forthcoming in History of Political Economy vol. 36, no. 2 (summer) 2004 Overconsumption and Forced Saving
Overconsumption and forced saving, though seeming antonyms, are actually cognates that describe different phases of the business cycle, as variously understood by the Austrian economists. Recognizing the sense in which the two terms are conformable helps to resolve terminological and substantive differences within the Austrian school and to show why the term "forced saving" has been such an obstacle to understanding-both within and beyond that school. Accounting for overconsumption (as well as overinvestment) allows for some reconciliation between Austrian and mainstream views, while at the same time enhancing the internal logic of the Austrian theory. As an important aside, unperceived-or only dimly perceived-shortcomings in F. A. Hayek's theorizing may help explain why Hayek was largely ineffective in responding to his critics and why he failed to produce a timely and effective critique of Keynes's General Theory.
Forced Saving or Overconsumption?
Forced Saving: A Problem or a (Partial) Solution?
Overconsumption and then Forced Saving
[A] prerequisite of any production using roundabout methods is, of course, the corresponding supply of consumer goods which can serve to support the originary factors of production. Here [in the case of credit expansion] we are confronted on the one hand with an expanded provision of consumer goods, and on the other, with an lengthening of the roundabout production methods. Both of these movements work together in such a way that the expansion in provisions occurs at the expense of the supply of capital.... [T]he consumption of capital only makes an expanded supply possible temporarily, but as a result of this consumption of capital, a continuous provision will not be possible to the same extent. At the same time, lengthening the roundabout methods of production requires that a perpetual supply from the previous stock of capital lasts in order to be able to bridge the time span until the end of the lengthened roundabout production process. In a simple formula: Expanding the production of consumer goods by consuming capital will further increase the difficulties which must result from lengthening the roundabout methods of production.In a 1933 lecture at Columbia University (see footnote 5), Machlup recast Strigl's formulation with an explicit reference to the stages of production that make up the Hayekian triangle: The additional credit causes an increased demand on the market for consumer goods without a substantial delay. The output of consumer goods is elastic, indeed, and simultaneous expansion of production in the construction goods industry and in the consumption goods industry takes place. We see at the same time symptoms of a lengthened and of a shortened production period, a swelling at both ends of the production structure at the expense of some middle parts of the stage system.The subsequent maturing of those middle stages is coincident with�and virtually synonymous with�forced saving. But neither Strigl nor Sraffa nor anyone else claims that this increase in saving could be sufficient to accommodate the increased demands by the business community. Funds�and resources�needed to complete the projects initiated during the boom are simply not available. This is the essence of the internal conflict in the market process set in motion by credit expansion. Just as overconsumption eventually begets forced saving, malinvestment eventually begets liquidation. Using the two pairs of terms in this way maintains the distinction between saving and investment while emphasizing the essential nature and temporal charactistics of the boom-bust cycle. Overconsumption, then, is not a denial of forced saving in the Hayekian sense but rather a compounding of the problem identified with that term. That is, the market conditions during the boom are even more untenable�less sustainable�than if saving were merely involuntary or than if saving had simply not increased. The problem created by forced saving (read: malinvestment) is compounded by a simultaneous decrease in saving (read: overconsumption). Mises ([1913] 1953, p. 362) was aware of this compounding of effects even in his earliest exposition, when he tended to think in terms of the classical economists' subsistence fund: 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).Almost inexplicably, Hayek himself never gives play to the overconsumption that accompanies credit expansion or even acknowledges the possibility of it. (6) In connection with his discussion of Arthur Spiethoff's analysis, (7) Hayek ([1939] 1975, p. 172) refers to the scarcity of circulating capital that characterizes the end of the boom as "relative over-consumption." The "relative" appended here suggests that consumption is excessive only in comparison with the level consistent with the actual completion of the investment projects initiated during the boom. This term does not allow for consumption in excess of its pre-expansion level. For Hayek ([1928] 1975, p. 218-19), overconsumption seems to be ruled out by the very concept of forced saving: "This phenomenon, we are to understand, consists of an increase in capital creation at the cost of consumption, through the granting of additional credit, without voluntary action on the part of individuals who forgo consumption, and without their deriving any immediate benefit." (Hayek offered this statement as the "usual presentation," objecting to it only because it supposedly works through a change in the overall value of money rather than through a change in relative prices.) In Prices and Production, Hayek ([1935] 1967, p. 88) denied even the possibility of overconsumption in the sense later emphasized by Mises. His discussion of the situation created a by cheap-credit 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." (8) Hayek does allow for an increase in consumer demand and for this increase having significant price effects, but he allows for no positive quantity effects in the early phases of the boom. It is as if the supply of consumption goods were in fact perfectly inelastic. He even allows for the increase in incomes of workers and other factor owners and for the resulting increases in consumption demands to drive the price of consumer goods still higher. Hayek ([1935] 1967, p. 89) insists, however, that during the boom, "these decisions [i.e., increased consumption demand] will not change the amount of consumers' goods immediately available." If we were to lay stress on the word "immediately," we could take Hayek to be making the simple and obvious point that these goods do not and cannot simply pop into existence; all production activities take time; resources have to be reallocated. Hayek's own emphasis, however, makes clear that his meaning is something different. 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 favour of the former." In summary terms we can say that 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. We now understand that Hayek's forced saving and Mises's malinvestment are the same thing. But how do we understand the contrast of views about the corresponding pattern of consumption? At this point there seems to be no room for reconciling the two views. We must ask instead: Which is more consistent with our understanding of the market forces set in motion by credit expansion? Several considerations suggest that Mises's view is the more consistent and the more plausible of the two. First, for Hayek's view to be correct, there must be an accounting of the time lag between the increased allocation of resources toward the early stages and the subsequent reallocation in the direction of late stages. Why wouldn't workers and other factor owners in the early stages spend their higher incomes on consumer goods almost immediately? And why wouldn't entrepreneurs respond to the increased demand so that there would be not only a price effect but also a quantity effect? These are the questions posed by John Hicks (1967) in his critique of Hayek's version of the theory. Hicks could find no basis for such a lag and thus concluded that the counter-movement of resources would set in almost immediately. The Hayekian business cycle would end just about as soon as it began. (9) Comparing Hayek with Mises (or Hayek and Strigl), we see that there is an alternative answer: While there is no lag between earning money (in the early stages) and spending it (on consumables), there is scope for both malinvestment and overconsumption to take place at once. Thinking strictly in terms of the Hayekian triangle, we can envision a pattern of reallocation in which both early and late stages get increased allocations at the expense of middle stages. This understanding of the market process set into motion by credit expansion helps dramatize the notion that malinvestment and overconsumption are compounding problems. And even beyond this two-way distortion of the intertemporal pattern of resource allocation, there is scope for temporary, i.e., unsustainable, increases in production all around. Both capital and labor can be employed more intensely than is possible on a sustainable basis. Routine maintenance of machinery can be postponed, and the machinery can be kept running more hours per day or more days per week than usual. A greater proportion of the population can be drawn into the labor force, some workers can work overtime, and others can postpone retirement. These considerations allow for the production of both investment goods and consumption goods to increase simultaneously but, of course, not on a sustainable basis. Second, Hayek may have allowed the "rather unfortunate expression," forced saving, to mislead him into the belief that income earners, like it or not, were actually saving. What else could he mean when he wrote, as quoted above, that "for some time, society as a whole will have to put up with an involuntary reduction of consumption"? To the extent that such reductions actually occurred, the resources would in fact be available to continue the credit-driven investment activities, and the subsequent crisis would be less severe. The problem is precisely that people do not forgo current consumption. The telling point, as recognized by Mises, is that the incentives they actually face are pushing in exactly the opposite direction. Third, even a casual understanding of economic conditions created by credit expansion warns against arguing that people are somehow forced to save while the economy becomes more capital intensive. The Roaring '20s, (and, later, the Bullish '80s and the Dot.com '90s) were years of high consumption. And the high consumption�the overconsumption�is driven by the same set of incentives that drives the malinvestment. Further, we should recognize that it's the "good times" (read: high consumption) associated with artificial booms that make credit expansions so attractive to elected officials and policymakers. Policies that actually did force people to reduce consumption would not likely be included in any incumbent candidate's re-election strategy. All of these reasons for questioning Hayek's view of the pattern of consumption during the boom-bust cycle are also reasons for accepting Mises's view: Credit expansion gives rise to malinvestment (a.k.a. "forced saving") and, at the same time, overconsumption. On the eve of the bust, market conditions change such that income earners actually do curtail consumption and save instead. This forgoing of consumption, which more-than-offsets the earlier overconsumption, is a necessary part of the market process that takes the economy back to a sustainable growth path. (10) The case can be made for reserving the term forced saving to refer to this eventual eve-of-the-bust curtailment of consumption. The discussion and graphics (11) in the following section make just such a use of the term. The analytical coherence of the story that can be told with the aid of forced saving so conceived (together with the overconsumption that precedes it) lends credence to our treatment of these and related terms in the Mises-Hayek theory. Overconsumption and Forced Saving by the Numbers
Two further points of clarification are warranted. First, the direction
of movement indicated by the arrows have their most straightforward interpretation
in the context of a no-growth economy. In a growing economy, in which the
PPF is shifting outward, the arrows represent movements relative to trend.
Hence, a decrease in consumption may be only a decrease in consumption's
growth rate. Second, the real losses suffered as a result of resource misallocations
during boom-bust cycle will prevent the economy from fully recovering to
the initial equilibrium. That is, as a result of the cyclical episode,
the PPF itself will shift inward�or, allowing for ongoing growth, it will
shift outward at a slower rate.
Mises v. Hayek, Again
The observer notices only the malinvestments which are visible and fails to notice that these establishments are malinvestments only because of the fact that other plants�those required for the production of complementary factors of production and those required for the production of consumers' goods more urgently demanded by the public�are lacking" (emphasis added).The italicized "only" in this passage is unwarranted. The resources are coming only partly from later stages; they are also coming from the increased use of labor and capital equipment beyond the levels associated with full employment. Notice, too, that whereas this passage seems almost to deny overconsumption, consistency would demand that Mises issue a similar statement to the effect that the observed overconsumption is achieved only by the withdrawal of resources from the earlier stages of production. Mises (1966, p. 560) illustrates the essential malinvestment with a parable in which both overinvestment and overconsumption are ruled out by construction. During an artificial boom, the whole entrepreneurial class is, as it were, in a position of a master-builder whose task it is to erect a building out of a limited [i.e., fixed] supply of building materials. If this man overestimates the quantity of the available supply, he drafts a plan for the execution of which the means at his disposal are not sufficient. He oversizes the groundwork and the foundations and only discovers later in the progress of the construction that he lacks the material needed for the completion of the structure. It is obvious that our master-builder's fault was not overinvestment, but an inappropriate employment of the means at his disposal.Mises' parable is a memorable one for its vivid illustration of a point that is wholly ignored outside the Austrian school. But it does not demonstrate the absence of overinvestment any more than it demonstrates the absence of overconsumption. And since Mises had affirmed�even emphasized�the problem of overconsumption in a less restrictive setting than is created for his master-builder, he should have no reason to deny the problem of overinvestment. What he should deny, of course, is that overinvestment is the whole problem. As understood in the context of a macroeconomy, it would seem that while malinvestment is unique to the Austrian theory, both malinvestment and overinvestment (along with overconsumption) are essential to it. Malinvestment without overinvestment would allow the counter-movements to set in early, undoing the damage before much damage is done. Overinvestment (along with overconsumption) without malinvestment would allow the economy to experience a temporarily high growth rate, moving first beyond and then back to the PPF but without there being any intertemporal misallocations requiring painful adjustments that can send the economy inside the frontier. Only with both prefixes (mal- and over-) in play do we have (1) a problem of intertemporal misallocation and (2) time for that problem to fester before the internal conflict of market forces eventually turns boom into bust. Reconciling Within and Beyond the Austrian
Theories
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.The view that economic booms were characterized by overinvestment was commonly held when the Austrian theory was being developed. This view is still clearly evident in today's mainstream macroeconomics. Monetary expansion sends the economy up an upward-sloping short-run aggregate supply curve. Or, alternatively, the economy moves up along a downward sloping short-run Phillips curve. (The effects of monetary expansion could be similarly expressed in the context of New Classicism or New Keynesianism.) In these reckonings, overproduction relative to the output levels associated with the corresponding long-run aggregate-supply and Phillips curves is the essence of the boom. And owing to the underlying structure of this mainstream theorizing, namely, the high level of aggregation adopted, there is no accounting for malinvestment or for forced saving in any of the relevant senses without fundamentally recasting the theory. The opportunity for reconciliation is quite different from the Austrian point of view. The movements of the mainstream aggregates are both plausible and consistent with casual observation. There is little to be gained in denying these movements and insisting that the boom is characterized exclusively by misallocations within the output aggregate rather than misallocations accompanied by a temporary bloating of the aggregates themselves. In fact, as this paper has argued, a productive reconciliation lies in the direction of incorporating just such movements of aggregate output into the Austrian theory. With these movements (overconsumption as well as overinvestment) taken into account, the Austrian theory encompasses mainstream theory and observations while at the same time enhancing its own internal logic. BIBLIOGRAPHY Böhm-Bawerk, E. ([1884, 1889, and 1909] 1959) Capital and Interest, 3 vols., South Holland, Ill.: Libertarian Press. Brimelow, P. (1982) "Talking Money with Milton Friedman," Barron's, 25 October, 6-7. Caldwell, B. (1995) "Introduction," in B. Caldwell (ed.) Contra Keynes and Cambridge, Chicago: University of Chicago Press, 1-48. ______ (1998) "Why Didn't Hayek Review Keynes's General Theory?" History of Political Economy, 30(4), pp.545-569. Cochran, J. (2001) "Capital-Based Macroeconomics: Recent Developments and Extensions of Austrian Business Cycle Theory," Quarterly Journal of Austrian Economics, vol. 4, no. .3, pp. 17-25. Cowen, T. (1997) Risk and Business Cycles, London: Routledge. Ebeling, R. (2002), "Fritz machlup and His Early Writings: A Summary and Appriciation," conference paper, Southern Economic Association meetings, New Orleans, Louisiana, November. Garrison, R (1995) "Linking the Keynesian Cross and the Production Possibilities Frontier," Journal of Economic Education, 26(2), 122-130. _____(2001) Time and Money: The Macroeconomics of Capital Structure, London: Routledge. _____(2002) "Business Cycles: Austrian Approach," Snowden and Vane, eds., Encyclopedia of Macroeconomics, Edward Elgar. pp. 64-68. _____([1935] 1967) Prices and Production, 2nd edn, New York: Augustus M. Kelley. _____([1928] 1975) Monetary Theory and the Trade Cycle, New York: Augustus M. Kelley. _____([1939] 1975) Profits, Interest and Investment, New York: Augustus M. Kelley. _____(1975) Full Employment at Any Price?, Occasional Paper 45, London: Institute of Economic Affairs. _____([1969] 1978) "Three Elucidations of the Ricardo Effect," in F. A. Hayek, New Studies in Philosophy, Politics, Economics and the History of Ideas, Chicago: University of Chicago Press, 165-178. _____(1984) Money, Capital, and Fluctuations: Early Essays, ed. by Roy McCloughry, Chicago: University of Chicago Press. Hicks, J. R. (1967) "The Hayek Story," in J. Hicks, Critical Essays in Monetary Theory, Oxford: Clarendon Press, 203-215. _____(1985 [1925]) "The Monetary Policy of the United States after the Recovery from the 1920 Crisis," in F. A. Hayek, Money, Capital, and Fluctuations: Early Essays, Chicago: Chicago Press. Howson, Susan (2001) "Why Didn't Hayek Review Keynes's General Theory?-A Partial Answer," History of Political Economy, 33(3), pp. 369-374. Keynes, J. M. (1936) The General Theory of Employment, Interest, and Money, New York: Harcourt, Brace, and Company. _____(1930) A Treatise on Money. 2 vols. London: Macmillan. Machlup, F. ([1943] 1963) "Forced or Induced Saving: An Exploration into its Synonyms and Homonyms," in Essays on Economic Semantics, Englewood Cliffs, NJ: Prentice- Hall, pp. 213-240). Menger, C. ([1871] 1981) Principles of Economics, New York: New York University Press. Mises, L. ([1912] 1953) The Theory of Money and Credit, New Haven, Conn: Yale University Press. _____(1966) Human Action: A Treatise on Economics, 3rd rev. edn, Chicago: Henry Regnery. _____(1969) Theory and History: An Interpretation of Social and Economic Evolution, New Rochelle, New York: Arlington House. _____(1978) On the Manipulation of Money and Credit, Dobbs Ferry, NY: Free Market Books. Robinson, J. (1972) "The Second Crisis in Economic Theory," American Economic Review, 62(2) Strigl, R. ([1934] 2000) Capital and Production, trans, M. Hoppe and H. Hoppe, Auburn, Alabama: Ludwig von Mises Institute. Sraffa, P. (1932) "Dr. Hayek on Money and Capital," Economic Journal vol. 42, no. 165, pp. 42-53. Wicksell, K. ([1898] 1962) Interest
and Prices. New York: Augustus M. Kelley.
ENDNOTES 1. The earliest expositions of the theory focused on alternative originating causes. Following Lord Overestone (and Knut Wicksell), Mises (1978, p. 135) believed that it was some "outside stimulus" [such as technological change] rather than credit creation that initiated the boom; Hayek ([1928] 1975, pp. 143-148) believed that in a setting where bank credit is elastically supplied, most any real change could initiate a boom. Accordingly, he concluded that the cyclical process "must always recur under the existing credit organization, and that it thus represents a tendency inherent in the economic system, and is in the fullest sense of the word an endogenous theory (emphasis original). His most comprehensive analysis (Hayek, [1935] 1967, p. 54), however, focused on "the case most frequently to be encountered in practice: the case of an increase of money in the form of credits granted to producers." 2. The article in which the note appears, "The Monetary Policy of the United States after the Recovery from the 1920 Crisis" in Hayek (1984), is an extract from a longer work first published in German in 1925. 3. The use here of the adjective "forced" and the prefix "over-" reflects common usage in the literature. The doctrinal issues could be sharpened by contrasting "forced saving" with the analogous "forced consumption" or "overconsumption with the analogous "oversaving." 4. Without referencing the Austrians, Milton Friedman (Brimelow, 1982, p. 6) has explained at least one instance of high interest rates on the eve of the bust in terms of "distress borrowing" by the business community. 5. For the references to both Strigl and Machlup, I am indebted to Richard Ebeling, who presented a paper titled "Fritz Machlup and His Early Writings: A Summary and Appreciation" at the Southern Economic Association meetings in New Orleans in November 2002. Ebeling demonstrates on the basis of a 1933 hand-written Machlup lecture on file at the Hoover Institution that Machlup was fully aware of the differences between Hayek and Strigl on the issue of overconsumption. (Machlup's understanding of Strigl is based on a conference paper that predated Strigl's book.) Ebeling also notes the match between Strigl's accounting of the credit-induced distortions of the production process in his Capital and Production (1934, pp. 130-31) and my own graphical representation in Time and Money (Garrison, 2001, p. 69.) 6. We can imagine, however, that in light of the trouble Hayek had in defending the idea of forced saving [i.e., malinvestment] before his English audience in 1931 (Robinson, 1972), he would not have been eager to add that overconsumption was occurring at the same time. 7. Spiethoff's analysis gets attention in Hayek's stocktaking article, "The Present State and Immediate Prospects of the Study of Industrial Fluctuations," originally published in German in the 1933 Festschrift für Arthur Spiethoff and included in translation in Hayek ([1939] 1975, pp. 171-182). 8. Maintaining consistency with this and similar statements, Bruce Caldwell (1995, p. 16) builds into the definition of forced saving the actual forgoing of consumption: "[Consumers] are forced to consume less than they desire; Hayek accordingly attached the term 'forced saving' to this phenomenon." 9. Though without reference to Hicks' criticism, Tyler Cowen (1998, p. 97) reintroduces the lag problem in terms of the first-, second-, and third-round recipients of newly created funds. Once the new money has passed through the hands of commercial banks, business borrowers, and factor owners, these factor owners spend it in accordance with unchanged saving/consumption preferences. Thus, the Austrian theory, according to Cowen, fails to explain how the boom persists beyond the spending of these third-round recipients of the new money. 10. Hayek never recognized that the element of overconsumption was critical in responding effectively to the criticisms offered by Sraffa and (later) by John Hicks. Instead of allowing for overconsumption, Hayek (1978) offered his mound-of-honey analogy to support the notion of a substantial lag between the increased investment spending and the subsequent increase in consumption. (Pouring money into the economy is like pouring honey into a vat: Where the honey hits the surface, a mound forms and persists as long as the pouring continues. Analogously, where the new money is injected into the economy, misallocations occur and persist as long as the injections are continued.) Understandably, Hicks found the analogy unhelpful. Taking account of overconsumption would also have been critical in Hayek's offering a coherent view of boom and bust that could compare favorably with the view offered by Keynes. If it was even dimly perceived that there was a problem here with his own formulation, the lacking of a ready solution could very plausibly be a part of the answer to the question, asked by Bruce Caldwell (1998), "Why Didn't Hayek Review Keynes's General Theory?" Such an answer is not included in�but is not at odds with�the "Partial Answer" offered by Susan Howson (2001). 11. The graphical portrayal is adapted from Garrison (2001), a book in which doctrinal issues, such as the ones addressed here, are downplayed. 12. The PPF of Figure 2 shows combinations of consumption and investment that are sustainable, implying that combinations beyond the frontier are unsustainable. Conventional presentations of this graphical device label the area outside the frontier "unattainable." Certainly, for points very far outside it, this adjective is appropriate. But many of those same expositions identify the frontier itself as entailing the "full employment" of labor and other resources. For macroeconomic applications, then, "unattainable" should be understood as "unsustainable." An economy with an unemployment rate temporarily below the so-called natural rate is producing an output that lies beyond the frontier. Similarly, an economy in which capital equipment is being pressed beyond its normal limits is producing an output that lies beyond the frontier. This is only to say that for the PPF to be useful, the frontier has to depict the macroeconomically relevant limits to production and not some physical or absolute limit. 13. Had the expansion been financed by increased saving rather than by credit expansion, the economy would have moved along the PPF to the small hollow point. 14. The dynamics of a transfer expansion, during which the money goes first to consumers, would entail a rotation in the direction of consumption. See Garrison, 2001, p. 76. 15. It may be helpful in some applications to distinguish between forced saving relative to the maximum overconsumption and forced saving relative to the pre-expansion level. 16. It should be noted that if, at this point in the cycle, the central bank aggressively keeps the interest rate low, the faltering demand for investment goods may be offset by an increased demand for consumer durables, complicating the adjustment path in ways not allowed for in Figures 2 and 3. 17. This Hayekian understanding is incorporated in Garrison (1995), where overconsumption plays no role in the account of boom and bust. The allowance for movements beyond the frontier (both overconsumption and overinvestment) in Garrison (2001) constitutes a critical difference between these two expositions, the 2001 exposition having the greater logical integrity. Machlup, as reported by Ebeling (2002, p. 8), offers an account of Hayek's formulation and recognizes, in effect, that the expansion and subsequent contraction are represented by movements along the PPF: "Hayek holds that additional credit will increase the demand for capital goods and that the production of production goods will be enlarged at the expense of the production of consumer goods. Only in a later step [will the] the inserted credit, converted into income of the employed factors,... increase the demand for consumption goods, rendering unprofitable the enlarged construction goods industries." Maclup considered Strigl's formulation superior to Hayek's in this regard. 18. Though more
plausible and more consistent with Mises's emphasis on overconsumption,
this understanding suggests that Mises original account of the "counter-movements,"
which features in summary fashion the prices of consumption goods relative
to the prices of production goods, is inadequate. (I owe this observation
to Ivo Sarjanovic.)
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In its simplest application, the two legs of this right triangle measure
consumption and the corresponding production time (reckoned in the number
of stages of production) for an economy that has achieved an intertemporal
equilibrium. A primitive instance of this intertemporal equilibrium and
of potential changes in it can be illustrated by a Robinson Crusoe who
for some time is content to sustain himself by catching fish with the aid
of little or no fishing equipment. A greater output of fish is possible
but only if Crusoe is willing to take time away from fishing in order to
fashion a net and possibly a boat. Consumable output would have to fall
while the production process is being enhanced. Once the new, more capital
intensive (and more time-consuming) process is completed, however, the
level of output would rise above its initial level. The new intertemporal
equilibrium can be depicted by a Hayekian triangle with a longer consumption
leg, representing more fish, and a longer production-time leg, representing
the increase in the time spent maintaining the new production process.
the
heels of this effect, workers and other factor owners are earning greater
incomes and spending them to a larger extent than before on consumption
goods. In the early phase of the expansion, it doesn't much matter that
it is the business community that gets the new money first. There is no
significant lag between the earning and the spending. It all happens, according
to John Hicks (1967, p. 208), within a "Robertsonian week." Resources are
reallocated on the basis of conflicting market signals.
processes
that were in their middle stages at the beginning of the expansion�and
from which resources were being misallocated at point 1�now begin to yield
a declining volume of consumables. Overconsumption, measured by the vertical
displacement from the initial equilibrium, reaches its maximum at point
2. At point 3 forced saving in the sense most conformable with overconsumption
sets in.
the
regulatory authorities, that the recovery phase will be preempted by spiraling
downward into deep depression. Points 6, 7 and 8 show the economy moving
to successively lower levels of both consumption and investment despite
its already having fallen below the PPF. This is the aspect of the downturn
that concerned Keynes in his
General Theory�which is why he couldn't
find application for the concept of forced saving in that book. Hayek ([1939]
1975, p. 176; 1975, p. 44) recognized that the downturn can feed on itself,
but he labeled this possible development a "secondary deflation" or "secondary
depression" to distinguish it from the more direct implications of an artificially
low rate of interest.