Saving and Economic Growth
We tend to think of economies as experiencing some ongoing rate of growth.
The growth rate will be positive, negative, or zero, depending upon the
relationship between saving and capital depreciation. In a stationary, or nogrowth,
economy, saving finances just enough investment to offset capital
depreciation. Consumable output is constant over time, as depicted in the first
two periods in Figure 9.2.
If saving is in excess of capital depreciation, the economy grows. The
volume of consumable output rises over time, as depicted in the last three
periods of Figure 9.2. The output of each of the stages of production increases
as well. The economy grows at every margin, allowing even for a
continual increase in the number of stages. During a period of secular growth,
the Hayekian triangle increases in size but not – or not necessarily – in shape.
An interesting question, one whose answer serves as a prelude to the Austrian
analysis of business cycles, concerns the transition from no growth to a
positive rate of growth – or, for that matter, from some initial growth rate to a
higher growth rate. What must be true about the time profile of consumable
output during the transition? Let’s assume that there has been no change in the
state of technology or in the general availability of resources. We assume,
though, that people’s intertemporal preferences change if favour of future
consumption. If confronted with the simple choice between no growth and
growth, people would surely prefer the latter. The choice, however, is never
quite that simple. The memorable acronym introduced by science-fiction writer
Robert Heinlein (1966) applies. TANSTAAFL: ‘There ain’t no such thing as a
free lunch’. Modifying the acronym to fit the application, we recognize that
TANSTAFG. Free growth is not available for the asking, either.
The relevant trade-off is that between consumable output in the near future
and consumable output in the more remote future. Are people willing to forgo
some current and near-term consumption in order to enjoy increasing consumption
over an extended period? It is the forgoing of current and near-term
consumption, after all, that frees up the resources with which to expand the
economy’s productive capacity and make increasing future consumption possible.
In Figure 9.2 the hypothesized preference change occurs at the end of
the second period. In light of this change, the output of consumption goods
during the third period needs to be reduced. The freed-up resources can be
employed in earlier stages of production. So altered, the capital structure will
eventually begin yielding consumables at an increased rate, matching the
initial output level at the end of the sixth period (in this particular example)
and exceeding it in the subsequent periods.
The market economy, in the judgement of the Austrians, is capable of
tailoring intertemporal production activities to match intertemporal consumpThe
Figure 9.3 Intertemporal capital restructuring
Stages of production
Initial
consumable
output
Initial highest
stage of production
tion preferences. The temporal pattern of consumable output shown in Figure
9.2 requires a capital restructuring, as can be depicted by a change in the
Hayekian triangle’s shape. Figure 9.3 shows the general nature of the required
change. The no-growth periods 1 and 2, which pre-date the preference
change, are depicted by the triangle having a relatively short intertemporal
capital structure. Beginning with the preference change at the end of period
2, consumption falls, reaching a minimum at the end of period 3. The freedup
resources can be allocated to the early stages of production and to the
creation of still earlier stages, enhancing the ability of the economy to produce
consumable output in the future. The reduced near-term yield of
consumable output and the increased number of stages of production are
depicted by the triangle 3, the smallest of the reshaped triangles.
As goods in process begin to move through the restructured sequence of
stages, the output of consumables begins to rise, and with saving now in
excess of capital depreciation, expansion continues in each of the stages of
production. The economy experiences a positive secular growth rate, as shown
by the triangles 4 through 8, triangle 6 having the same consumable output as
the initial no-growth triangle. Yet to be discussed are the market mechanisms
that actually bring about this capital restructuring. At this point, the focus is
on the correspondence between the intertemporal capital restructuring shown
in Figure 9.3 and the temporal pattern of consumable output shown in Figure
9.2.
The attention here to a one-time simple preference change resulting in a
transition from a no-growth economy to an economy experiencing a positive
secular growth rate finds justification in analytical and heuristic convenience.
More complex preference changes can easily be imagined. Actual changes in
intertemporal preferences may themselves be gradual, and the preferred time
profile of consumables is undoubtedly not as simply described as is the
intertemporal pattern in Figure 9.2. This is only to say that a decentralized
economy – including its intertemporal dimension – entails much more complexity
than can be depicted by our simple pedagogical constructions.
The key feature of Figure 9.2 is the reduction of consumable output during
the transition from no growth to a positive rate of growth. The forgone
consumption is a manifestation of the Heinleinian principle: there ain’t no
such thing as free economic growth. In applications where the initial rate of
growth is positive, there need not be an actual decline in consumable output.
In this circumstance, the Heinleinian principle would manifest itself in a
more subtle way. With consumable output growing initially at a rate of, say, 2
per cent, an increased willingness to save may give rise to a pattern of output
that rises continuously but at changing rates – possibly from the initial rate of
2 per cent to 1 per cent and then subsequently to 3 per cent. During the
transition period, in which the growth rate is only 1 per cent, people are
forgoing consumable output that they could have enjoyed had they not decided
to increase their saving.
The explicit recognition of the opportunity costs associated with savinginduced
growth underlies a general proscription relevant to policy making. In
short, the Austrians are not cheerleaders for growth. Many introductory and
intermediate texts introduce the subject matter of macroeconomics with a
short list of policy goals. Invariably, a prominent entry on the list is rapid
economic growth. But is there any basis for including a high growth rate as a
goal for policy makers to achieve? What is needed, according to the Austrians,
are institutional arrangements that allow the growth rate of consumable
output to be consistent with people’s willingness to save. Production plans
need to be consistent with consumption preferences. But that consistency
may entail a low growth rate, no growth, or – in unusual circumstances –
even a negative growth rate. The growth rate itself is nothing but a summary
description of people’s willingness to forgo consumption in the near future in
order to enjoy increased consumption in the more remote future. Macroeconomists
should not adopt ‘rapid growth’ as one of their goals any more
than microeconomists should adopt ‘plenty of vegetables’ as one of theirs.
Still, there are key macroeconomic issues in play here. Achieving the right
growth rate in macroeconomics has its parallel in microeconomics in achieving
the right quantity of vegetables. As discussed in the following two sections,
both of these goals are achieved if the relevant supply and demand schedules
accurately reflect the fundamentals – the preferences and constraints that
govern the respective market activities.
We tend to think of economies as experiencing some ongoing rate of growth.
The growth rate will be positive, negative, or zero, depending upon the
relationship between saving and capital depreciation. In a stationary, or nogrowth,
economy, saving finances just enough investment to offset capital
depreciation. Consumable output is constant over time, as depicted in the first
two periods in Figure 9.2.
If saving is in excess of capital depreciation, the economy grows. The
volume of consumable output rises over time, as depicted in the last three
periods of Figure 9.2. The output of each of the stages of production increases
as well. The economy grows at every margin, allowing even for a
continual increase in the number of stages. During a period of secular growth,
the Hayekian triangle increases in size but not – or not necessarily – in shape.
An interesting question, one whose answer serves as a prelude to the Austrian
analysis of business cycles, concerns the transition from no growth to a
positive rate of growth – or, for that matter, from some initial growth rate to a
higher growth rate. What must be true about the time profile of consumable
output during the transition? Let’s assume that there has been no change in the
state of technology or in the general availability of resources. We assume,
though, that people’s intertemporal preferences change if favour of future
consumption. If confronted with the simple choice between no growth and
growth, people would surely prefer the latter. The choice, however, is never
quite that simple. The memorable acronym introduced by science-fiction writer
Robert Heinlein (1966) applies. TANSTAAFL: ‘There ain’t no such thing as a
free lunch’. Modifying the acronym to fit the application, we recognize that
TANSTAFG. Free growth is not available for the asking, either.
The relevant trade-off is that between consumable output in the near future
and consumable output in the more remote future. Are people willing to forgo
some current and near-term consumption in order to enjoy increasing consumption
over an extended period? It is the forgoing of current and near-term
consumption, after all, that frees up the resources with which to expand the
economy’s productive capacity and make increasing future consumption possible.
In Figure 9.2 the hypothesized preference change occurs at the end of
the second period. In light of this change, the output of consumption goods
during the third period needs to be reduced. The freed-up resources can be
employed in earlier stages of production. So altered, the capital structure will
eventually begin yielding consumables at an increased rate, matching the
initial output level at the end of the sixth period (in this particular example)
and exceeding it in the subsequent periods.
The market economy, in the judgement of the Austrians, is capable of
tailoring intertemporal production activities to match intertemporal consumpThe
Figure 9.3 Intertemporal capital restructuring
Stages of production
Initial
consumable
output
Initial highest
stage of production
tion preferences. The temporal pattern of consumable output shown in Figure
9.2 requires a capital restructuring, as can be depicted by a change in the
Hayekian triangle’s shape. Figure 9.3 shows the general nature of the required
change. The no-growth periods 1 and 2, which pre-date the preference
change, are depicted by the triangle having a relatively short intertemporal
capital structure. Beginning with the preference change at the end of period
2, consumption falls, reaching a minimum at the end of period 3. The freedup
resources can be allocated to the early stages of production and to the
creation of still earlier stages, enhancing the ability of the economy to produce
consumable output in the future. The reduced near-term yield of
consumable output and the increased number of stages of production are
depicted by the triangle 3, the smallest of the reshaped triangles.
As goods in process begin to move through the restructured sequence of
stages, the output of consumables begins to rise, and with saving now in
excess of capital depreciation, expansion continues in each of the stages of
production. The economy experiences a positive secular growth rate, as shown
by the triangles 4 through 8, triangle 6 having the same consumable output as
the initial no-growth triangle. Yet to be discussed are the market mechanisms
that actually bring about this capital restructuring. At this point, the focus is
on the correspondence between the intertemporal capital restructuring shown
in Figure 9.3 and the temporal pattern of consumable output shown in Figure
9.2.
The attention here to a one-time simple preference change resulting in a
transition from a no-growth economy to an economy experiencing a positive
secular growth rate finds justification in analytical and heuristic convenience.
More complex preference changes can easily be imagined. Actual changes in
intertemporal preferences may themselves be gradual, and the preferred time
profile of consumables is undoubtedly not as simply described as is the
intertemporal pattern in Figure 9.2. This is only to say that a decentralized
economy – including its intertemporal dimension – entails much more complexity
than can be depicted by our simple pedagogical constructions.
The key feature of Figure 9.2 is the reduction of consumable output during
the transition from no growth to a positive rate of growth. The forgone
consumption is a manifestation of the Heinleinian principle: there ain’t no
such thing as free economic growth. In applications where the initial rate of
growth is positive, there need not be an actual decline in consumable output.
In this circumstance, the Heinleinian principle would manifest itself in a
more subtle way. With consumable output growing initially at a rate of, say, 2
per cent, an increased willingness to save may give rise to a pattern of output
that rises continuously but at changing rates – possibly from the initial rate of
2 per cent to 1 per cent and then subsequently to 3 per cent. During the
transition period, in which the growth rate is only 1 per cent, people are
forgoing consumable output that they could have enjoyed had they not decided
to increase their saving.
The explicit recognition of the opportunity costs associated with savinginduced
growth underlies a general proscription relevant to policy making. In
short, the Austrians are not cheerleaders for growth. Many introductory and
intermediate texts introduce the subject matter of macroeconomics with a
short list of policy goals. Invariably, a prominent entry on the list is rapid
economic growth. But is there any basis for including a high growth rate as a
goal for policy makers to achieve? What is needed, according to the Austrians,
are institutional arrangements that allow the growth rate of consumable
output to be consistent with people’s willingness to save. Production plans
need to be consistent with consumption preferences. But that consistency
may entail a low growth rate, no growth, or – in unusual circumstances –
even a negative growth rate. The growth rate itself is nothing but a summary
description of people’s willingness to forgo consumption in the near future in
order to enjoy increased consumption in the more remote future. Macroeconomists
should not adopt ‘rapid growth’ as one of their goals any more
than microeconomists should adopt ‘plenty of vegetables’ as one of theirs.
Still, there are key macroeconomic issues in play here. Achieving the right
growth rate in macroeconomics has its parallel in microeconomics in achieving
the right quantity of vegetables. As discussed in the following two sections,
both of these goals are achieved if the relevant supply and demand schedules
accurately reflect the fundamentals – the preferences and constraints that
govern the respective market activities.
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