The Concept of Gross Savings

0:00Before I present my paper, I would like to clarify two things. The first is what I'm going to do is not a critique of the structure of production. I think that the structure of production is a very useful concept and it's very useful in explaining capital theory and production theory. And to prove this, I've bought this t-shirt. 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. 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.

1:05And 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. from the Final Output of Consumption Goods and second this structure of production demonstrates that production takes time. In this case the whole production process has six stages and it takes six years and both these points are not considered by mainstream Keynesian economists and it has a place in Austrian economics in order to demonstrate what cannot be explained by the Keynesian framework.

2:11Some short remarks to the logic of this structure of production. This structure shows all the spendings that happen during one period in an economy. The Expandages by the Consumers, 100 oz at the bottom, they pay 100 oz of gold for consumer goods and then these 100 oz are received by the capitalists of the first stage. These capitalists of the first stage pay first 15 ounces to the factor owners, owners of land and labor, and they pay in addition 80 ounces for input that is delivered by capitalists of the second stage.

3:10The capitalists of the second stage receive 80 ounces, and the difference between what they pay, these 80 ounces and 15 ounces, and what they receive from the consumers, it's 5 ounces in this case this is their profit or in equilibrium it would be their interest income and the same can be said about the capitalists of the second stage they pay in this case 16 ounces to land and labor and they pay 60 ounces of gold to the capitalists of the Second Stage and they earn four ounces of interest income and this can be continued. All stages can be explained the same way.

3:57Now to the concept of gross savings and gross investment, Rothbard calls all spending by the capitalists of the different stages gross investments and says that these gross investments are equal to gross savings, the gross investments are financed by gross savings. So they are necessarily equal and in this case you can see in the whole structure of production gross savings are first the 80 ounces the capitalists of the first stage pay to the capitalists of the second stage plus the 15 ounces paid to the land and labor, Again the 60 ounces that the capitalists of the second stage pay to the capitalists of the third stage and the 16 ounces to lead and labor and so forth.

4:46Together we have gross investment and gross saving of 318 ounces in this structure of production as shown in Rothbard's Man Economy and State. Now why does Rothbard employ the concept of growth investment and growth saving? He wants to show that the consumption expenditure, these 100 at the bottom, are less important than mainstream Keynesian economists would maintain. Keynesians would say that it's especially consumption expenditures that drive the economy. This expenditure is needed to keep production going.

5:36And Rothbard says the spending by capitalists, the 318 ounces, this spending is much more important. You know, here it's 318 ounces compared to 100 ounces by consumers, so it's much more important and it's this gross savings, the gross investments that drive the economy rather than consumption expenditure. and he employs this concept of gross savings also to demonstrate that the conventional cross-national income, cross-national expenditure figures are not really gross figures. They are not showing what is produced in the economy. They do not show what is spent in the economy. It only includes consumption expenditures and expenditures on new capital goods and and Depreciation, but it does not include the spendings between the different stages, which is part of gross savings. Although Rothbard thinks that these gross investment drives the economy and are necessary as he expresses it to prevent us from barbarism, so to prevent and as from the production of suction falling down.

6:53Now I argue in my paper that this concept, the concept of growth saving does not contain the amount of useful information that Rothbard maintains. I rather argue that it is an arbitrary concept and that these 318 ounces that are shown here in this graph of gross savings are an arbitrary figure, and this I want to demonstrate in the following. That this point has not been recognized so far can be imputed, in my opinion, to the assumption the concept rests upon. Rothbard assumes that each stage takes the same length of time and that this length is one year for all stages.

7:44It is true, Rothbard declares that, I quote, it is not necessary to make any restrictive assumptions about how many separate stages occur or what the time intervals between individual stages might be, end quote. However, he provides no proof for this claim, at least no proof concerning the gross savings. And furthermore, during the rest of the discussion, he assumes, as I said, the same time length for all stages. 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.

8:31If one does relax the assumption, the concept of gross investment and gross savings falls into pieces. And that is what I'm going to do now. I'm going to relax this assumption that every stage takes one year. So what I'm going to do is to construct a graph which shows the same production process as this graph. So it's totally the same, the same tools are employed, the same machines, the same workers or the same amount of workers. The only difference is that the time length of the stages is cut in half.

9:17So, what has been done before by one capitalist in one stage is now done by two capitalists in two subsequent stages, which each only take half a year instead of one year as before. So you can see this here. We've got the same income of labor and land, 83 ounces as before. We have the same income of capitalists, 17 ounces of interest income. Of course, these payments to land and labor and the interest income is now paid per stage and each stage takes only half a year, so the payments per stage are smaller.

10:09So interest is paid for half a year, not for the whole of a year and also Rothbard recognizes that interest income would change the way as I have shown it. What I've done of course is that I've rounded the figures in order to make this graph easier comparable to the other graph. Now before I come to the role of growth savings in this graph, I have to deal with one problem The problem is that in the first graph all spendings that were shown related to one period, the period of one year, all spendings by capitalists and consumers. This also depicts all spendings within one period.

10:59The difference is that now this period where this happens is only half a year. So there's indeed a change. The two graphs differ also in the length of the period that it depicts. So if I would take this structure of production here, which is only for half a year, then I would have to explain, okay, what happens during the rest of the year. Of course, production goes on and then the output for the whole year would double, would be double the output. So this structure of production is so far not comparable to the structure of production before. 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.

11:53So what I have to do is to cut this structure in half. 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. There the first half of all consumer output is produced and sold for 50 ounces instead of 100. 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.

12:40And again, the whole income of land and labor is 83 ounces, like in the example of Rothbard. 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. 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.

13:33He said it's inconvenient and now you see why. It's inconvenient. You have two graphs instead of one. But now I come to the additional problem that I focus on, the growth savings or the growth investments. As you can see in this graph and also in the last one, the amount of growth savings has changed considerably. Now the spending of capitalists between the stages and to land and labor has increased. Before it has been 318 now, and you can count yourself, it's 597 ounces. So the amount of spending has nearly doubled as I cut the time length of the stages in half.

14:26Growth savings has nearly doubled, but otherwise the production is the same as before. As before, the production process is the same, only the growth savings have changed because of the number of stages it has changed. And by now, it should be clear that if I decrease the time length of the stages even more, then also the spending between the stages and growth savings will increase even more. So in the end, I argue, the amount of spending of capitalists, that is, gross investment and gross savings, depends on the number of stages of the production structure.

15:12If many capitalists share in the production of the final output, in other words, if there are a lot of stages owned by different capitalists, then the intermediate goods will change hands very often. In this case there will be a lot of gross savings or gross investments. If on the other hand only few different capitalists participate in production, intermediate goods will change hands only rarely and therefore the amount of gross savings will be low. Just consider one extreme case, one extreme example where only one capitalist owns the whole structure of production. So he owns all stages, now you don't know whether you can call it stages, but he owns the whole production structure.

16:05So then there are zero payments between the stages, of course, because the capitalist won't pay himself. So the spending of capitalists only consists of the payment of income, of the income of land and labor. So the growth savings are very, very small in this case. So I come to my conclusion. What I try to show in my paper is that the amount of growth investment, of growth savings is arbitrary. It can be high or it can be low and this only depends on the way the production process is organized. So this is my main point. I just want to stress at the finish what I do not want to say.

16:59I do not say that consumer expenditures are decisive and drive the economy. That I criticize the concept of gross investments and gross savings does not imply that I consider the structure of production of the capitalists to be unnecessary. It is still true that the income of land and labor and the net income, the interest of the capitalists of the higher stages derives from the payments of the capitalists of the lower stages, not from the expenditures of the consumers. Net income is paid out of capital and therefore the building up of capital by saving out of income is crucial for maintaining the structure of production.

17:44However, in order to demonstrate this point, the concept of gross savings is not necessary or it's even misleading. That wages are paid out of capital is a very old insight and it has been stressed by the classical economists in their so-called wages fund theory, which I would call today the subsistence fund theory. So again, my conclusion is read the great book of Richard von Striegel Capital and Production. Thank you very much for your attention.