WEBVTT NOTE The Concept of Gross Savings 1 00:00:00.000 --> 00:00:06.080 Before I present my paper, I would like to clarify two things. 2 00:00:06.080 --> 00:00:12.520 The first is what I'm going to do is not a critique of the structure of production. 3 00:00:12.520 --> 00:00:17.360 I think that the structure of production is a very useful concept 4 00:00:17.360 --> 00:00:22.040 and it's very useful in explaining capital theory and production theory. 5 00:00:22.040 --> 00:00:26.800 And to prove this, I've bought this t-shirt. 6 00:00:26.800 --> 00:00:43.800 And the second point is, I will proceed very fast, I will sidestep some problems that you can find in my paper because I think it is necessary to do this without this, I couldn't drive home my main point. 7 00:00:43.800 --> 00:01:05.800 Now to the first slide. This is the craft that Rothbard uses in his Man Economy and State to depict, to show the structure of production and I think that you are all familiar with this craft. 8 00:01:05.800 --> 00:01:34.800 And just a few comments. I think that he or the Austrians use pictures like this in order to demonstrate first that capital is not homogeneous, so that there are different stages of production and that investment can have different maturities and this can be seen as you think that there are different stages of production which have a different time length which separates them from each other. 9 00:01:35.800 --> 00:01:44.200 from the Final Output of Consumption Goods and second this structure of production demonstrates 10 00:01:44.200 --> 00:01:50.400 that production takes time. In this case the whole production process has six stages and 11 00:01:50.400 --> 00:01:59.080 it takes six years and both these points are not considered by mainstream Keynesian economists 12 00:01:59.080 --> 00:02:07.480 and it has a place in Austrian economics in order to demonstrate what cannot be explained 13 00:02:07.480 --> 00:02:11.560 by the Keynesian framework. 14 00:02:11.560 --> 00:02:17.800 Some short remarks to the logic of this structure of production. 15 00:02:17.800 --> 00:02:28.600 This structure shows all the spendings that happen during one period in an economy. 16 00:02:28.600 --> 00:02:44.320 The Expandages by the Consumers, 100 oz at the bottom, they pay 100 oz of gold for consumer 17 00:02:44.320 --> 00:02:51.680 goods and then these 100 oz are received by the capitalists of the first stage. 18 00:02:51.680 --> 00:02:59.180 These capitalists of the first stage pay first 15 ounces to the factor owners, owners of 19 00:02:59.180 --> 00:03:07.540 land and labor, and they pay in addition 80 ounces for input that is delivered by capitalists 20 00:03:07.540 --> 00:03:10.900 of the second stage. 21 00:03:10.900 --> 00:03:14.940 The capitalists of the second stage receive 80 ounces, and the difference between what 22 00:03:14.940 --> 00:03:21.420 they pay, these 80 ounces and 15 ounces, and what they receive from the consumers, it's 23 00:03:21.420 --> 00:03:29.060 5 ounces in this case this is their profit or in equilibrium it would be their interest 24 00:03:29.060 --> 00:03:37.260 income and the same can be said about the capitalists of the second stage they pay in 25 00:03:37.260 --> 00:03:42.940 this case 16 ounces to land and labor and they pay 60 ounces of gold to the capitalists 26 00:03:42.940 --> 00:03:53.060 of the Second Stage and they earn four ounces of interest income and this can be continued. 27 00:03:53.060 --> 00:03:57.100 All stages can be explained the same way. 28 00:03:57.100 --> 00:04:05.820 Now to the concept of gross savings and gross investment, Rothbard calls all spending by 29 00:04:05.820 --> 00:04:11.940 the capitalists of the different stages gross investments and says that these gross investments 30 00:04:11.940 --> 00:04:18.140 are equal to gross savings, the gross investments are financed by gross savings. 31 00:04:18.140 --> 00:04:23.460 So they are necessarily equal and in this case you can see in the whole structure of 32 00:04:23.460 --> 00:04:30.260 production gross savings are first the 80 ounces the capitalists of the first stage 33 00:04:30.260 --> 00:04:36.500 pay to the capitalists of the second stage plus the 15 ounces paid to the land and labor, 34 00:04:36.500 --> 00:04:42.180 Again the 60 ounces that the capitalists of the second stage pay to the capitalists of 35 00:04:42.180 --> 00:04:46.860 the third stage and the 16 ounces to lead and labor and so forth. 36 00:04:46.860 --> 00:04:54.740 Together we have gross investment and gross saving of 318 ounces in this structure of 37 00:04:54.740 --> 00:05:00.500 production as shown in Rothbard's Man Economy and State. 38 00:05:00.500 --> 00:05:07.780 Now why does Rothbard employ the concept of growth investment and growth saving? 39 00:05:07.780 --> 00:05:18.280 He wants to show that the consumption expenditure, these 100 at the bottom, are less important 40 00:05:18.280 --> 00:05:23.020 than mainstream Keynesian economists would maintain. 41 00:05:23.020 --> 00:05:30.420 Keynesians would say that it's especially consumption expenditures that drive the economy. 42 00:05:30.420 --> 00:05:36.460 This expenditure is needed to keep production going. 43 00:05:36.460 --> 00:05:44.380 And Rothbard says the spending by capitalists, the 318 ounces, this spending is much more 44 00:05:44.380 --> 00:05:45.380 important. 45 00:05:45.380 --> 00:05:51.580 You know, here it's 318 ounces compared to 100 ounces by consumers, so it's much more 46 00:05:51.580 --> 00:05:56.520 important and it's this gross savings, the gross investments that drive the economy rather 47 00:05:56.520 --> 00:05:59.260 than consumption expenditure. 48 00:05:59.260 --> 00:06:06.260 and he employs this concept of gross savings also to demonstrate that the conventional 49 00:06:06.860 --> 00:06:13.860 cross-national income, cross-national expenditure figures are not really gross figures. They 50 00:06:14.740 --> 00:06:20.220 are not showing what is produced in the economy. They do not show what is spent in the economy. 51 00:06:20.220 --> 00:06:25.820 It only includes consumption expenditures and expenditures on new capital goods and 52 00:06:25.820 --> 00:06:33.100 and Depreciation, but it does not include the spendings between the different stages, 53 00:06:33.100 --> 00:06:41.860 which is part of gross savings. Although Rothbard thinks that these gross investment drives 54 00:06:41.860 --> 00:06:49.780 the economy and are necessary as he expresses it to prevent us from barbarism, so to prevent 55 00:06:49.780 --> 00:06:53.660 and as from the production of suction falling down. 56 00:06:53.660 --> 00:07:02.660 Now I argue in my paper that this concept, the concept of growth saving does not contain 57 00:07:02.660 --> 00:07:07.100 the amount of useful information that Rothbard maintains. 58 00:07:07.100 --> 00:07:17.100 I rather argue that it is an arbitrary concept and that these 318 ounces that are shown here 59 00:07:17.100 --> 00:07:23.100 in this graph of gross savings are an arbitrary figure, and this I want to demonstrate in 60 00:07:23.100 --> 00:07:24.980 the following. 61 00:07:24.980 --> 00:07:32.140 That this point has not been recognized so far can be imputed, in my opinion, to the 62 00:07:32.140 --> 00:07:35.380 assumption the concept rests upon. 63 00:07:35.380 --> 00:07:41.940 Rothbard assumes that each stage takes the same length of time and that this length is 64 00:07:41.940 --> 00:07:44.860 one year for all stages. 65 00:07:44.860 --> 00:07:49.140 It is true, Rothbard declares that, I quote, 66 00:07:49.140 --> 00:07:52.780 it is not necessary to make any restrictive assumptions 67 00:07:52.780 --> 00:07:55.540 about how many separate stages occur 68 00:07:55.540 --> 00:07:59.900 or what the time intervals between individual stages 69 00:07:59.900 --> 00:08:02.860 might be, end quote. 70 00:08:02.860 --> 00:08:07.720 However, he provides no proof for this claim, 71 00:08:07.720 --> 00:08:10.800 at least no proof concerning the gross savings. 72 00:08:10.800 --> 00:08:18.800 And furthermore, during the rest of the discussion, he assumes, as I said, the same time length for all stages. 73 00:08:18.800 --> 00:08:31.800 He says that he does so for convenience only, but it can be shown, and I try it here, that it is impossible to relax this assumption. 74 00:08:31.800 --> 00:08:42.600 If one does relax the assumption, the concept of gross investment and gross savings falls into pieces. 75 00:08:42.600 --> 00:08:50.200 And that is what I'm going to do now. I'm going to relax this assumption that every stage takes one year. 76 00:08:50.200 --> 00:09:02.200 So what I'm going to do is to construct a graph which shows the same production process as this graph. 77 00:09:02.200 --> 00:09:10.200 So it's totally the same, the same tools are employed, the same machines, the same workers or the same amount of workers. 78 00:09:10.200 --> 00:09:17.200 The only difference is that the time length of the stages is cut in half. 79 00:09:17.200 --> 00:09:24.700 So, what has been done before by one capitalist in one stage is now done by two capitalists 80 00:09:24.700 --> 00:09:32.420 in two subsequent stages, which each only take half a year instead of one year as before. 81 00:09:32.420 --> 00:09:35.680 So you can see this here. 82 00:09:35.680 --> 00:09:42.860 We've got the same income of labor and land, 83 ounces as before. 83 00:09:42.860 --> 00:09:50.860 We have the same income of capitalists, 17 ounces of interest income. 84 00:09:50.860 --> 00:10:00.660 Of course, these payments to land and labor and the interest income is now paid per stage 85 00:10:00.660 --> 00:10:09.340 and each stage takes only half a year, so the payments per stage are smaller. 86 00:10:09.340 --> 00:10:16.100 So interest is paid for half a year, not for the whole of a year and also Rothbard recognizes 87 00:10:16.100 --> 00:10:21.100 that interest income would change the way as I have shown it. 88 00:10:21.100 --> 00:10:26.700 What I've done of course is that I've rounded the figures in order to make this graph easier 89 00:10:26.700 --> 00:10:30.180 comparable to the other graph. 90 00:10:30.180 --> 00:10:38.460 Now before I come to the role of growth savings in this graph, I have to deal with one problem 91 00:10:38.460 --> 00:10:47.620 The problem is that in the first graph all spendings that were shown related to one period, 92 00:10:47.620 --> 00:10:53.700 the period of one year, all spendings by capitalists and consumers. 93 00:10:53.700 --> 00:10:59.240 This also depicts all spendings within one period. 94 00:10:59.240 --> 00:11:04.380 The difference is that now this period where this happens is only half a year. 95 00:11:04.380 --> 00:11:06.220 So there's indeed a change. 96 00:11:06.220 --> 00:11:13.820 The two graphs differ also in the length of the period that it depicts. 97 00:11:13.820 --> 00:11:22.720 So if I would take this structure of production here, which is only for half a year, then 98 00:11:22.720 --> 00:11:26.020 I would have to explain, okay, what happens during the rest of the year. 99 00:11:26.020 --> 00:11:31.220 Of course, production goes on and then the output for the whole year would double, would 100 00:11:31.220 --> 00:11:32.220 be double the output. 101 00:11:32.220 --> 00:11:38.220 So this structure of production is so far not comparable to the structure of production before. 102 00:11:38.220 --> 00:11:53.220 What I have to do before in order to make them comparable is to regard not half a year as year but the whole year with double the number of stages. 103 00:11:53.220 --> 00:11:57.220 So what I have to do is to cut this structure in half. 104 00:11:57.220 --> 00:12:16.220 What I've done here, it's MS Paint by the way, and now I can compare this graph to the first one by Rothbard because now I can say what happens during the first half of the year is what you see on the left. 105 00:12:16.220 --> 00:12:25.220 There the first half of all consumer output is produced and sold for 50 ounces instead of 100. 106 00:12:25.220 --> 00:12:40.220 And on the right side you see what happens during the second half of the year and then the second half of the consumer goods is produced and sold also for 50 ounces. 107 00:12:40.220 --> 00:12:49.220 And again, the whole income of land and labor is 83 ounces, like in the example of Rothbard. 108 00:12:49.220 --> 00:13:11.220 and the whole interest income is 17 ounces, the output is the same structure, the production process is the same only that now it's 12 stages that produce the output instead of 6 stages, that was the case before in Rothbard. 109 00:13:11.220 --> 00:13:33.220 Now, I'm sure that not everybody has understood now what I'm saying because I think it's rather complicated and this is the reason why Rothbard said that it is very inconvenient to let the assumption go that each stage takes one year. 110 00:13:33.220 --> 00:13:39.220 He said it's inconvenient and now you see why. It's inconvenient. You have two graphs instead of one. 111 00:13:39.220 --> 00:13:47.220 But now I come to the additional problem that I focus on, the growth savings or the growth investments. 112 00:13:47.220 --> 00:13:58.220 As you can see in this graph and also in the last one, the amount of growth savings has changed considerably. 113 00:13:58.220 --> 00:14:07.220 Now the spending of capitalists between the stages and to land and labor has increased. 114 00:14:07.220 --> 00:14:16.220 Before it has been 318 now, and you can count yourself, it's 597 ounces. 115 00:14:16.220 --> 00:14:26.220 So the amount of spending has nearly doubled as I cut the time length of the stages in half. 116 00:14:26.220 --> 00:14:32.220 Growth savings has nearly doubled, but otherwise the production is the same as before. 117 00:14:32.220 --> 00:14:38.220 As before, the production process is the same, only the growth savings have changed because 118 00:14:38.220 --> 00:14:41.660 of the number of stages it has changed. 119 00:14:41.660 --> 00:14:50.900 And by now, it should be clear that if I decrease the time length of the stages even more, then 120 00:14:50.900 --> 00:14:58.780 also the spending between the stages and growth savings will increase even more. 121 00:14:58.780 --> 00:15:06.820 So in the end, I argue, the amount of spending of capitalists, that is, gross investment 122 00:15:06.820 --> 00:15:12.680 and gross savings, depends on the number of stages of the production structure. 123 00:15:12.680 --> 00:15:17.860 If many capitalists share in the production of the final output, in other words, if there 124 00:15:17.860 --> 00:15:24.740 are a lot of stages owned by different capitalists, then the intermediate goods will change hands 125 00:15:24.740 --> 00:15:26.900 very often. 126 00:15:26.900 --> 00:15:30.860 In this case there will be a lot of gross savings or gross investments. 127 00:15:30.860 --> 00:15:37.380 If on the other hand only few different capitalists participate in production, intermediate goods 128 00:15:37.380 --> 00:15:43.420 will change hands only rarely and therefore the amount of gross savings will be low. 129 00:15:43.420 --> 00:15:52.700 Just consider one extreme case, one extreme example where only one capitalist owns the 130 00:15:52.700 --> 00:15:56.180 whole structure of production. 131 00:15:56.180 --> 00:16:02.500 So he owns all stages, now you don't know whether you can call it stages, but he owns 132 00:16:02.500 --> 00:16:05.980 the whole production structure. 133 00:16:05.980 --> 00:16:10.140 So then there are zero payments between the stages, of course, because the capitalist 134 00:16:10.140 --> 00:16:13.120 won't pay himself. 135 00:16:13.120 --> 00:16:19.940 So the spending of capitalists only consists of the payment of income, of the income of 136 00:16:19.940 --> 00:16:21.900 land and labor. 137 00:16:21.900 --> 00:16:26.220 So the growth savings are very, very small in this case. 138 00:16:26.220 --> 00:16:30.620 So I come to my conclusion. 139 00:16:30.620 --> 00:16:39.500 What I try to show in my paper is that the amount of growth investment, of growth savings 140 00:16:39.500 --> 00:16:41.380 is arbitrary. 141 00:16:41.380 --> 00:16:46.820 It can be high or it can be low and this only depends on the way the production process 142 00:16:46.820 --> 00:16:49.120 is organized. 143 00:16:49.120 --> 00:16:50.300 So this is my main point. 144 00:16:50.300 --> 00:16:59.340 I just want to stress at the finish what I do not want to say. 145 00:16:59.340 --> 00:17:06.140 I do not say that consumer expenditures are decisive and drive the economy. 146 00:17:06.140 --> 00:17:12.620 That I criticize the concept of gross investments and gross savings does not imply that I consider 147 00:17:12.620 --> 00:17:17.540 the structure of production of the capitalists to be unnecessary. 148 00:17:17.540 --> 00:17:24.020 It is still true that the income of land and labor and the net income, the interest of 149 00:17:24.020 --> 00:17:28.940 the capitalists of the higher stages derives from the payments of the capitalists of the 150 00:17:28.940 --> 00:17:33.980 lower stages, not from the expenditures of the consumers. 151 00:17:33.980 --> 00:17:40.180 Net income is paid out of capital and therefore the building up of capital by saving out of 152 00:17:40.180 --> 00:17:44.420 income is crucial for maintaining the structure of production. 153 00:17:44.420 --> 00:17:51.500 However, in order to demonstrate this point, the concept of gross savings is not necessary 154 00:17:51.500 --> 00:17:53.860 or it's even misleading. 155 00:17:53.860 --> 00:18:00.380 That wages are paid out of capital is a very old insight and it has been stressed by the 156 00:18:00.380 --> 00:18:05.420 classical economists in their so-called wages fund theory, which I would call today the 157 00:18:05.420 --> 00:18:07.500 subsistence fund theory. 158 00:18:07.500 --> 00:18:15.540 So again, my conclusion is read the great book of Richard von Striegel Capital and Production. 159 00:18:15.540 --> 00:18:16.980 Thank you very much for your attention.