Time and Money: The Macroeconomics of Capital Structure
London: Routledge, 2001
Also see: http://www.auburn.edu/~garriro
Forced Saving and Overconsumption
in the Mises-Hayek Theory of the Business Cycle
http://www.auburn.edu/~garriro/strigl.htm
FD
HAYEK
…..VS
.MISES
Characteristics of a credit-driven boom:
Hayek: Forced Saving
ANTONYMS?
FD
Mises: Overconsumption and Malinvestment
Characteristics of a credit-driven boom:
Hayek: Forced Saving
Forced Saving is a pattern of investment
FD
inconsistent with saving preferences.
Mises: Overconsumption and Malinvestment
Malinvestment is a pattern of investment
inconsistent with saving preferences.
Characteristics of a credit-driven boom:
Hayek: Forced Saving
SYNONYMS
FD
??????
Mises: Overconsumption and Malinvestment
Figure 4.4 from
Time and Money
Padding the supply of loanable
funds with newly created money
drives a wedge between saving
and investment.
Figure 4.4 from
Time and Money
The artificially low rate of interest
incites a tug-of-war between
investors and consumers.
Figure 4.4 from
Time and Money
The tug-of-war affects the pattern of
allocation among the stages of
production: Both ends of the capital
structure are pulled against the
middle.
The limits of
overinvestment and
of overconsumption
can be identified in
terms of a one-sided
tug-of-war.
PRODUCTION POSSIBILITIES FRONTIER
First, suppose that
consumers fully
cooperated (or were
somehow forced to
cooperate) in freeing
up resources for use
by investors.
PRODUCTION POSSIBILITIES FRONTIER
The
Thehorizontal
economy would
movement
movecould
alongbe
thetermed
PPF
overinvestment;
to a point of lower
the
vertical
consumption
movement
and
could
greater
beinvestment.
termed
forced saving.
Second, suppose
that investors fully
cooperated (or were
somehow forced to
cooperate) in freeing
up resources for use
by consumers.
PRODUCTION POSSIBILITIES FRONTIER
Second, suppose
that investors fully
cooperated (or were
somehow forced to
cooperate) in freeing
up resources for use
by consumers.
PRODUCTION POSSIBILITIES FRONTIER
The
moveThevertical
economy
would
ment
movecould
alongbe
thetermed
PPF
overconsumption;
to a point of less the
horizontal
investmentmovement
and
could
beconsumption.
termed
greater
forced disinvestment.
To some
With
neither
limited
consumers
extent, both
nor investors
can
prevail—temporarily.
cooperating
with one another, we get a
But the path beyond the PPF
two-sided tug-of-war—with
has an investment bias to it
the combatants pulling at
because of the artificially low
right angles to one
rate of interest.
another.
PRODUCTION POSSIBILITIES FRONTIER
Figure 4.4 from
Time and Money
If a lower interest rate is
attributable to an increase in
saving, then the economy
will move along the PPF to
an new equilibrium point.
Hayek argued as if incomeearners were somehow
forced to cooperate initially
but eventually countered the
shift of resources by
spending their increased
incomes on consumption
goods….
And he argued that the
recovery could be derailed
by a secondary contraction.
Hayek’s discussion of the situation created by cheapcredit investment boom is to the point: “[A]s thing are,
for some time, society as a whole will have to put up
with an involuntary reduction of consumption.”
For him, the eventual increased consumption
characterizes the end of the boom.
Using italics, he makes the “fundamental point” that
the increase in consumer demand means “a new and
reversed change of proportion between the demand
for consumers’ goods and the demand for producers’
goods in favor of the former.”
Problems with Hayek’s construction:
1. It takes “forced saving” in the sense of a pattern of
investment at odds with saving preferences to
mean also saving in the sense of abstaining from
consumption.
2. It leaves Hicks’ question about the lag between
credit expansion and increased consumer
spending unanswered.
3. It denies one of the most salient features of an
credit-induced boom—increased consumption.
Mises recognized that the
counterforces would be in
play from the outset. His
reasoning suggests that the
economy would be pushed
beyond the PPF with an
investment bias.
According to Mises (TMC), “A time must necessarily
come when the means of subsistence available for
consumption are all used up although the capital
goods employed in production have not yet been
transformed into consumption goods. This time must
come all the more quickly inasmuch as the fall in the
rate of interest weakens the motive for saving and
slows up the rate of capital accumulation” (emphasis
added).
And from Mises Human Action:
The overconsumption “squanders capital and impairs the
future state of want-satisfaction.”
Also, “the immediate consequence of credit expansion is
a rise in consumption on the part of those wage earners
whose wages have risen on account of the intensified
demand for labor displayed by the expanding
entrepreneurs” (emphasis added).
“[T]he boom itself does not result in a restriction but
rather in an increase in consumption” (emphasis added).
And again, “the boom affects also the consumers’ goods
industries. They too invest more and expand their
production capacity.”
A summary comparison:
Hayek sees the boom-bust cycle as forced saving, which
is eventually countered by intensified consumption
demand.
Mises sees the boom as malinvestment, which is
immediately compounded by overconsumption.
HAYEK v. MISES:
“eventually countered” v “immediately compounded”
HAYEK and MISES:
A credit-driven boom constains the seeds of its own undoing.
The artificially low interest rate encoursges the initiation of
more long-term projects than can actually be completed.
On the eve of the bust, distress borrowing allows some
producers to finish their projects and minimize their losses.
In this phase, the high interest rates bolstered by distress
borrowing cause people to curtail their consumption and to
save instead. The resources thus freed up constitute an
explicit form of “forced saving”–a term used more broadly by
Hayek to characterize all the boom-related commitments of
resources that are at odds with consumers’ time preferences.
With scope for sustaining the boom on the basis of forced
saving severely limited, the economy is forced to adjust to a
slower growth path.