Saving Is the Key

July 13, 1959

For 25 years the Western world, and particularly Washington, has been dominated by the economic philosophy of The General Theory of Employment, Interest, and Money by John Maynard Keynes. That philosophy, as commonly interpreted, supports a program of deficit financing and inflation, of ever-rising money wages (never to be adjusted downward) and of low interest rates under all conditions. Above all the Keynesian philosophy deplores saving, which it calls hoarding or “liquidity preference,” and blames as the primary cause of slumps.

In my book The Failure of the ‘New Economics’ (Van Nostrand, $7.50), I examine the General Theory chapter by chapter and theorem by theorem, calling attention to its many fallacies, contradictions, and errors of fact. But Keynes’s own book might never have been written if he had devoted some of his days and nights to a careful study of the Austrian economist Eugen von Böhm-Bawerk (1851–1914).

Böhm-Bawerk’s two volumes on Capital and Interest had been published respectively in 1884 and 1889. English translations by William Smart appeared respectively in 1890 and 1891. But Böhm-Bawerk subsequently made extensive revisions and additions, and published second and third editions, also adding a third volume, over the following 25 years. These were never translated. English-reading economists based their interpretation of Böhm-Bawerk, at best, on the Smart translation. Now, however, a new translation has appeared, by George D. Huncke and Hans F. Sennholz, of the whole three volumes of the fourth (posthumous) Austrian edition of 1921 (Libertarian Press, South Holland, Ill., $25).

CAPITAL AND INTEREST

Böhm-Bawerk made greater contributions to the theory of capital and interest than any other economist. Knut Wicksell called The Positive Theory of Capital (the second volume) “one of the finest achievements of economic theory.” It would be impossible, of course, to review or summarize here these three volumes of more than 1,200 closely packed pages. But Böhm-Bawerk’s name is most closely associated with one doctrine that “a wisely chosen selection or extension of a roundabout way of production generally results in greater productivity.”

Keynes’s knowledge and criticism of Böhm-Bawerk seem to have been taken at second hand from Alfred Marshall: “It is true,” wrote Keynes in the General Theory, “that some lengthy or roundabout processes are physically efficient. But so are some short processes. Lengthy processes are not physically efficient because they are long.” But this was explicitly and emphatically conceded by Böhm-Bawerk himself: “Above all, my thesis does not state that every lengthening of every production process must literally and without exception lead to higher productivity or that a process must be more productive just because it is more time-consuming, even if it has been blindly or impractically chosen.” In short, more time-consuming roundabout ways of production are chosen, in spite of the fact that they are more time-consuming and round about, because they are also more productive, and hence in the long run more economical.

CAPITAL FORMATION

Keynes might have gained even more from a study of Böhm-Bawerk. He might have been brought to recognize the fallacies in his own fear of saving. “Economic growth,” higher real wages and living standards, are possible only through new capital formation. The rate of economic growth depends on the rate of capital formation. “Production and saving,” as Böhm-Bawerk pointed out, “constitute equally indispensable conditions of the formation of capital.”

This is what Keynes tended constantly to overlook. He persistently regarded saving as something merely negative, a mere non-spending. And here Böhm-Bawerk could have reminded him: “To complete the act of forming capital it is of course necessary to complement the negative factor of saving with the positive factor of devoting the thing saved to a productive purpose. . . . [But] saving is an indispensable condition precedent to the formation of capital.”