[ronigafni]

I have read about this from Peter Schiff and Robert Murphy but I never seem fully satisfied with my ability to respond to people when they say that spending, and not savings, is what the economy needs now because if people spend the the retailers will have more money and expand which will then give the wholesalers more business so they can expand which will the pump more business in to makers of capital good etc… What is a good way to express how it is savings that makes an economy grow and specifically now we need more of that and not more spending?

[jmherbener]

The premise shared by both sides of your debate is incorrect. The physical aspects of human action are adjusted to satisfy preferences, not the other way around. We don’t change our preferences (e.g., increase consumption) to invigorate production or change our preferences (e.g., save and invest more) to stimulate economic growth, we arrange production to satisfy our preferences, including our time preferences. The economy is our concerted effort to arrange production in a division of labor to best satisfy our preferences. If our preferences shift toward consumption and away from saving, the market economy will shift production away from building up the capital structure to producing consumer goods more directly to give us what we prefer. If our preferences shift toward saving and away from consumption, the market economy will shift production toward building up the capital structure to give us what we prefer.

The problem of the boom and bust is that the monetary inflation and credit expansion of the boom generate a build up of the capital structure that does not satisfy our time preferences. During the bust (i.e., right now), the question is how to economize the transition of the distorted capital structure into the form that best satisfies our preferences. The basic answer is to let entrepreneurs alone to do their task. This task will be made easier if people lower their time preferences. By saving and investing more, they give entrepreneurs command over more resources to make the transition and less liquidation overall will need to be done if time preferences stay lower. The entrepreneurs’ task will be made more difficult if people increase their consumption because they will command fewer resources to make the transition and more liquidation will need to be done if time preferences stay higher.

The problem with the argument that consumption spending determines investment spending through the interconnectedness of production through the capital structure (instead of saving determining investment spending via time preferences) is that it ignores time. Mining company entrepreneurs must spend now to buy inputs to produce iron, then, steel companies must spend in the near future to buy the iron and other inputs, then, auto companies must spend in the later future to buy the steel and other inputs, then, consumers spend in the even later future to buy the autos. Obviously consumption today can only generate revenue in the future for producers. But, the goods must already have been produced to be bought and paid for by consumers. Therefore, producers must have saved and invested in the past to produce the goods sold today and must be saving and investing today to produce the goods which will be sold in the future. In a market economy the inter-temporal dimension of production is account for through the time market,

[ronigafni]

Wow, that was incredible and really cleared a lot of things up. One follow up though… You wrote “By saving and investing more, they give entrepreneurs command over more resources to make the transition and less liquidation overall will need to be done if time preferences stay lower. ”
This would also seem to reveal another great evil of debt/deficit spending on the part of the Federal Government. By crowding out credit for entrepreneurs (since they need to borrow that money for themselves) and forcing a greater amount of necessary liquidation that can only be solved (in the ruling classes mind) by printing more money for them (thereby further distorting the market). Is that about right?

[jmherbener]

Indeed, that’s correct.

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