Lesson 4 of 8
Resources released
What abstaining from consumption actually frees, stage by stage, and the shape the structure takes when the freed resources are put to work.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Saving does not release money. It releases the specific labour, materials and machine time that would have replaced the goods a saver did not buy.
- In Hayek's figures the proportion of spending moves from one to two to one to three, and four stages become six, with the quantity of money unchanged.
- The released resources arrive at the shop end of the chain and have to travel to the remote end, which takes time and is not automatic.
Somebody stops buying something. Follow what that does, in order, to the five-stage chain from the first lesson.
Four things that happen, in sequence
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A household defers. It buys 20 fewer units at stage 1 this period and lends the money instead. The shop's takings fall from 100 to 80.
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The shop orders less. It buys less from stage 2 next period, which buys less from stage 3, and so on back up the chain. Labour and materials that had been committed to replacing what was sold are not required for that.
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The loan market clears lower. The 20 lent is supply that was not there before. The rate falls, and projects that take longer to pay now clear it.
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The freed resources move. Labour and materials that had been near the shop end are bid for by firms at the remote end, and two new stages are added. Nothing was created. The same hands are doing different work.
Hayek's own before and after
Before
- Consumers' goods: 40.
- Intermediate products: 80.
- Actual stages: four.
- Average length of the roundabout process: two.
After saving
- Consumers' goods: 30.
- Intermediate products: 90.
- Actual stages: six.
- Average length of the roundabout process: three.
Same money, different arrangement of the same resources.
The point about what is released
Money is the record, not the thing. What the saver actually released is a quantity of specific work: the shift at the assembly plant that would have built the replacement, the ore that would have been refined into it.
Hayek insists that the outcome is identical to what would have happened if the savings had been made in kind rather than in money, and that the amount of original means of production is unchanged throughout.
What the numbers say
The proportion of spending between consumers' goods and intermediate products moves from one to two to one to three. Hayek's arithmetic is that the average length of the roundabout process must rise in the same proportion, from an average of two stages to an average of three, which for a process divided into equal periods means an actual count rising from four to six.
The base of the structure has narrowed from 40 to 30 and the whole has become taller. He describes the money stream as having become longer and narrower.
What is not automatic
The freed resources are at the wrong end of the chain. They were doing work near the shop and they are wanted far from it.
Hayek's own account of the reverse movement makes the point by symmetry: when a structure shortens, the shorter processes have to be started from the beginning and only gradually absorb the available producers' goods as the product moves towards consumption. The same delay applies here, and it is why a transition is a period and not an instant.
Why this lesson is the hinge of the course
Because the next two courses describe the same change with the last sentence of the example removed. The loan happens, the rate falls, the firm at stage 5 hires. But the machinist's month, the steel and the warehouse were never released, because nobody deferred anything.
Check yourself
What does saving release, on this account?
- Money that was previously in circulation
- The specific labour, materials and machine time that would have replaced the goods the saver did not buy
- Bank reserves
Show the answer
Answer: B.
Hayek insists the outcome is the same as if the saving had been made in kind, with the quantity of original means of production unchanged.In Hayek's figures, what happens to the money stock?
- It rises from 120 to 160
- It stays at 120, with the split moving from 40 and 80 to 30 and 90
- It falls to 90
Show the answer
Answer: B.
Holding money and velocity constant is what makes the case a pure change of proportion rather than a change of quantity.Why is the transition not instantaneous?
- Because banks process loans slowly
- Because the released resources were working near the shop end and are wanted at the remote end, and moving them takes time
- Because savers can change their minds
Show the answer
Answer: B.
Hayek makes the same point about the reverse movement: shorter processes must be started from the beginning and absorb resources only gradually.Sources
- Hayek, Prices and Production, first published 1931, second revised edition 1935, lecture II, section 9, for the shift from 40 and 80 to 30 and 90, the move from four actual stages to six, the constancy of money and of the original means of production, the statement that the effect is identical to saving made in kind, and the description of the money stream becoming longer and narrower.
- Hayek, Prices and Production, lecture III, section 8, for the delay while resources move between ends of the chain, stated there for the shortening case.
What this leaves out
- This is a heterodox tradition. The mainstream account of the same phenomenon differs, and nothing here is a forecast or a view on any security.
- The five-stage chain and the household deferring 20 units are invented illustrations. The 40, 80, 30 and 90 are Hayek's own diagram figures and are not measurements of any economy.
- The step sequence is a teaching order, not a claim about timing. How long each step takes, and whether it completes at all, are exactly the questions the objections to this theory press on.