Why Savings Are So Critical to Improving the Standard

Posted on: July 10, 2020 at 11:26:12 CT

Why Savings Are So Critical to Improving the Standard of Living

https://mises.org/wire/why-savings-are-so-critical-improving-standard-living

Fabrizio Ferrari

Among the essential concepts Mises analyzes and dwells upon in Human Action (1949), there is the notion of capital. Mises conceives of capital as a factor of production intrinsically different from land and labor. In fact, capital is not nature given—its total amount increases or decreases depending upon human choices and intertemporal preferences—and its accumulation is the only way conducive to technological progress, higher productivity of labor, and better living standards. Lastly, capital is conceived in Human Action as strictly related to the time element—i.e., working time stored and transferred into the future in order to attain a greater or more sophisticated output.

Means and Length of Production

Human action entails production in order to remove uneasiness and improve acting humans’ well-being. In order to produce, acting agents can—and need to—employ factors of production: land, labor, and capital. Among them, however, only land and labor are naturally given (i.e., original) factors of production; capital, instead, needs to be created by human beings themselves—it cannot come into existence otherwise—and can be considered as a produced factor of production. As Mises writes, classical economists

“erred in classifying “capital” as an independent factor of production along with the nature-given material resources and labor. The capital goods—the factors of further production produced in the past—are not an independent factor….They are rather labor, nature, and time stored up.” (Mises [1949] 1998, p. 490)

Capital is a label encompassing any means of production different from natural resources (i.e., land) and labor; hence, it includes both machines (fixed capital) and intermediate products (circulating capital). More generally, capital is accumulated production, not yet consumed, allowing the transfer of land, labor, and working time into the future—thus easing the productive process in the future.

Transferring labor, land and working time into the future—i.e., the process of capital accumulation and establishment—is tantamount to a lengthening of the productive structure occurring in the future. As a matter of fact, it means that a task which, without accumulated capital, would require a relatively longer time to be carried out (or would be completely unfeasible), thanks to accumulated capital becomes doable in a shorter lapse. As Mises explains,

“The difference between production without the aid of capital goods and that assisted by the employment of capital goods consists in time….In buying a machine [i.e., capital] he [the producer] buys the original factors of production…plus time, i.e., the time by which his period of production is shortened.” (Mises [1949] 1998, p. 490)

Hence, capital is intrinsically different from land and labor—it stems from agents’ decisions about saving and consumption. In other words, capital originates when agents decide to forego consumption—i.e., satisfaction of immediate wants—in favor of saving. When agents choose to save, they act according to their readiness to wait a longer time for the enjoyment of consumption.

Saving and Productivity

The very act of saving is what allows capital to come into existence. In Mises's own words,

“The sine qua non of any lengthening [i.e., capital accumulation] of the processes of production adopted is saving, i.e., an excess of current production over current consumption.” (Mises [1949] 1998, p. 487)

Concretely what does this mean? How is capital brought into existence by saving? An example might clarify some perplexities.

Consider a hypothetical tribe of men deciding to settle on a certain territory: being former wandering hunter-gatherers, the only factors of production available to them are their own labor and the natural resources surrounding them (i.e., land).

(Let’s assume, for the sake of argument, that these hunter-gatherers have not manufactured any hunting tools yet, carrying out their hunts only by means of rocks, sticks, etc., i.e., nature-given and nonmanufactured resources and commodities—ascribable to land).

In other words, these hunter-gatherers have consuming their whole daily production their whole lives, without saving any fraction of it—and hence without improving their daily productivity or becoming able to attain qualitatively more sophisticated prey (i.e., output).

However, let’s assume that one day one member of the tribe figures out how to manufacture spears by assembling sticks, animal tendons, and sharpened rocks. Spears would be a sort of capital tool, making it possible for tribesmen both to kill more animals per day (thus increasing the tribe’s daily productivity) and to hunt bigger animals, whose size would otherwise make them inaccessible (thus putting the tribe in the position to attain a qualitatively superior output that would be otherwise unattainable).

But spears do not come free. They are not bestowed upon tribesmen by nature like natural resources (i.e., land) and labor are. In order to manufacture spears, our tribesmen will need—besides the knowledge about how to manufacture a spear—first, the necessary time to blend labor with natural sources; second, saving that sustains them while they are busy manufacturing spears and unable to devote their time to the usual hunting. As Mises writes,

“People eager to embark upon processes with a longer period of production must first accumulate, by means of saving, that quantity of consumers' goods which is needed to satisfy, during the waiting time, all those wants the satisfaction of which they consider more urgent than the increment in well-being expected from the more time-consuming process.” (Mises [1949] 1998, p. 488, bold added)

Once this process is completed and the spears are manufactured, the tribesmen find out that they are now closer to the attainment of more time-consuming goals—such as more units of game per day and/or a kind of game otherwise unattainable, say, because of its size—than they were before. In Mises’s own words,

“Capital goods are intermediary stations on the way leading from the very beginning of production to its final goal, the turning out of consumers' goods. He who produces with the aid of capital goods enjoys one great advantage over the man who starts without capital goods; he is nearer in time to the ultimate goal of his endeavors.” (Mises [1949] 1998, p. 490, bold added)

Thanks to accumulated capital, the tribe can now collect the same prey within a shorter timespan—i.e., it is now more productive. Tasks which would have previously required more working hours and/or the cooperation of other tribesmen are now more manageable. As Mises explains,

“A lengthening of the period of production [i.e., capital accumulation] can increase the quantity of output per unit of input or produce goods which cannot be produced at all within a shorter period of production.” (Mises [1949] 1998, p. 526, bold added)

Thus, thanks to the capital brought into existence, our tribesmen realize two things. First, their daily labor is now more productive; second, they can now attain a quality of output which was previously unattainable given the land and labor at their disposal.

Conclusion

Here is the gist of the Misesian ontology of capital: capital stems from saved production—that is, previous time-consuming assemblages of land and labor which have not been consumed yet—and is a means for storing production time and transferring it into the future. The transfer of time of production into the future is a lengthening of the productive structure—i.e., it allows the production of items that could not have been produced otherwise and/or an increase in the amount of items produced per unit of labor. In other words, capital is the giant whose shoulders the current producers are standing on.