Introduction
This is one of several surviving essays in Trevor Swan’s archives. It was written as a 19-year-old undergraduate studying part-time and working full-time in a bank and illustrates his early maturity, not only as an economist but also as an accomplished author who has read deeply into a vast literature and can quote and recall apt quotations at will. Also his ability to read literature written in both German and Latin.
Trevor W. Swan, 1937, “Forced Savings”, University of Sydney, Economics II Essay, mimeo.
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Notes
- 1.
Cf. F. Knight’s review of the General Theory in the Canadian Journal of Economics and Political Science, February 1937.
- 2.
Even this does not exhaust the possibilities, since it is not unusual for the same economist to employ the term in more than one meaning. Furthermore, Hayek’s researches, in particular (cf. Quarterly Journal of Economics, November 1932) have enabled the term “forced saving” to be applied retrospectively to theories only remotely resembling those current to-day.
- 3.
It is assumed, for present purposes, that full employment exists in the sense that if more resources are devoted to capital, less are available for consumption. It is not necessary to Hayek’s theory (to which this section mainly refers) to assume, as he does, that no unused resources exist at all (cf. “Prices and Production,” page 34).
- 4.
If, owing to technical progress, etc. output as a whole is tending to increase, an absolute reduction may not be necessary, but consumption will still have to be reduced below the level which would otherwise be attained. It should be noticed that this refers only to present consumption—when the investments mature an increased output of consumption goods may again be possible.
- 5.
The fact that investment constitutes the value of unconsumed output requires emphasis. All expenditure on unconsumed output at various stages does not mean a net addition to demand, any more than the sum of Douglas’ A and B payments represents total costs. Moreover, investment is a net value after subtracting the value of depletion of stocks: in fact, it is total value of output—value of consumed output. It is immaterial to the present discussion whether investment and value of output are taken net or gross of depreciation allowance, so long as a consistent interpretation is maintained. It is, whoever, much more realistic to exclude from the value of output profit on unsold production, putting this part of output in at cost.
- 6.
“Net hoarding”, since some consumers may be dishoarding. Thus, an expansion of bank is not the only, but still the most important, means of creating “excess investment”. Other things being equal, an increase in investment without a corresponding decrease in expenditure on consumption requires an increase in M V. But Hayek’s emphasis on a “constant circulation” as the condition of monetary neutrality is misplaced—other things, in fact, never are equal, and in particular changes in the financial circulation would make a constant total circulation a source of gravest disequilibrium. Keynes’ bewilderment (General Theory, page 79) at Hayek’s association of forced saving with “changes in the quantity of money or bank credit” is to be explained by Hayek’s failure to maintain the “ceteris paribus”—the same sin of which Hayek, in effect, accuses Wicksell in connection with the price-level (cf. Next footnote).
- 7.
Cf. Lectures II, p.158 (London 1935). The essence of Wicksell’s theory is that such an increase in investment means, not a transfer of demand from consumption to capital, but a net increase in the aggregate value of output, implying (“ceteris paribus”—constant output must be assumed) a rise in the price-level. Criticism of Wicksell (by Davidson and Hayek in particular) has often been directed in effect against his lack of emphasis on the “ceteris paribus”. Lindahl and others have shown the weaknesses of his alternative definitions of the “natural” rate.
- 8.
Alternatively, this may be described as an “elongation of the structure of production” induced by a change in the “relative price-levels of intermediate and final products”, which is associated with a market rate of interest below the natural rate.
- 9.
Hayek, however, is most careful to point out that if productivity is increasing there need not be an absolute reduction in real income or a rise in the price-level.
- 10.
Rospke: “Crises and Cycles”. Hayek, on the other hand, speaks (Monetary Theory and the Trade Cycle) of “forced saving” as “an alluring name!”.
From the “value of output” which constitutes income (and similarly from the value of unconsumed output which constitutes investment) may be excluded anticipated profit on the sale of unsold production. This treatment is more realistic for our purposes than that of the General Theory, and makes income, defined as the value of output, consist entirely of money receipts in the form of wages or profits.
- 11.
Mises, Hayek and Robbins all explicitly assume that, for their purposes, the “relative disposition to spend and save” may be considered as unchanged. If, however, it does change in favour of saving, then “at last we have some real saving” (Hayek). The Mises of this theory is the Mises of Money and Credit, 1912: we shall see later that he may since have changes his views.
- 12.
From the “value of output” which constitutes income (and similarly from the value of unconsumed output which constitutes investment) may be excluded anticipated profit on the sale of unsold production. This treatment is more realistic for our purposes than that of the “General Theory”, and makes income, defined as the value of output, consist entirely of money receipts in the form of wages or profits.
- 13.
Income = Value of output. Savings = Excess of income over expenditure on consumption = value of unconsumed output = investment. “Saving resembles investment as an elephant's proboscis resembles his trunk” (D.H. Robertson).
- 14.
The amount of increase in income associated with an increase in investment is given by the Multiplier formula, \(k = \frac{1}{1 - r}\), where r is the marginal propensity to consume.
- 15.
The existence of retail stocks means that even if the production goods industries obtain a temporary advantage, consumption need not be immediately restricted, and the stocks can be replaced when the advantage turns the other way. It may be that resources will actually be diverted by an offer of higher rewards before investment in monetary terms actually increases: this fact need have no permanent results.
- 16.
Hayek’s reply to Straffa's review of Prices and Production (Economic Journal, 1932). It is another of Hayek's inconsistencies that in this place the rise in income (wages) produces the crisis not by increasing the demand for consumption goods but by checking investment by reason of rising costs.
- 17.
It might be argued that since among the stocks whose depletion makes net investment less than the expenditure of bank credit are consumption goods, there may be an increased demand for fixed capital, for example, greater than that indicated by net investment, and therefore relative to consumption demand. But the reduction of consumption stocks is itself equivalent to additional consumption demand; had prices been raised to protect these stocks, incomes and expenditure on consumption would have increased still more.
- 18.
Malthus pointed out long ago that when persons on fixed income who “only buy” are suffering a reduction in purchasing power, all those “who sell as well as buy” are making “unusual profits”.
- 19.
It is not suggested that the compression of certain individuals’ purchasing power is irrelevant, but merely that it does not in itself provide a reason for the diversion of resources to capital from consumption.
- 20.
The difference between value of output and disposable income will be the difference between saving and investment.
- 21.
In a previous footnote we pointed out that anticipated profit on unsold output could conveniently be excluded from the value of output.
- 22.
Economic Journal, 1933.
- 23.
Thus a shareholder is conceived as planning his spending and saving up to the receipt of the next dividend on the basis of expectations that the dividend will not only recoup him for his expenditure but provide a margin, in accordance with his propensity to consume for saving. (Robertson’s concept would mean that profits earned by a limited company “yesterday” are counted as disposable income and added to savings “to-day;” however, shareholders' expenditure “to-day” is affected by expectation of the receipt of the profits when a dividend is declared.) Ohlin does not indicate the place of profits “saved” by transfer to reserves in his analysis, but they can probably be related to the expectations of company directors.
- 24.
The complete theory (cf. Ohlin: Economic Journal, March 1937) envisages, more accurately than the above outlines, the division of time into short periods for which expectations are assumed to remain unchanged. At the beginning of each period are ex ante concepts—planned saving, planned investment which have direct causal significance; the ex-post concepts at the end of the period are merely realized results which can exert a causal influence only as they affect expectations for the next period. The saving, investment and income of the “General Theory” are all ex-post concepts; the marginal efficiency of capital is truly ex ante. Hawtrey (Capital and Employment, 1937) has pointed out the weakness of this position as far as investment is concerned but failed to notice the parallel difficulty in Keynes’ “Propensity to consume”.
- 25.
It is difficult to see how such a lag of disposable behind received income as Robertson envisages could ever be of material significance in determining the distribution of resources between capital and consumption.
- 26.
As a matter of fact, this interpretation of normal profit is not strictly correct, since, as Keynes in effect points out (Vol. I., p. 125) the existence of contract frictions, etc. permits of the possibility that an entrepreneur may continue to produce an output which, in the light of his profit expectations, is unjustified. Keynes of course did not design his terms of the purpose for which we suggest they may be used—his own statements about the relation of his analysis to capital and consumption in real terms are often rather loose. He apparently did not realize that a “period” analysis, in which the windfall profits of one period would be added to the normal profits of the next, was appropriate to the theory.
- 27.
Keynes believed when he wrote the Treatise that the Viennese “forced saving” was his excess of investment over saving (p. 171). He has since revised his opinion (General Theory, p. 79). It is not suggested here that Hayek and Co. have anything in the nature of “normal profits” in mind, but merely that, more or less as a coincidence, their theories interpreted on Treatise lines make some sort of sense. Hayek himself has refused thus to have meaning thrust upon him (cf. Economica, pp. 32–33).
- 28.
There is thus some doubt as to whether we are to call the excess of investment over saving itself the “forced saving” or reserve the term for the reduction in real income which may result. Hayek and others seem to use the two concepts interchangeably. Dr. Walker (Economic Record, December 1933) confused the two by making “forced saving” equal to the excess of investment over saving (apparently in Keynes’ sense) minus “increased output elicited”.
- 29.
Contrary to what Keynes seems to claim (Treatise p. 298) this is only true in so far as the rise in price is the result of a reduced output of consumption goods, and not due to increased expenditure on consumption out of larger incomes, which leaves aggregate purchasing power unchanged while each unit of money is reduced in real value. When (to take “automatic lagging”—the difference between the real value of income at time of receipt and its value when spent a “day” later—as our example) an increase in income received “yesterday” is spent “to-day”, even those whose incomes have increased perform “automatic lagging”, as the price-level rises—even though their real consumption rises above “yesterday’s” level.
- 30.
To this extent Hayek’s conclusions remain valid.
- 31.
This is what Schumpeter calls a “compression of purchasing power” and Knight “a dilution of purchasing power”. “Forced saving” in this form becomes little more than a disguised version of the quantity theory of money.
- 32.
A good example of this would occur if a government purchased consumption goods for army use, for example. But if the government used the “printing press” or bank credit to purchase goods—armaments perhaps—which the public could not consume, no net reduction in the public’s consumption would occur unless as the result of an excess of realized over planned saving or the voluntary decision of the public itself to increase the proportion of its saving. If the armaments were paid for out of taxes or the government intervened directly to control the disposition of resources, the position would, of course, be different.
- 33.
Mills and Walker “Money”. The statement remains in the latest edition.
- 34.
Robertson (Economic Journal, 1933) suggests the distinction between “fixed income” theories and his “automatic lagging” is one of this type, and that Hayek is thinking of “automatic lagging”, the others of a modification of the propensity to consume (he does not use the term). This is difficult to believe, since “automatic lagging” is, in effect, (as has been said of some of Wicksell’s interest theory) simply a “recondite way of saving that prices are rising” with no special relation to capital or consumption.
- 35.
This is strictly correct only if disposable income equals the value of output, but the possibility of an excess of realized over planned saving is not materially relevant in this connection.
- 36.
It is necessary for the increase in saving by entrepreneurs to outweigh the decreased saving by rentiers seeking to maintain their consumption in the face of falling real incomes. This offsetting factor will not be present if, owing to greater productivity, prices are merely prevented from falling. (This is possibly what Dr. Walker—“Australia in the World Depression”—means when he says that resources will be diverted by “forced saving” much more easily under such conditions). If the increased investment leads to increased employment, not only will this point hold, but the propensity to consume will fall as real income increases.
- 37.
Bentham speaks of “an unprofitable tax on the incomes of all fixed economists” which increases “national wealth” (Most of the 19th-century economists make mention of some such phenomenon—V. Hayek’s writings). Pigou, to find the amount of capital accumulated by his “forced levies” divides the amount of additional bank credit by the price-level and subtracts the reduction in the savings of rentiers. He does not realize that only by adding increased voluntary saving of others to capital will his levies produce any capital at all.
- 38.
It is significant that, according to Tobertson, (Economic Journal, 1933) Mises in “Geldwertstabilisierung and Konjunkturtheorie” (1928) makes “Erzwungenes Sparen” consist entirely of “money saved and invested by entrepreneurs out of their increased incomes”. Unfortunately, this book (which evidently represents a radical change of view from 1922 theories which Hayek still maintains) is not available in Sydney libraries. Is it possible that after all Hayek, too, is thinking of a temporary modification for the propensity to consume?
- 39.
The terms are borrowed from Hahn: “Volkeswirtschaftliche Theorie des Bank credits”.
- 40.
Both of these factors are included within the “propensity to consume” of the General Theory.
- 41.
Hayek’s ability to subsume every variety of theory under his own is demonstrated in the Quarterly Journal 1932 and “Prices and Production”. Most American economists with characteristic eclecticism have accepted all theories as meaning much the same thing. Among the most all-round eclectics is Dr. Walker, who, (in “Money”, Australia in the World Depression” and “Economic Record” December 1933) presents “forced saving” as an excess of investment over saving (in some undefined—probably “Treatise”—sense) as a reduction of consumption imposed on rentiers, and in the Viennese guise. Each theory is, of course, in his case, presented in a different book.
- 42.
Thus when Roepke says that forced saving rather than voluntary saving is likely to establish a level of investment which cannot be maintained (owing to the principle of acceleration) he simply means—what Harrod would not deny—that investment would not be likely to get out of hand if banks never expanded credit unless consumers had reduced their expenditure by an equivalent amount. Similarly, use can still be made in cycle theory of the Viennese competition between capital and consumption industries, and particularly of the eventual rise in the rate of interest.
Bibliography
Books
Hayek: Monetary Theory and the Trade Cycle, Prices and Production.
Wickell: Lectures on Political Economy, Vol. 11. *Interest and Prices.
*Pigou: Industrial Fluctuations.
Robertson: Money, Banking Policy and the Price Level.
Durbin: Purchasing Power and Trade Depression, Credit Policy.
Mises: Theory of Money and Credit.
Ellis: German Monetary Theory.
Schumpeter: Theory of Economic Development.
*Roepke: Crises and Cycles.
Thomas: Monetary Policy and Crises.
Moulton: Formation of Capital.
Abrams: Money.
MacPhie: Theories of the Trade Cycle.
*Hansen: Business Cycle Theory.
*Knight: Risk, Uncertainty and Profit.
*Anderson: Value of Money.
Harrod: The Trade Cycle.
Hawtrey: Capital and Employment.
Robinson: Essays in the Theory of Employment.
Mills and Walker: Money.
Walker: Australia in the World Depression.
Roll: About Money.
Keynes: Treatise on Money, General Theory of Employment, Interest and Money.
Periodicals
Economic Journal - Articles and notes in recent years by Robertson, Keynes, Hawtrey, Straffa, Hayek, etc. Book Reviews.
Economics - Articles and notes by Keynes, Hayek, Robinson, Pigou, Presciani-Turoni, etc. Book Reviews.
Quarterly Journal of Economics - Articles by Hayek, Robertson, etc.
Economic Record Article by Dr. Walker, December 1933. Book Reviews.
*An asterisk denotes books consulted on a few points only.
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Swan, P.L. (2022). T. W. Swan: “Forced Savings”. In: Trevor Winchester Swan, Volume I. Palgrave Studies in the History of Economic Thought. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-031-13737-2_2
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