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.


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