You have to test the logic. An appeal to authority doesn't work for me. But seeing that Murphy seems to want this crutch for his argument, well I can pull that crutch away from Murphy also, i.e., Murray Rothbard is with me in this argument. Rothbard writes:
Savings and investment are indissolubly linked. It is impossible to encourage one and discourage the other. Aside from bank credit, investments can come from no other source than savings (and we have seen what happens when investments are financed by bank credit). Not only consumers save directly, but also consumers in their capacity as independent businessmen or as owners of corporations. But can't savings be "hoarded"? This, however, is an artificial and misleading way of putting the matter. Consider a man's possible allocation of his monetary assets:

He can (1) spend money on consumption; (2) spend on investment; (3) add to cash balance or subtract from previous cash balance. This is the sum of his alternatives. The Keynesians assume, most contrivedly, that he first decides how much to consume or not, calling this "not-consumption" saving, and then decides how much to invest and how much to "leak" into hoards. (This, of course, is neo-Keynesianism rather than pure Keynesian orthodoxy, which banishes hoarding from the living room, while readmitting it by the back door.) This is a highly artificial approach and confirms Sir Dennis Robertson's charge that the Keynesians are incapable of "visualizing more than two margins at once."[2] Clearly, our individual decides at one and the same stroke about allocating his income in the three different channels. Furthermore, he allocates between the various categories on the basis of two embracing utilities: his time preferences decide his allocation between consumption and investment (between spending on present vs. future consumption); his utility of money decides how much he will keep in his cash balance. In order to invest resources in the future, he must restrict his consumption and save funds. This restricting is his savings, and so saving and investment are always equivalent. The two terms may be used almost interchangeably.

These various individual valuations sum up to social time-preference ratios and social demand for money. If people's demand for cash balances increases, we do not call this "savings leaking into hoards"; we simply say that demand for money has increased. In the aggregate, total cash balances can only rise to the extent that the total supply of money rises, since the two are identical. But real cash balances can increase through a rise in the value of the dollar. If the value of the dollar is permitted to rise (prices are permitted to fall) without hindrance, no dislocations will be caused by this increased demand, and depressions will not be aggravated. The Keynesian doctrine artificially assumes that any increase (or decrease) in hoards will be matched by a corresponding fall (or rise) in invested funds. But this is not correct. The demand for money is completely unrelated to the time-preference proportions people might adopt; increased hoarding, therefore, could just as easily come out of reduced consumption as out of reduced investment. In short, the savings-investment-consumption proportions are determined by time preferences of individuals; the spending-cash balance proportion is determined by their demands for money


  1. Bob Murphy and I had a discussion on this several months ago, where I argued your same premise to no avail. The Keynesian model seems to rest on the idea that massive amounts of cash are being hoarded, thus hurting aggregate demand. If savings are sent to banks which then lend out the money to be spent, there will be no shortage of aggregate demand. The cash hoarding by banks has been the only thing keeping inflation in check.

  2. Here is my response. It's just a mopping up operation at this point. I grant that my bringing up the saving/investment distinction was a distraction. But other than that, I still think you are self-evidently wrong. I don't know how you are going to deal with my latest post, but maybe you will be a magician.

  3. What distinguishes saving and investing?

  4. If I go to a restaurant, eat half my sandwich and place the other in a box we would say I saved the sandwich for later (because I expect it to meet my future demand for a sandwich).

    Now if I have a bunch of sunflower seeds I might consume them now. I might save them for later. I might also plant the seeds in the ground, expecting the action to yield me a greater number of sunflower seeds in the future. It would not say I saved the sunflower seeds since I can no longer eat them. If the crop fails I lose my seeds.

    Placing money under my mattress resembles the former action. Lending money to a bank's savings account seems like the latter situation. Why not call monetary saving the action that most resembles physical saving? We can use a new word for depositing money into a bank and the additional risk/reward.

  5. That's out of America's Great Depression? I think I read something similar in that book by Rothbard.

    Not that this post wasn't enlightening enough, but I wished you would put the pages and book titles of these sorts of passages you pull for the blog.

  6. "And, I have to say that by not agreeing with me, Murphy simply has to be ranked as a Keynesian."

    When stupid name-calling is presented as an argument, I stop reading.

  7. @ Gene Callahan

    That wasn't stupid name calling. Murphy is simply using Keyensian thought proceess here.

    Murphy syas:

    The exact definition of saving for me is to consume less than one's income.

    Rothbard says:

    The Keynesians assume, most contrivedly, that he first decides how much to consume or not, calling this "not-consumption" saving, and then decides how much to invest and how much to "leak" into hoards

    They sound the same to me.

    Although Gene after re-reading your original comment at Murphy's post, I shouldn't have lumped you with the Keynesians, you are, for better or worse, an original thinker on thus subject.

  8. @Ercik

    As you will note I think they are pretty much the same thing, as does Rothbard who writes:

    The two terms may be used almost interchangeably.

  9. @Ry

    There is a link to the Rothbard quote, that includes title and page number.

  10. In every Physics 101 class, someone will ask the Professor, "Are you telling me that if I hold a barbell over my head for an hour that I'm not doing work?"

    The Professor will smile and tell the young student, "No, according to the definition of work, you are not."

    "Mechanical work is the amount of energy transferred by a force acting through a distance."

    I could multiply examples many times over by looking through any summary of Philosphy book.

    Taking an approach from G E Moore, I might give my son or daughter a five dollar bill and put it in a jar and state, "We'll put this here so you can save it." "Low Powered" or "High Powered" money never enters into the conversation. Any of my kids would get all big eyed over the transaction but they would understand. That's just what happened.

    I suspect that the technical definitions have fogged the USE (Wittgenstein) of the term between you two. That's the problem with Keynesian Thought. The Categories have been appropriated (Kissinger) and the kid with the five dollar bill is left confused. Maybe he'll buy a book on Quants instead of wasting it all on candy.


  11. "They sound the same to me."

    Well, given that everyone else in the world except Rothbard and a few of his followers deem money you tuck away in the cupboard to be "saved," then it's not too surprising the Bob and JM agree on this, is it? I'm pretty sure Keynes recognized trees as a type of plant, so if I call them plants as well, is that "Keynesian thinking"?

  12. @GeneCallhan

    Yes, a new rule in science, majority rules:

    Well, given that everyone else in the world except Rothbard and a few of his followers deem money you tuck away in the cupboard to be "saved," then it's not too surprising the Bob and JM agree on this, is it?

  13. RW dodged the question:

    Does agreeing with Keynes that trees are plants make you a keynesian? ;)

  14. Ha ha, Robert, very funny.

    1) In language usage, yes, the majority certainly does rule. If you and Rothbard choose to call something "squelch" (or whatever) when everyone else calls it "savings," then you are wrong. That's the way languages work.

    2) And you completely ignored the point I was actually making, which is that if Bob, JM, and every person on the globe except you and Rothbard call putting money in the cupboard "savings," then it's very odd of you to accuse Bob of "Keynesian thinking." Why not "Friedmanite thinking," or "Smithian thinking," or "Ricardian thinking," or "Millian thinking"? Or, indeed, why not "Babe Ruthian" thinking. or "Michael Jacksonian thinking," since, no doubt, they also thought of putting money in the cupboard as saving?

  15. @GeneCallahan

    So as far as inflation is concerned, you wouldn't advance the science by differentiating between price inflation and monetary inflation because the majority are for confusion on the topic?

    As I clearly pointed out in my posts, I acknowledge that layman use the term saving to also mean cash holdings. But that a professional economist should not.

    Keynes is certainly more known in his discussions of savings and investment, than Smith and Friedman. Indeed, I know of know such Smithian differentiations.

    The fact remains that you may be able to attribute the non-consumption of income definition to others, but it is certainly Keyensian thinking also. (I happen to think prominently Keyensian).