Friday, July 15, 2011

A Note on Rothbard and Savings

Bob Murphy attempts to pull Murray Rothbard into the debate on the meaning of savings. Again, I have no problem with the definition of "savings" used by Ludwing von Mises, where he clearly identifies that there are two ways the term savings can be used, savings to mean hoarding or savings to mean investment. This is different from Keynes, who uses the term savings in both senses simultaneously.

However, here's Murphy on Rothbard:

Also relevant, here is Murray Rothbard on pages 419-420 of Man, Economy, and State:
It is clear that the gross savings that maintain the production structure are the “productive” savings, i.e., those that go into productive investment, and that these exclude the “consumption” savings that go into consumer lending. From the point of view of the production system, we may regard borrowing by a consumer as dissaving, for this is the amount by which a person’s consumption expenditures exceed his income, as contrasted to savings, the amount by which a person’s income exceeds his consumption.
If I didn’t know any better, I would say that Rothbard is endorsing my claim that over a defined time interval, savings = income – consumption. But Rothbard can’t be as muddled as me, so I must be wrong.
Murphy is correct that Rothbard is not muddled, but Murphy sure is. Rothbard is contrasting savings that go into "productive" use and saving that goes into "consumption" use. He is not talking about cash balances, or hoarding, at all in his example. What is the clue here that this is what is going on? It is the very comment by Rothbard, that Murphy thinks saves his position that Rothbard considers savings to include hoarding, but look at the first part of the sentence that Murphy thinks bails him out (my bold)  :

From the point of view of the production system, we may regard borrowing by a consumer as dissaving, for this is the amount by which a person’s consumption expenditures exceed his income, as contrasted to savings, the amount by which a person’s income exceeds his consumption.

Got that? Rothbard is implying that he isn't even thinking about hoarding here. Since it is possible for a person to hoard cash, and at the same time borrow money which would mean a person's consumption expenditures wouldn't necessarily exceed his income.

Consider this example. A person earns $10,000 in a given month. He spends $9,000, hoards $1,000 by putting it under the bed and borrows $500, which he spends. This means this person has spent $9,500, which is less than his total income for the month. Rothbard states that dissaving occurs when a person’s consumption expenditures exceed his income, but that is not the case in my example. Yet, from the point of view of the production system, the consumer borrowing of $500 results in dissaving---as Rothbard states.

In other words, the quote Murphy is using actually demonstrates that Rothbard, at least in this instance, is using the term "savings" in the sense of investment and not considering hoarding at all.

This quote doesn't prove, as Murphy suugest, that Rothbard is using the term "savings" to include hoarding, it shows the exact opposite, that Rothbard is thinking about savings without thinking about hoarding at all.

In most of Man, Economy and State, Rothbard uses "savings-investment" to make clear that he is not discussing hoarding, but in the quote that Murphy grabs, its clear that Rothbard has just dropped out thinking about hoarding and is using savings in the sense of just investment.


  1. Dear Bob Wenzel & Bob Murphy,

    First, I enjoy observing this Murphy-Wenzel love fest – it’s been very entertaining, and thought provoking to say the least.

    Second, while I know it is almost taboo to insert the name of Antal Fekete into this conversation involving those so close to, I don't think his theory of interest should be dismissed in this discussion. I think you will both find what he has to offer of interest - no pun intended.

    May I point you both to: –AND– –AND– ?

    I hope a fruitful discussion will ensue from this…

    Kind regards,


  2. I had victory declared over me regarding the proper theory of interest (liquidity versus time) on the basis of a typo I made in saying "investment" instead of "consumption" and calling investment a stock concept instead of a flow concept.

    I'm still trying to wrap my head around that one.

    Then there are the 3 criticisms of the liquidity preference theory I posted numerous times that Murphy hasn't even touched. He has all the time in the world to talk about semantics issues but not the most crucial ones.

    I don't know, maybe it's because his PhD thesis is at stake, or maybe because he's feeling a little too cornered and singled out unjustifiably, but it's certainly the case that he went out of his way to make a blog post saying how brilliant Keynes was and how Mises was wrong about interest, so I hope that as an Austrian posting on a blog read by other Austrians, he should expect the hornet's nest to be roused. But at the same time, that's why he's such a good economist. He's more concerned with what he thinks is right than toeing the party line day in day out. I respect that.

  3. Hi Bob,
    You know what I'd like to see? You and Bob Murphy in a series of YouTube videos in which you debate each other via video-conference or Skype. Kind of along the lines of the YouTube videos Jeff Tucker and Stefan Molyneux did together, except you would be arguing. That would be fun. And educational. Edutainment, if you will.
    You could call it "A Meeting with the Bobs".

  4. Love your blog Mr. Wenzel, but I think you may be wrong in this case. Would you exclude investments in financial instruments from productive investments? If not, an investment in a gold commodities fund is also a productive investment. Then gold held physically, also is a productive investment, because why would holding gold through an intermediary be any different? Hoarding gold also reduces the supply and thereby stimulates gold production (i.e. hoarding is a productive good).

  5. Whether cash is hoarded in a mattress or piggy bank, or placed in a time deposit or in a money-market fund, or converted into physical gold in a vault or in the ground, it nonetheless affects the market.

    Thus ALL these are forms of savings or deferral of consumption, some with a greater preference for liquidity (cash in the mattress, money-market funds), some with a smaller preference (CDs, funds).

    Whatever is withheld from the economy also affects it.

  6. @Lila Rajiva

    This is part of Keynes's confusion. They both affect the market but in very, very different ways. By calling them both savings and not making the distinction that Mises and Rothbard do, Keynes fails to get at the very important point that savings as hoarding versus savings as investment impact the economy in two very different ways.

  7. @Lila Rajiva

    To further clarify, hoarding has a tendency to impact the general price level downward.

    Savings (via investment) tends to impact interest rates (down the road through increased productivity it impacts prices but this is different from the horading price impact which does not result in a gain in productivity).

    Thus, it is very dangerous to simply say, "they all impact the economy". This is what Keynes did by lumping them together.

  8. @Wenzel
    Yes, absolutely.

    You misunderstand me.

    I wasn't supporting Keynes.

    I was rounding off our previous discussion when I'd suggested that deferring consumption should be the starting point of the analysis and then time preference and liquidity come out of that.

    My point wasn't to suggest that there is no difference between different ways of deferring consumption.

    Of course there is. I was just pointing out the critical issue - that consumption is being postponed.

  9. Joseph Salerno criticizes Murphy's concept of saving:

  10. @Ivan

    Salerno too is putting the deferral of consumption at the heart of the matter

    That was precisely my point to Bob (carried over from conversation).