Saving and Investment

“He who does not take into consideration the scarcity of capital goods available is not an economist, but a fabulist. He does not deal with reality but with a fabulous world of plenty.” – Ludwig von Mises, Human Action, Page 844

Every waking moment of every day, we are faced with decisions. In deciding upon on the purchase of some item, we must necessarily abandon the purchase of alternative items. In choosing how to spend our time, we prefer some activities over all others. It is near impossible to be both an accomplished concert pianist and a world renowned physicist.

Each and every time the clock ticks, that second is lost to mankind for eternity. A morsel of food is eaten and digested but once. The tires on our cars are worn down with every revolution of the wheel until eventually the tire pops and we have to go out and buy a new set. Desktop computer freeze up and are replaced by iPads. We all grow old and die.

Such is the nature of the world that we inhabit. It is a world of scarce resources.

The first task of the human being is to stay alive. In order to do so, he or she must produce enough food, shelter, and clothing to bear the elements. After the food has been eaten and the clothes and shelter are worn out, these items must be produced again….and again…..and again. Life is a constant struggle.

There comes a time though, through the application of hard work and experience, when an individual learns to produce more than they need to survive just the immediate future. Their production outstrips their consumption. They’re able to save. Savings are nothing more that a surplus of production over consumption.

A decision must be made. What will be done with the savings? The excess production can be stored away in a safe place. When times get tough and production wanes, the backup can be used to endure. The saver can take time off of work and live off of their savings for awhile. Savings can be used for recreation. Or, the savings can be invested.

Investment allows certain people to develop new technologies without starving to death in the meantime. If you make $5,000 dollars but you only need $3,000 to survive, your savings are $2,000. Imagine now that you have a brilliant friend who in his free time has figured out how to build a machine that will make your work more efficient. He would build the machine for you but he can’t take the time off of from his own work. After all, he needs to survive too. You tell him to quit his job, you’ll use your savings to pay his salary and buy the materials for the machine. This is investing.

Once the machine is built, if it works as advertised, instead of making $5,000 you make $10,000. The new machine allows you to produce more with the same amount of effort. Your savings are now $7,000 instead of $2,000. You decide to keep investing. You higher more people and build more machines. More and more stuff is produced, jobs are created, the economy grows. The scarcity problem goes into retreat. It can never be completely eliminated but it can be progressively minimized.

Eventually, however, the machines will wear out and a new decision will have to be made: should the machines be replaced or not? If you choose to replace the machines, production will continue unperturbed. It will require more savings and investment though. Otherwise, you can say nuts to replacing the machines. You decide to take a vacation with the savings instead. With every machine that is worn out and not replaced, production decreases. Scarcity reasserts itself in force. The economy shrinks, the machine operators are fired, everybody gets poorer.

This leads us to an interesting conclusion. Savings, investment, and production make us richer. Consumption makes us poorer. We are told the exact opposite everyday by the experts and by the government. They want to stimulate consumption. They want to boost aggregate demand. Get out there and buy something! You’re a consumer darn it! Consume already!

What they don’t seem to realize is that in a world of scarcity, consumption comes at the expense of savings and investment. If we consume more we necessarily save less. Investment can’t occur without savings. To stimulate the economy by pushing consumption is to make us all poorer in the long run.

Economists want the government to run huge deficits in order to stimulate the economy. According to their theories, if regular people won’t get out there and consume, the government must step in and do it for them. Since people are unwilling to countenance higher taxes, the government borrows the money needed to consume more.

In today’s modern economy, most of us outsource our investment decisions. We buy mutual funds consisting of stocks and bonds or we leave our money in the bank. When you buy a mutual fund you give your money to the fund’s managers and say to them “Here, you invest it for me.” According to their brochures they’ve studied the market and they know where the good investments are. If you leave your money with a bank, they lend it out. It doesn’t matter if you have a checking or a savings account. The bankers invest it in something.

To the extent that the people investing our money invest in new technology, more machines, more efficient production techniques, new businesses, etc. the economy grows and prospers. If banks and mutual funds give the money to the government in order to stimulate consumption, or if bankers and fund managers use the money to buy $2,000 suits and Ferraris for themselves, our savings are consumed and the economy goes into retrograde.

In an age where the government is running trillion dollar deficits year after year and interest rates in the United States are at all time lows, its safe to assume that much of the economy’s savings are being consumed. The government keeps issuing debt and the investors keep buying the debt. The vast majority of the federal budget consists of entitlement programs and military spending, see here. Money is being spent on building stuff that gets blown up, people sitting at desks in government offices, and consumption for old and poor people.

No wonder it feels like we’re all getting poorer. Most of us are.

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