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Saving Robert Murphy

July 18, 2011

When I think of all the worries Keynesians seem to find
And how they’re in a hurry to complicate their minds
By chasing after money with nothing else in view
Austrians are different, we see the problem through
(sung to “Let’s Live for Today,” with apologies to the Grassroots)

In a recent series of blog posts on the meaning of saving, Bob Murphy gives the following example intended to illustrate and defend his interpretation of the concept of saving:

15-year-old Johnny mows my lawn every week, and I pay him $20 each time. Every week, he spends $15 of it going to the movies with his friends, but he puts $5 in a piggy jar on his bureau.

After a year, he has accumulated $5×52 = $260 which he uses to buy a nice watch. Johnny says, “I’m sure glad I consumed less than my income all year, saving $5 per week. Then I used my accumulated savings to buy a watch. I deferred consumption all year in order to buy a nice good later on.
Bob then goes on to ask rhetorically, “Are you guys all comfortable with that? You don’t think Johnny was saving $5 per week?”

Although debates about the meaning of words are always treacherous and seldom fruitful, in this case, I believe we can add some clarity to the conceptual issues at stake by analyzing Murphy’s simple example more closely.

Unspecified in Murphy’s example is exactly when little Johnny goes to the movies. Let us suppose that he regularly cuts Murphy’s lawn and receives his pay of $20 on Monday and spends $15 going to a matinee with his friends the following Sunday. Everything else remains as specified in the original example. Thus, in order to carry out this plan, Johnny must retain $15 of his weekly income in his cash balance for a full week. The question that immediately arises is whether this would also be considered saving by Murphy. Indeed little Johnny could easily say, presumably without fearing contradiction from his economist-employer, “I deferred consumption all week in order to see a good movie later on.”

Now, let’s tweak the example a bit. Let us say that Johnny is always thirsty after he cuts Murphy’s lawn, because Murphy refuses to supply him with refrigerated bottled water and permits him only to drink the warm, coppery-tasting swill from his garden hose. So Johnny routinely goes to the local convenience store and orders a big Slushy for $2 one hour after he cuts Murphy’s lawn. (He therefore foregoes a large tub for a small bag of popcorn at the movies the following Sunday.) But this wouldn’t this be just as much saving according to Murphy, because Johnny holds the $2.00 in his cash balance, refraining from consumption for a full hour?

The broader point that emerges from this analysis is that Murphy is simply defining “saving” as the holding of cash balances. For consider the ineluctable fact that in a monetary economy everyone must retain a money payment in his cash balance for a shorter or longer period of time, whether he intends to purchase an immediately consumable service like a movie or restaurant meal, a consumer durable like a car or a house, or an investment asset of some kind. In other words, all income and spending (on both consumption and investment) must flow through cash balances. It follows from the very nature of money as the general medium of exchange that there is always a lapse of time between monetary receipts and expenditures. Whether it is a matter of hours, weeks or years, money income once received must always be held in cash balances before it can be spent.

Getting back to Murphy’s main argument: Is it therefore his contention that all monetary income is necessarily saved because it is held for a time in cash balances? If not, then what is his criterion for distinguishing those parts of cash balances that constitute “saving” from those that do not? It would seem that any attempt to establish such a criterion would be entirely arbitrary. Is money that is spent on consumer goods within a month, a week, 5 hours, 15 minutes of its receipt considered consumption or saving? Where is the line to be drawn?

Let us change Murphy’s example one more time to illustrate the point from another angle. Suppose that Murphy is the franchise owner of the local multiplex theater and also a silent partner in a local jewelry store. Assume further that he makes a deal to pay Johnny a voucher for a matinee ticket and concession items worth $15 plus a $5 credit to Johnny’s layaway account for a watch at his jewelry store. In this scenario Johnny receives and holds no cash balances, precisely because money enters the transaction only as a numeraire or accounting device and not as a true medium of exchange; in effect, Johnny’s income and expenditures are simultaneous, i.e., he purchases the movie voucher and layaway account credit instantaneously upon receiving his money. Nonetheless Johnny achieves exactly the same ends on the market—a movie every Sunday and a watch at the end of the year—as he does when he is compensated in money.

Thus, however Murphy may wish to characterize Johnny’s temporal pattern of consumption in relation to his receipt of income, it has nothing to do with the holding of money. In the case in which Murphy compensates Johnny with money, Johnny earns $1,040 (= $20 x 52) and holds an average daily cash balance during the course of the year of $145 (= $15 every day + $260/2—assuming for ease of calculation that he holds the $15 for the entire day each Sunday rather than only part of it). In the second scenario Johnny also earns an annual income of $1,040, but now he holds an average of zero cash balances. So to put the question at issue in another way, does Johnny save any more in scenario two compared to scenario one just because he holds $145 in cash on average? Murphy must answer this question and those posed above in order to make his definition of saving coherent and meaningful.

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