de Soto, Capítulo 5, Seção 2 de Money, Bank Credit, and Economic Cycles

THE RICARDO EFFECT

All increases in voluntary saving exert a particularly important, immediate effect on the level of real wages. Chart V-2 shows how the monetary demand for consumer goods falls by one-fourth (from 100 m.u. to 75 m.u.), due to the rise in saving. Hence it is easy to understand why increases in saving are generally followed by decreases in the prices of final consumer goods.* If, as generally occurs, the wages or rents of the original factor labor are initially held constant in nominal terms, a decline in the prices of final consumer goods will be followed by a rise in the real wages of workers employed in all stages of the productive structure. With the same money income in nominal terms, workers will be able to acquire a greater quantity and quality of final consumer goods and services at consumer goods’ new, more reduced prices.

This increase in real wages, which arises from the growth in voluntary saving, means that, relatively speaking, it is in the interest of entrepreneurs of all stages in the production process to replace labor with capital goods. To put it another way, via an increase in real wages, the rise in voluntary saving sets a trend throughout the economic system toward longer and more capital-intensive productive stages. In other words, entrepreneurs now find it more attractive to use, relatively speaking, more capital goods than labor. This constitutes a third powerful, additional effect tending toward the lengthening of the stages in the productive structure. It adds to and overlaps the other two effects mentioned previously. 

The first to explicitly refer to this third effect was David Ricardo. He did so in his book, On the Principles of Political Economy and Taxation, the first edition of which was published in 1817. Here Ricardo concludes that 

[e]very rise of wages, therefore, or, which is the same thing, every fall of profits, would lower the relative value of those commodities which were produced with a capital of a durable nature, and would proportionally elevate those which were produced with capital more perishable. A fall of wages would have precisely the contrary effect.**

In the well-known appendix “On Machinery,” which was added in the third edition, published in 1821, Ricardo concludes that “[m]achinery and labour are in constant competition, and the former can frequently not be employed until labour rises.”*** 

The same idea was later recovered by F.A. Hayek, who, beginning in 1939, applied it extensively in his writings on business cycles. Here we will for the first time use it, integrated with the prior two effects, to explain the consequences an upsurge in voluntary saving has on the productive structure and to detract from theories on the so-called “paradox of thrift” and the supposedly negative influence of saving on effective demand. Hayek offers a very concise explanation of the “Ricardo Effect” when he states that 

[w]ith high real wages and a low rate of profit investment will take highly capitalistic forms: entrepreneurs will try to meet the high costs of labour by introducing very labour-saving machinery—the kind of machinery which it will be profitable to use only at a very low rate of profit and interest.****

Hence the “Ricardo Effect” is a third microeconomic explanation for the behavior of entrepreneurs, who react to an upsurge in voluntary saving by boosting their demand for capital goods and by investing in new stages further from final consumption. 

It is important to remember that all increases in voluntary saving and investment initially bring about a decline in the production of new consumer goods and services with respect to the short-term maximum which could be achieved if inputs were not diverted from the stages closest to final consumption. This decline performs the function of freeing productive factors necessary to lengthen the stages of capital goods furthest from consumption.*****Furthermore the consumer goods and services left unsold as a result of the rise in voluntary saving play a role remarkably similar to that of the accumulated berries in

our Robinson Crusoe example. The berries permitted Crusoe to sustain himself for the number of days required to produce his capital equipment (the wooden stick); during this time period he was not able to devote himself to picking berries “by hand.” In a modern economy, consumer goods and services which remain unsold when saving increases fulfill the important function of making it possible for the different economic agents (workers, owners of natural resources and capitalists) to sustain themselves during the time periods that follow. During these periods the recently-initiated lengthening of the productive structure causes an inevitable slowdown in the arrival of new consumer goods and services to the market. This “slowdown” lasts until the completion of all of the new, more capital-intensive processes that have been started. If it were not for the consumer goods and services that remain unsold due to saving, the temporary drop in the supply of new consumer goods would trigger a substantial rise in the relative price of these goods and considerable difficulties in the provision of them.******

*As Hayek indicates, these reductions in prices may take some time, depending upon the rigidity of each market, and at any rate, they will be less than proportional to the fall in demand that accompanies saving. If this were not the case, saving would not entail any actual sacrifice and the stock of consumer goods necessary to sustain economic agents while more capital-intensive processes are completed would not be left unsold. See F.A. Hayek, “Reflections on the Pure Theory of Money of Mr. J.M. Keynes (continued),” Economica 12, no. 35 (February 1932): 22–44, republished in The Collected Works of F.A. Hayek, vol. 9: Contra Keynes and Cambridge: Essays, Correspondence, Bruce Caldwell, ed. (London: Routledge, 1995), pp. 179–80.

**See David Ricardo, The Works and Correspondence of David Ricardo, vol. 1: On the Principles of Political Economy and Taxation, Piero Sraffa and M.H. Dobb, eds. (Cambridge: Cambridge University Press, 1982), pp. 39–40.

***Ibid., p. 395. 

****See Hayek, “Profits, Interest and Investment” and Other Essays on the Theory of Industrial Fluctuations, p. 39. Shortly afterward, in 1941, F.A. Hayek briefly touched on this effect in relation to the impact an increase in voluntary saving exerts on the productive structure, though he did not expressly quote Ricardo. This is the only instance we know of in which the “Ricardo Effect” is directly applied to an analysis of the consequences of a rise in voluntary saving, and not to the role the effect plays in the different phases of the business cycle, theorists’ predominant concern up until now. The excerpt in question is found on p. 293 of The Pure Theory of Capital (London: Macmillan, 1941), and successively reprinted thereafter (we quote from the 1976 Routledge reprint). It reads as follows: “The fall in the rate of interest may . . . drive up the price of labour to such an extent as to enforce an extensive substitution of machinery for labour.” Hayek later returned to the topic in his article, “The Ricardo Effect,” published in Economica 34, no. 9 (May 1942): 127–52, and republished as chapter 11 of Individualism and Economic Order (Chicago: University of Chicago Press, 1948), pp. 220–54. Thirty years later he dealt with it again in his article, “Three Elucidations of the Ricardo Effect,” published in the Journal of Political Economy 77, no. 2 (1979), and reprinted as chapter 11 of the book New Studies in Philosophy, Politics, Economics and the History of Ideas (London: Routledge and Kegan Paul, 1978), pp. 165–78. Mark Blaug recently admitted that his criticism of the “Ricardo Effect” in his book, Economic Theory in Retrospect (Cambridge: Cambridge University Press, 1978), pp. 571–77, was based on an error in interpretation regarding the supposedly static nature of Hayek’s analysis. See Mark Blaug’s article entitled “Hayek Revisited,” published in Critical Review 7, no. 1 (Winter, 1993): 51–60, and esp. note 5 on pp. 59–60. Blaug acknowledges that he discovered his error thanks to an article by Laurence S. Moss and Karen I. Vaughn, “Hayek’s Ricardo Effect: A Second Look,” History of Political Economy 18, no. 4 (Winter, 1986): 545–65. For his part, Mises (Human Action, pp. 773–77) has criticized the emphasis placed on the Ricardo Effect in order to justify a forced increase in wages through union or government channels with the purpose of raising investment in capital goods. He concludes that such a policy only gives rise to unemployment and a poor allocation of resources in the productive structure, since the policy does not stem from an increase in society’s voluntary saving, but rather from the simple coercive imposition of artificially high wages. Rothbard expresses a similar view in Man, Economy, and State (pp. 631–32). Hayek does so as well in The Pure Theory of Capital (p. 347), where he concludes that dictatorially- imposed growth in wages produces not only a rise in unemployment and a fall in saving, but also generalized consumption of capital combined with an artificial lengthening and narrowing of the stages in the productive structure.

*****See Hayek, The Pure Theory of Capital, p. 256.

******In the words of Hayek himself: All that happens is that at the earlier date the savers consume less than they obtain from current production, and at the later date (when current production of consumers’ goods has decreased and additional capital goods are turned out . . .) they are able to consume more consumers’ goods than they get from current production. (Hayek, The Pure Theory of Capital, p. 275.

de Soto, Capítulo 6, Seção 12 de Money, Bank Credit, and Economic Cycles

THE NECESSARY TIGHTENING OF CREDIT IN

THE RECESSION STAGE: CRITICISM OF THE

THEORY OF “SECONDARY DEPRESSION”

We will now consider three different types of deflation, defined as any decrease in the quantity of money “in circulation.” Deflation consists of a drop in the money supply or a rise in the demand for money, and other things being equal, it tends to cause an increase in the purchasing power of the monetary unit (i.e., a decline in the “general price level”). Nevertheless it is important to avoid confusing deflation with its most typical, pronounced effect (the fall in the general price level), given that in certain cases the prices of goods and services decrease in the absence of deflation. As we have seen, this is part of the healthy growth process of an economy whose productivity is improving due to the incorporation of new technologies and to capital accumulation which arises from the entrepreneurial spirit and from the natural increase in the voluntary saving of its agents. We studied this process in previous sections, and without any decrease in the quantity of money in circulation, it gives rise to a widespread increase in the production of consumer goods and services, which can only be sold at lower prices. Thus the process results in a real rise in wages and in the income of the other original means of production, because although the income of workers and of the other owners of original factors may remain fairly constant in nominal terms, the prices of the consumer goods and services workers acquire drop considerably. In this case the decline in the general price level is not monetary in origin, but real, and it derives from the generalized increase in the productivity of the economy. Hence this phenomenon is completely unrelated to deflation as we have defined it, and is simply a sign of the healthiest and most natural process of economic development. 


Nonetheless we will now examine three distinct types of deflation (strictly defined as any decline in the supply of or increase in the demand for money) which have radically different causes and consequences. Let us analyze these types of deflation in detail:


(a) The first type consists of policies adopted by public authorities to deliberately reduce the quantity of money in circulation. Such policies have been implemented on various historical occasions and trigger aprocess by which the purchasing power of the monetary unit tends to increase. Moreover this forced decrease in the quantity of money in circulation distorts the structure of society’s productive stages. Indeed the reduction in the quantity of money initially brings about a decline in loan concession and an artificial increase in the market interest rate, which in turn leads to a flattening of the productive structure, a modification forced by strictly monetary factors (and not by the true desires of consumers). Consequently many profitable capital goods stages in the productive structure erroneously appear unprofitable (especially those furthest from consumption and most capital-intensive). As a result the most specialized companies in capital-intensive sectors sustain widespread accounting losses. Furthermore in all sectors the reduced monetary demand is unaccompanied by a parallel, equally-rapid decline in costs, and thus accounting losses arise and pessimism becomes generalized. In addition the increase in the purchasing power of the monetary unit and the decrease in the products’ selling price cause a substantial rise in the real income of the owners of the original means of production, who, to the extent their prices are rigid and do not fall at the same rate as those of consumer goods, will tend to become unemployed. Therefore a prolonged, painful adjustment period begins and lasts until the entire productive structure and all original factors have adjusted to the new monetary conditions. This whole process of deliberate deflation contributes nothing and merely subjects the economic system to unnecessary pressure. Regrettably, politicians’ lack of theoretical knowledge has led them on various historical occasions to deliberately initiate such a process.


(b) The second type of deflation, which should be clearly distinguished from the first, occurs when economic agents decide to save; that is, to refrain from consuming a significant portion of their income and to devote all or part of the monetary total saved to increasing their cash balances (i.e., to hoarding)*. In this case, the rise in the demand for money tends to push up the purchasing power of the monetary unit (in other words, it tends to push down the “general price level”). However this type of deflation differs radically from the former in the sense that it does make a contribution, since it originates from an increase in the saving of economic agents, who thus free resources in the form of unsold consumer goods and services. [...] [T]he “Ricardo Effect” appears, due to the drop in the relative prices of consumer goods, which in turn leads to an increase, other things being equal, in the real wages of workers and in the income of the other original means of production. Hence the processes which trigger a lengthening of the productive structure are set in motion. The productive structure becomes more capital-intensive, due to the new investment projects undertaken, projects entrepreneurs will be able to complete because productive resources have been freed in the stages closest to consumption. The only difference between this situation and that of an increase in voluntary saving which is immediately and directly invested in the productive structure or capital markets is as follows: when saving manifests itself as a rise in cash balances, there is a necessary decline in the price of consumer goods and services and in the price of products from the intermediate stages, as well as an inevitable reduction in the nominal income of the original means of production and in wages, all of which adapt to the increased purchasing power of the monetary unit. Nevertheless unlike the first type of deflation mentioned, this type does not entail a painful process which contributes nothing. Instead here it is based on effective saving which causes a rise in society’s productivity. The lengthening of the productive structure and the reallocation of the factors of production occur to the extent there is a change in the relative prices of the products from the intermediate stages and from the final stage, consumption. Such a change is independent of whether, in absolute, nominal terms, all prices must drop (to a varying extent) as a consequence of the increased purchasing power of the monetary unit.**  


(c) The third type of deflation we will consider results from the tightening of credit which normally occurs in the crisis and recession stage that follows all credit expansion[...]: just as credit expansion increases the quantity of money in circulation, the massive repayment of loans and the loss of value on the assets side of banks’ balance sheets, both caused by the crisis, trigger an inevitable, cumulative process of credit tightening which reduces the quantity of money in circulation and thus generates deflation. This third type of deflation arises when, as the crisis is emerging, not only does credit expansion stop increasing, but there is actually a credit squeeze and thus, deflation, or a drop in the money supply, or quantity of money in circulation. Nevertheless this sort of deflation differs from that analyzed in (a) above and produces various positive effects which merit our attention. First, deflation caused by the tightening of credit does not give rise to the unnecessary maladjustments referred to in section (a); instead it facilitates and accelerates the liquidation of the investment projects launched in error during the expansionary phase. Therefore it is the natural market reaction necessary for a rapid liquidation of the investment projects undertaken in error during the expansionary stage. A second positive effect of credit deflation is that it in a sense reverses the redistribution of income which took place in the expansionary stage of the inflationary boom. In fact inflationary expansion tended to bring about a decrease in the purchasing power of money, which in turn reduced the real income of everyone on a fixed income (savers, widows, orphans, pensioners) in favor of those who first received the loans of the banking system and first experienced an increase in monetary income. Now, in the stage of credit tightening, this forced redistribution of income reverses in favor of those who in the expansionary stage were the first harmed, and thus people on a fixed income (widows, orphans, and pensioners) will gain an advantage over those who most exploited the situation in the earlier stage. Third, credit deflation generally makes business ventures appear less profitable, since historical costs are recorded in monetary units with less purchasing power, and later, accounting income is recorded in monetary units with more purchasing power. As a result entrepreneurial profits are artificially diminished in account books, prompting entrepreneurs to save more and distribute less in the form of dividends (exactly the opposite of what they did in the expansionary phase). This tendency to save is highly favorable to the commencement of economic recovery***. The decline, provoked by the tightening of credit, in the quantity of money in circulation undoubtedly tends to drive up the purchasing power of the monetary unit. An inevitable drop in the wages and income of the original means of production follows, though at first this decrease will be more rapid than the reduction in the price of consumer goods and services, if such a reduction takes place. Consequently, in relative terms, the wages and income of the original means of production will decline, leading to an increased hiring of workers over machines and a massive transfer of workers toward the stages closest to consumption. In other words the credit squeeze reinforces and accelerates the necessary “flattening” of the productive structure, a process which accompanies thebrecession. It is essential that labor markets be flexible in every aspect, in order to facilitate the massive transfers of productive resources and labor. The sooner the readjustment is completed and the effect of loans granted for erroneous investment projects is eliminated, the sooner the foundations of the subsequent recovery will be laid. The recovery will be characterized by a restoration of the relative price of the original means of production, i.e., by a decrease in the price of consumer goods and services. This reduction in the price of consumer goods and services will be greater, in relative terms, than the drop in wages, due to an increase in society’s general saving, which will again stimulate growth in the capital goods stages. This growth will be achievable, given that it will originate from a rise in voluntary saving. As Wilhelm Röpke reasonably concludes, this third type of deflation (the result of the credit squeeze that follows the crisis) 

is the unavoidable reaction to the inflation of the boom and must not be counteracted, otherwise a prolongation and aggravation of the crisis will ensue, as the experiences in the United States in 1930 have shown.

Under certain conditions, government and union intervention, along with the institutional rigidity of the markets, may prevent the necessary readjustments which precede any recovery of economic activity. If wages are inflexible, hiring conditions very rigid, union power great and governments succumb to the temptation of protectionism, then extremely high unemployment can actually be maintained indefinitely, without any adjustment to new economic conditions on the part of the original means of production. Under these circumstances a cumulative process of contraction may also be triggered. By such a process the massive growth of unemployment would give rise to a widespread decrease in demand, which in turn would provoke new doses of unemployment, etc. Some theorists have used the term secondary depression to refer to this process, which does not arise from spontaneous market forces, but from coercive government intervention in labor markets, products, and international trade. In some instances, “secondary depression” theorists have considered the mere possibility of such a situation a prima facie argument to justify government intervention, encouraging new credit expansion and public spending. However the only effective policy for avoiding a “secondary depression,” or for preventing the severity of one, is to broadly liberalize markets and resist the temptation of credit expansion policies. Any policy which tends to keep wages high and make markets rigid should be abandoned. These policies would only make the readjustment process longer and more painful, even to the point of making it politically unbearable. 

What should be done if, under certain circumstances, it appears politically “impossible” to take the measures necessary to make labor markets flexible, abandon protectionism and promote the readjustment which is the prerequisite of any recovery? This is an extremely intriguing question of economic policy, and its answer must depend on a correct evaluation of the severity of each particular set of circumstances. Although theory suggests that any policy which consists of an artificial increase in consumption, in public spending and in credit expansion is counterproductive, no one denies that, in the short run, it is possible to absorb any volume of unemployment by simply raising public spending or credit expansion, albeit at the cost of interrupting the readjustment process and aggravating the eventual recession. Nonetheless Hayek himself admitted that, under certain circumstances, a situation might become so desperate that politically the only remaining option would be to intervene again, which is like giving a drink to a man with a hangover. In 1939 Hayek made the following related comments: 

it has, of course, never been denied that employment can be rapidly increased, and a position of “full employment” achieved in the shortest possible time by means of monetary expansion. . . . All that has been contended is that the kind of full employment which can be created in this way is inherently unstable, and that to create employment by these means is to perpetuate fluctuations. There may be desperatevsituations in which it may indeed be necessary to increase employment at all costs, even if it be only for a short period—perhaps the situation in which Dr. Brüning found himself in Germany in 1932 was such a situation in which desperate means would have been justified. But the economist should not conceal the fact that to aim at the maximum of employment which can be achieved in the short run by means of monetary policy is essentially the policy of the desperado who has nothing to lose and everything to gain from a short breathing space. [Hayek, Profits, Interest and Investment, footnote 1 on pp. 63–64]

Now let us suppose politicians ignore the economist’s recommendations and circumstances do not permit the liberalization of the economy, and therefore unemployment becomes widespread, the readjustment is never completed and the economy enters a phase of cumulative contraction. Furthermore let us suppose it is politically impossible to take any appropriate measure and the situation even threatens to end in a revolution. What type of monetary expansion would be the least disturbing from an economic standpoint? In this case the policy with the least damaging effects, though it would still exert some very harmful ones on the economic system, would be the adoption of a program of public works which would give work to the unemployed at relatively reducedwages, so workers could later move on quickly to other more profitable and comfortable activities once circumstances improved. At any rate it would be important to refrain from the direct granting of loans to companies from the productive stages furthest from consumption. Thus a policy of government aid to the unemployed, in exchange for the actual completion of works of social value at low pay (in order to avoid providing an incentive for workers to remain chronically unemployed) would be the least debilitating under the extreme conditions described above unemployed) would be the least debilitating under the extreme conditions described above

* It is also possible, in theory and in practice, for economic agents to raise their cash balances (demand for money) without at all modifying their volume of monetary consumption. They can do this by disinvesting in productive resources and selling capital goods. This leads to a flattening of the productive structure and brings about the widespread impoverishment of society through a process which is the exact opposite of the one we analyzed with respect to a lengthening (financed by growth in voluntary saving) of the productive structure. resources have been freed in the stages closest to consumption.

**48 Whenever an individual devotes a sum of money to saving instead of spending it for consumption, the process of saving agrees perfectly with the process of capital accumulation and investment. It does not matter whether the individual saver does or does not increase his cash holding. The act of saving always has its counterpart in a supply of goods produced and not consumed, of goods available for further production activities. A man’s savings are always embodied in concrete capital goods. . . . The effect of our saver’s saving, i.e., the surplus of goods produced over goods consumed, does not disappear on account of his hoarding. The prices of capital goods do not rise to the height they would have attained in the absence of such hoarding. But the fact that more capital goods are available is not affected by the striving of a number of people to increase their cash holdings. . . . The two processes—increased cash holding of some people and increased capital accumulation—take place side by side. (Mises, Human Action, pp. 521–22)

***An analysis of the positive effects of this third type of deflation (caused by the tightening of credit in the recession stage of the cycle) can be found in Rothbard, Man, Economy, and State, pp. 863–71. See also Mises, Human Action, pp. 566–70. Furthermore Mises indicates that despite its negative effects, the deflationary squeeze is never as damaging as credit expansion, because contraction produces neither malinvestment nor overconsumption. The temporary restriction in business activities that it engenders may by and large be offset by the drop in consumption on the part of the discharged wage earners and the owners of the material factors of production the sales of which drop. No protracted scars are left. When the contraction comes to an end, the process of readjustment does not need to make good for losses caused by capital consumption. (Mises, Human Action, p. 567)

o que nos remete, via de Soto, a Böhm-Bawerk

"To illustrate this important concept, we will use the
example given by Böhm-Bawerk to explain the process of saving
and investment in capital goods carried out by an individual
actor in an isolated situation, such as Robinson Crusoe
on his island.*

Let us suppose that Robinson Crusoe has just arrived on
his island and spends his time picking berries by hand, his
only means of subsistence. Each day he devotes all of his
efforts to gathering berries, and he picks enough to survive
and can even eat a few extra daily. After several weeks on this
diet, Robinson Crusoe makes the entrepreneurial discovery
that with a wooden stick several meters long, he could reach
higher and further, strike the bushes with force and gather the
necessary berries much quicker. The only problem is that he
estimates it could take him five whole days to find a suitable
tree from which to take the stick and then to prepare it by
pulling off its branches, leaves, and imperfections. During this
time he will be compelled to interrupt his berry picking. If he
wants to produce the stick, he will have to reduce his consumption
of berries for a time and store the remainder in a
basket until he has enough to survive for five days, the predicted
duration of the production process of the wooden
stick. After planning his action, Robinson Crusoe decides to
undertake it, and therefore he must first save a portion of the
berries he picks by hand each day, reducing his consumption
by that amount. This clearly means he must make an
inevitable sacrifice, which he nevertheless deems well worth
his effort in relation to the goal he longs to achieve. So he

decides to reduce his consumption (in other words, to save)
for several weeks while storing his leftover berries in a basket
until he has accumulated an amount he believes will be sufficient
to sustain him while he produces the stick.

This example shows that each process of investment in
capital goods requires prior saving; that is, a decrease in consumption,
which must fall below its potential level.** Once
Robinson Crusoe has saved enough berries, he spends five
days searching for a branch from which to make his wooden
stick, separating it from the tree and perfecting it. What does
he eat during the five days it takes him to prepare the stick, a
production process which forces him to interrupt his daily
harvest of berries? He simply consumes the berries he accumulated
in the basket over the preceding several-week period
during which he saved the necessary portion from his handpicked
berries and experienced some hunger. In this way, if
Robinson Crusoe’s calculations were correct, at the end of five
days he will have the stick (a capital good), which represents
an intermediate stage removed in time (by five days of saving)
from the immediate processes of the berry production (by
hand) which up to that point had occupied him. With the finished
stick Robinson Crusoe can reach places inaccessible to
him by hand and strike the bushes with force, multiplying his
production of berries by ten. As a result, from that point on his
stick enables him to gather in one-tenth of a day the berries he

needs to survive, and he can spend the rest of his time resting
or pursuing subsequent goals that are much more important
to him (like building a hut or hunting animals to vary his diet
and make clothes).

Robinson Crusoe’s production process, like any other,
clearly arises from an act of entrepreneurial creativity, the
actor’s realization that he stands to benefit, i.e., he can accomplish
ends more valuable to him, by employing action
processes which require a longer period of time (because they
include more stages). Thus action or production processes
yield capital goods, which are simply intermediate economic
goods in an action process whose aim has not yet been
reached. The actor is only willing to sacrifice his immediate
consumption (i.e., to save) if he thinks that by doing so he will
achieve goals he values more (in this case, the production of
ten times more berries than he could gather by hand). Furthermore
Robinson Crusoe must attempt to coordinate as well as
possible his present behavior with his foreseeable future behavior.
More specifically, he must avoid initiating action processes
that are excessively long in relation to his savings: it would be
tragic for him to run out of berries (that is, to consume all he
has saved) halfway through the process of producing a capital
good and without reaching his goal. He must also refrain
from saving too much with respect to his future investment
needs, since by doing so he would only unnecessarily sacrifice
his immediate consumption. Robinson Crusoe’s subjective
assessment of his time preference is precisely what
enables him to adequately coordinate or adjust his present
behavior in relation to his future needs and behavior. On the
one hand, the fact that his time preference is not absolute
makes it possible for him to forfeit some of his present consumption
over a period of several weeks with the hope of
thus being able to produce the stick. On the other hand, the
fact that he does have a time preference explains why he only
devotes his efforts to creating a capital good he can produce
in a limited period of time and which requires sacrificing and
saving for a limited number of days. If Robinson Crusoe had
no time preference, nothing would stop him from dedicating
all of his efforts to building a hut right away (which, forexample, might take him a month minimum), a plan he
would not be able to carry out without first having saved a
large quantity of berries. Therefore he would either starve to
death or the project, out of all proportion to his potential saving,
would soon be interrupted and abandoned. At any rate, it
is important to understand that the real saved resources (the
berries in the basket) are precisely the ones which enable
Robinson Crusoe to survive during the time period he spends
producing the capital good and during which he ceases to
gather berries directly. Even though Robinson Crusoe is
undoubtedly much more productive harvesting berries with
his wooden stick than he is with his bare hands, there is also
no doubt that the process of berry production using the stick
is a more lengthy one in terms of time (it includes more stages)
than the production process of berry picking by hand. Production
processes tend to increase in length and duration (i.e.,
to become more complex and include more stages) as a result
of the saving and entrepreneurial activity of humans; and the
longer and more time-consuming these processes become, the
more productive they tend to be."


*This is the classic example given by Eugen von Böhm-Bawerk, Kapital

und Kapitalzins: Positive Theorie des Kapitales (Innsbruck: Verlag der Wagner’schen
Universitäts-Buchhandlung, 1889), pp. 107–35. This work has
been translated into English by Hans F. Sennholz, Capital and Interest,
vol. 2: Positive Theory of Capital (South Holland, Ill.: Libertarian Press,
1959), pp. 102–18.



**Saving always results in capital goods, even when initially these
merely consist of the consumer goods (in our example the “berries”)
which remain unsold (or are not consumed). Then gradually some capital
goods (the berries) are replaced by others (the wooden stick), as the
workers (Robinson Crusoe) combine their labor with natural resources
through a process which takes time and which humans are able to go
through due to their reliance on the unsold consumer goods (the saved
berries). Hence saving produces capital goods first (the unsold consumer
goods that remain in stock) which are gradually used up and
replaced by another capital good (the wooden stick). On this important
point, see Richard von Strigl, Capital and Production, edited with an
introduction by Jörg Guido Hülsmann (Auburn, Ala.: Mises Institute,
2000), pp. 27 and 62."

[footnotes do livro, mas é claro; página 325 e seguintes]

outra pérola de de Soto

[relacionada ao anterior postado]


"This situation is very similar
to the one in which our Robinson Crusoe from section 1
would find himself if, having saved a basket of berries large
enough to permit him to spend a maximum of five days producing
a capital good without having to devote himself to the
collection of more berries, through an error in calculation he
were to believe that this amount of savings would allow him
to undertake the construction of his cabin. After five days
spent just digging the foundations and gathering materials, he
would have consumed all of his berries and would therefore
be unable to complete his illusory investment project"

THE SELF-DESTRUCTIVE NATURE OF THE ARTIFICIAL BOOMS CAUSED BY CREDIT EXPANSION: THE THEORY OF “FORCED SAVING”

[Quarta parte do sexto capítulo do livro Money, Bank Credit, and Economic Cycles, de Jesús Huerta de Soto]

In the broad sense of the term, “forced saving” arises whenever there is an increase in the quantity of money in circulation or an expansion of bank credit (unbacked by voluntary saving) which is injected into the economic system at a specific point. If the money or credit were evenly distributed among all economic agents, no “expansionary” effect would appear, except the decrease in the purchasing power of the monetary unit in proportion to the rise in the quantity of money. However if the new money enters the market at certain specific points, as always occurs, then in reality a relatively small number of economic agents initially receive the new loans. Thus these economic agents temporarily enjoy greater purchasing power, given that they possess a larger number of monetary units with which to buy goods and services at market prices that still have not felt the full impact of the inflation and therefore have not yet risen. Hence the process gives rise to a redistribution of income in favor of those who first receive the new injections or doses of monetary units, to the detriment of the rest of society, who find that with the same monetary income, the prices of goods and services begin to go up. “Forced saving” affects this second group of economic agents (the majority), since their monetary income grows at a slower rate than prices, and they are thereforeobliged to reduce their consumption, other things being equal.*

Whether this phenomenon of forced saving, which is provoked by an injection of new money at certain points in the market, leads to a net increase or decrease in society’s overall, voluntary saving will depend on the circumstances specific to each historical case. In fact if those whose income rises (those who first receive the new money created) consume a proportion of it greater than that previously consumed by those whose real income falls, then overall saving will drop. It is also conceivable that those who benefit may have a strong inclination to save, in which case the final amount of saving might be positive. At any rate the inflationary process unleashes other forces which impede saving: inflation falsifies economic calculation by generating fictitious accounting profits
which, to a greater or lesser extent, will be consumed. Therefore it is impossible to theoretically establish in advance whether the injection of new money into circulation at specific points in the economic system will result in a rise or a decline in society’s overall saving.**

In a strict sense, “forced saving” denotes the lengthening (longitudinal) and widening (lateral) of the capital goodsstages in the productive structure, changes which stem from credit expansion the banking system launches without the support of voluntary saving. As we know, this process initially generates an increase in the monetary income of the original means of production, and later, a more-than-proportional rise in the price of consumer goods (or in the gross income of consumer goods industries, if productivity increases). In fact, the circulation credit theory of the business cycle explains the theoretical microeconomic factors which determine that the attempt to force a more capital-intensive productive structure, without the corresponding backing of voluntary saving, is condemned to failure and will invariably reverse, provoking economic crises and recessions. This process is almost certain to entail an eventual redistribution of resources which in some way modifies the overall voluntary saving ratio that existed prior to the beginning of credit expansion. However unless the entire process is accompanied by a simultaneous, independent, and spontaneous increase in voluntary saving of an amount at least equal to the newly-created credit banks extend ex nihilo, it will be impossible to sustain and complete the new, more capital-intensive stages undertaken, and the typical reversion effects we have examined in detail will appear, along with a crisis and economic recession. Moreover the process involves the squandering of numerous capital goods and society’s scarce resources, making society poorer. As a result, by and large, society’s voluntary saving ultimately tends to shrink rather than grow. At any rate, barring dramatic, spontaneous, unforeseen increases in voluntary saving, which for argument’s sake we exclude at this point from the theoretical analysis (which furthermore always involves the assumption that other things remain equal), credit expansion will provoke a self-destructive boom, which sooner or later will revert in the form of an economic crisis and recession. This demonstrates the impossibility of forcing the economic development of society by artificially encouraging investment and initially financing it with credit expansion, if economic agents are unwilling to voluntarily back such a policy by saving more. Therefore society’s investment cannot possibly exceed its voluntary saving for long periods (this would constitute an alternative definition of “forced saving,” one more in line with the Keynesian analysis, as F.A. Hayekcorrectly indicates).*** Instead, regardless of the final amount of saving and investment in society (always identical ex post), all that is achieved by an attempt to force a level of investment which exceeds that of saving is the general malinvestment of the country’s saved resources and an economic crisis always destined to make it poorer.****

*Consequently in its broadest sense, “forced saving” refers to the forced expropriation to which banks and monetary authorities subject most of society, producing a diffuse effect, when they decide to expand
credit and money, diminishing the purchasing power of the monetary units individuals possess, in relation to the value these units would have in the absence of such credit and monetary expansion. The funds derived from this social plunder can either be completely squandered (if their recipients spend them on consumer goods and services or sink them into utterly mistaken investments), or they can become business or other assets, which either directly or indirectly come, de facto, under the control of banks or the state. The first Spaniard to correctly analyze this inflationary process of expropriation was the scholastic Father Juan de Mariana, in his work, De monetae mutatione, published in 1609. In it he
writes:

If the prince is not a lord, but an administrator of the goods of individuals, neither in that capacity nor in any other will he be able to seize a part of their property, as occurs each time the currency is devalued, since they are given less in place of what is worth more; and if the prince cannot impose taxes against the will of his vassals nor create monopolies, he will not be able to do so in this capacity either, because it is all the same, and it is all depriving the people of their goods, no matter how well disguised by giving the coins a legal value greater than their actual worth, which are all deceptive, dazzling fabrications, and all lead to the same outcome. (Juan de Mariana, Tratado y discurso sobre la moneda de vellón que al presente se labra en Castilla y de algunos desórdenes y abusos [Treatise and Discourse on the Copper Currency which is now Minted in Castile and on Several Excesses and Abuses], with a preliminary study by Lucas Beltrán [Madrid: Instituto de Estudios Fiscales, Ministerio de Economía y Hacienda, 1987], p. 40; italics added)

Asomewhat different translation from the original text in Latin has been more recently published in English. Juan de Mariana, S.J., A Treatise on the Alteration of Money, translation by Patrick T. Brannan, S.J. Introduction by Alejandro A. Chafuen, Journal of Markets and Morality 5, no. 2 (Fall, 2002): 523–93. The quotation is on page 544 (12 of the translation).

**Joseph A. Schumpeter attributes the appropriate expression “forced saving” (in German, Erzwungenes Sparen or Zwangssparen) to Ludwig von Mises in his book, The Theory of Economic Development, first published in German in 1911 (The Theory of Economic Development [Cambridge, Mass.: Harvard University Press, 1968], p. 109). Mises acknowledges having described the phenomenon in 1912 in the first German edition of his book, The Theory of Money and Credit, though he indicates he does not believe he used the particular expression Schumpeter attributes to him. In any case Mises carefully analyzed the phenomenon of forced saving and theoretically demonstrated that it is impossible to predetermine whether or not net growth in voluntary saving will follow from an increase in the amount of money in circulation. On this topic see On the Manipulation of Money and Credit, pp. 120, 122 and 126–27. Also Human Action, pp. 148–50. Mises first dealt with the subject in The Theory of Money and Credit, p. 386. Though we will continue to attribute the term “forced saving” to Mises, a very similar expression, “forced frugality,” was used by Jeremy Bentham in 1804 (see Hayek’s article, “A Note on the Development of the Doctrine of ‘Forced Saving,’” published as chapter 7 of Profits, Interest and Investment, pp. 183–97). As Roger Garrison has aptly revealed, a certain disparity exists between Mises’s concept of forced saving (what we refer to as “the broad sense” of the term) and Hayek’s concept of it (which we will call “the strict sense”), and thus “what Mises termed malinvestment is what Hayek called forced savings.” See Garrison, “Austrian Microeconomics: A Diagrammatical Exposition,” p. 196.

***See Hayek, “A Note on the Development of the Doctrine of ‘Forced Saving,’” p. 197. See also the comments on Cantillon and Hume’s contributions in chapter 8, pp. 615–20.

****Fritz Machlup has compiled up to 34 different concepts of “forced saving” in his article, “Forced or Induced Saving: An Exploration into its Synonyms and Homonyms,” The Review of Economics and Statistics 25, no. 1 (February 1943); reprinted in Fritz Machlup, Economic Semantics (London: Transaction Publishers, 1991), pp. 213–40.

MISES DAILY, 30 de Dezembro de 2011

"A popular argument (employed and nourished by more than a few prestigious economists like Schumpeter) holds that credit expansion and low interest rates facilitate the introduction of technological and entrepreneurial innovations, which foster economic development. The argument is contemptible. In a market economy it is as important to provide financing for solvent, viable entrepreneurial projects as it is to deny it for nonviable, harebrained ones: many "entrepreneurs" are like runaway horses, and we must limit their chances of trampling on society's scarce resources.

The problem is that only the market is capable of distinguishing between these two types of projects, and it does so by a social process in which key elements are precisely the indicator of the real amount of saved resources and the social rate of time preference, which helps separate the projects that should be financed from those whose time has not yet come and which therefore must remain "in the pipeline." It is true that every artificial expansion of credit and of the fiduciary media that back it provoke a redistribution of income in favor of those who first receive the new available funds and that this does not permit us to theorize about the net effects the process will have on society's real saving. (That will depend on how the time preference of those who come out ahead compares with that of those who come out behind.) However, there are more than enough signs that inflation discourages real saving, if only because it generates an illusion of wealth, which stimulates spending on consumer goods and capital consumption."

ou então:

"3. Is It True that Banks Caused the Crisis by Incurring Risks Disproportionate to Their Capital?

To attribute the crisis to the bad conduct of bankers is to confuse the symptoms with the causes. After all, during the stage of speculative euphoria, bankers merely responded to the incentives (null or negative real interest rates and the artificial expansion of credit) created by central banks. Now, in a display of hypocrisy and manipulation of the citizenry, central bankers throw up their hands in horror, blame others for the consequences of their own unsound policies, and try to appear as saviors to whom we must be grateful for the fact that we are not in the grip of an even more severe depression. And we need not repeat that it is precisely during the boom stage that inflation in the prices of financial assets was so high that bankers were able to show considerable equity capital in their balance sheets, which, at least in appearance, gave them substantial leverage and permitted them to incur risks with little difficulty. This was all in an environment of null or even negative real interest rates and an extraordinary abundance of liquidity promoted deliberately by central banks. Under such conditions, no one should be surprised that increasingly, peripherally, financing was granted for investment projects that were more and more risky, and less and less profitable (and less certain of producing profit)."

De Soto e suas preciosíssimas aulas...