Forced Saving

Early in the history of the debate between Keynes and Hayek, the two struggled without success to clarify the meaning of something called “forced saving.”

It turns out that they didn’t really disagree; they just didn’t agree on definitions.

The following are notes based on excerpts of an article by Roger Garrison.


Hayek and Keynes:
The problem with Hayek’s “forced saving,” then, is that it presents itself syntactically as a kind of saving while referring contextually to a pattern of investment. Hayek himself was certainly alive to this point even as early as his Monetary Theory and the Trade Cycle. In a chapter titled “Unsettled Problems in Trade Cycle Theory,” Hayek ([1928] 1975, p. 220) referred to the term as a “rather unfortunate expression.” He preferred the phrase “artificially induced capital accumulation.” In his subsequent “Note on the Development,” Hayek ([1939] 1975, p. 197) mentions Keynes’s avoidance of the term in his Treatise on Money: “Keynes … rejects this terminology [forced saving] and prefers to speak simply of investment being in excess of saving; and there is much to be said in favor of this.” But despite Hayek’s and others’ dissatisfaction with using the term to refer to a pattern of investment rather than a kind of saving, forced saving (both the term and the concept) has come to be considered the sine qua non of Austrian business cycle theory and particularly of Hayek’s rendition of that theory.

Mises and Hayek:
There is an easy—though only partial—reconciliation between Mises’s and Hayek’s contrasting formulations. It comes from our recognition that Hayek’s “forced saving,” rather than being the antonym of “overconsumption,” is actually a synonym for “malinvestment.” With unduly favorable credit conditions, the business community is investing as if saving has increased when in fact saving has decreased. There is no contradiction here between Mises and Hayek but rather a contradiction recognized by both in the market forces associated with a credit-driven boom. It is this contradiction, if fact, that lies at the root of the boom’s unsustainability. A fuller resolution of the differences between Mises and Hayek requires a closer look at “forced saving” and “overconsumption” as used by each.

Hayek had a concept of “forced saving” that is equivalent to “malinvestment” or investment in excess of what is optimal (optimal being consistent with maximizing society’s welfare). Indeed, he accepted that he really meant it to mean “artificially induced capital accumulation.”

Keynes tried to wrestle with the idea, and used it, according to Hayek, to mean something else: the excess of (desired) aggregate investment by firms over (actual) saving of households (assuming that only firms invest and only households save). The term would then cover an unwanted and unexpected increase in business inventories (that might signal that producers are producing more than quantity demanded at the prevailing prices). The concept, in the language of Keynes, could easily have been named “forced investment.”

We can then reconcile Keynes with Hayek. In either of these two’s views, forced saving comes at the down-turn of the business cycle. But in Hayek’s views, forced saving also happens at the boom, when there is over-investment by firms who have a too-rosy projection of future demand; the forcing factor here is artificially low interest rates arising from too-easy monetary policy.

Garrison states that the concept of forced saving is central to Austrian business cycle theory.

Posted in books and authors, capital markets, economic thought, macroeconomics, microeconomics | Tagged , , | Leave a comment

Recovery of the Soul

The theory seems plausible.

The idea is that consciousness consists of certain “perturbations” extant in our brains not contained in time/space that “migrate” to some other universe when humans die (what about plants and animals?).  This is a theory that the soul lives on, and by extension, can be infused into another body of matter that can hold consciousness.

But why can’t we remember our past incarnations? And if we can’t remember, isn’t it the same as having “died” in the sense of the consciousness going elsewhere that we can’t recover? Or is the secret to immortality the discovery of how we can recover that consciousness, the way we move “trash” in a Mac back to regular memory?

Posted in ephemera, philosophy | Tagged , | Leave a comment

Econ 12 – 5th Assignment – due by email on February 17, 2015

Prepare, individually, short written answers to the following questions, and submit them to me by e-mail ( on or before February 17, 2015. Most of the answers can be found in Chapters 8, 11, 12 and 13 of the Backhouse textbook. You should also do some independent research using other sources.

Please bring hard copies for your classmates and me when we discuss the answers in class on February 18.

1.Summarize the ideas of Austrian economics. Who are the main figures of Austrian economics? Is Austrian economics more or less useful for the Philippine economy?
2.Where is Hayek in the context of Austrian economics? What did he propound? In his debate in the 1930s with Keynes, what diametrically opposed conclusions did Hayek and Keynes have? Explain why they disagreed with each other.
3.What are the main theories of economic growth in ‘development economics’? What is the ‘Washington Consensus’? Would the Washington Consensus be applicable or relevant to the Philippines? Why or why not?
4.Where would you locate Schumpeter’s work in the history of economic thought? Is it a better alternative to Keynesian economics?
5.[extra credit only] What is game theory? Is it a good alternative to general equilibrium theory? Why or why not?

USEFUL REFERENCES (apart from Backhouse):

Posted in development economics, economic thought | Tagged , , , , | Leave a comment

Econ 12 – Assignment No. 4 due Feb. 10, 2015

Prepare, individually, short written answers to the following questions, and submit them to me by e-mail ( on or before February 10, 2015. Most of the answers can be found in Chs. 8, 9, 10, and part of Ch. 13 of the Backhouse textbook. You should also do some independent research using other sources.

1.Summarize the ideas and theories in institutional economics. Include the economic thought of Veblen, Commons, Wesley Mitchell, and Galbraith.
2.What is the Tragedy of the Commons? Explain. (Here, you may consult:
3.What is Keynesian economics? What is the role of ‘animal spirits’ in Keynesian economics?
4.What is the so-called neoclassical synthesis between neoclassical economics and Keynesian economics?
5.What is the main difference between the ideas in Keynesian economics and the so-called New Classical Macroeconomics?
6.What is general equilibrium theory, and what’s wrong with it?

Please bring hard copies of your submissions for giving out to me and your classmates when we meet again on February 11.

Posted in economic thought, institutional economics, macroeconomics, tragedy of the commons | Tagged , , | Leave a comment

Econ 12 – Assignments Nos. 2 and 3

Read Chapters 5 and 6 of Backhouse. Answer briefly the following questions (using also other material you can find from the references in the Syllabus).

Answers to questions 1-6 are due January 6.

1.What did Cantillon think about the problem of population? (2 pts.)

2.Turgot contributed to the modern economics definition of what constitutes wealth. What did he say? Re-state his thought in your own words. (2 pts.)

3.Quesnay, among the Physiocrats, argued that agriculture was fundamental. Was he right or wrong? Explain. (5 pts.)

4.Discuss how Quesnay and Turgot influenced Adam Smith. (4 pts.)

5.Summarize, in your own words, the evolutionary theory of social organization in the writings of the Scottish Enlightenment. (4 pts.)

6.Summarize Mandeville’s “Fable of the Bees.” (3 pts.)

Answers to questions 7-10 are due January 13.

7.What is the “invisible hand” in the work of Adam Smith? Quote the paragraphs in which these words appear in his writings. Explain in your own words, preferably in Taglish or Cebuano, how the invisible hand works. (20 pts.)

8.Would Adam Smith agree that ‘greed is good’? Why or why not? (5 pts.)

9.Did Smith, in arguing for free markets, also argue for only a limited role for government? Explain your answer. (5 pts.)

10.Did Smith see a role for government to maintain full employment? Why or why not? (4 pts.)

Posted in economic thought, Uncategorized | Tagged , , , , , , | Leave a comment

Futuristic Economics

In this lecture, we will mainly explore the question of how economists know what it is they know.

First, for reference, we have the following dictionary definitions:

Science: Knowledge gained through experience; Observation, identification, description, experimental investigation, and theoretical explanation of phenomena. (Root: Latin, scientia, knowledge.)
Phenomenon: A fact perceptible by the senses.
Experiment: A test made to demonstrate a known truth.
Empirical: Based on observation or experiment.

Philosophy: The study of the fundamental nature of knowledge, reality, and existence, especially when considered as an academic discipline.
Metaphysics: The branch of philosophy that treats of first principles.
Ontology: The branch of metaphysics dealing with the nature of being. It addresses the question of what kinds of things exist.
Epistemology: The theory of knowledge, especially with regard to its methods, validity, and scope. Epistemology is the investigation of what distinguishes justified belief from opinion.

Religion: A cause or activity pursued with zeal or devotion.
Logic: The study of the principles of reasoning.
Art: Discipline that does not rely on the scientific method; creative or imaginative activity.

Second, some “tickler” questions, for which we will not necessarily have an answer:

What is thought or thinking? If it is defined as “mental activity,” where does this activity take place? If it takes place in the brain, can animals with brains think? What about plants? Can they think?
Can a machine think? Can it learn? For example, Facebook and Google collect data about how their users behave. Do the algorithms inside the servers of Facebook “think”?

Okay. Let’s get down to some business for today. Continue reading

Posted in economic thought, essays, history, philosophy, Uncategorized | Tagged , , , | Leave a comment

EC 12 First Assignment

EC 12, 2014-15: First Assignment (due November 30, 2014)

Please refer to the syllabus for reference material and readings.

Special note on plagiarism: You are free to use all sources, including Google and search engines, but you are not free to pretend that you found the answers by your own thinking if that is not the case. Thus, you need to show me from where you got the answers. If it is from your own thinking, you will have to demonstrate to the reader how you got to your conclusions.

For this assignment, the following items in the syllabus are particularly useful: the prologue chapter in Backhouse (pp. 1-9), and Deirdre McCloskey’s “Three-Minute” history of economic thought at

For this assignment, you are allowed to collaborate and work with each other. However, I do ask that you indicate this by noting that the answer was, for example, formulated jointly, with the names of the group members so indicated. It is also okay if all of you collaborate on all of the answers. Nonetheless, there will always be a somewhat higher grade, ceteris paribus, for individual work.

Please answer the following questions briefly.

Deadline is by November 30, 2014 thru e-mail back to me at, with copies to your classmates.

  1. Is economics a science? Why or why not? Hint: To answer this question, you must first define what a science is.
  2. What are the usual reasons for studying the history of economic thought? What are the usual reasons for not bothering to study the history of economic thought?
  3. If physics is also a science, should a physics student study the history of thought in physics? Typically, physicists don’t think much of such a study. Why or why not? (Hint: Does this mean there is a difference between economics and physics?)
  4. We define economics as the study of human choice. If humans change or evolve, will the “truths” of economics change, say, by the year 3013? Defend your answer.
  5. Ants appear to work together to solve an economic problem of survival. So do flocks of birds. Can you imagine an economics of (animal) choice? Would it be the same as economics? Why or why not?
  6. If the basic difference between humans and animals is “free will,” how then can economics be used to “predict”? After all, humans can choose not to behave according to the economic model. Explain your answer.
Posted in Uncategorized | Leave a comment