What is Saving?

I have been thinking a lot about the meaning of saving money. Which brings me to what I call the fundamental question of finance: How does forgoing consumption today translate to increased consumption in the future?

In thinking about this question I have identified six distinct answers to this question:

The dog: Place a bowl of food in front of a hungry dog and it will devour it without hesitation, lick the bowl clean and then look around for more. The dog’s world represents the very simplest economic system. What you have now is what you consume now. If there is plenty today the dog will eat itself sick. If there is no food tomorrow he will go hungry.

The squirrel: Before the first human walked the earth, animals such as squirrels discovered the first financial innovation. Just as the squirrel gathers nuts to get through the long winter, there are some goods that we can simply store and use in their current form. This is the simple and most obvious answer to the question listed above. For many people this is as far as they get when thinking about savings. However, money is not a can of beans. Simply storing money today does not automatically translate to purchasing power in the future.

The farmer: Around 10000 years ago humans discovered that seeds left in the ground would grow into new plants. Thus the birth of agriculture also represented the first investments. By not consuming some grain today, early farmers could ensure a reliable supply in the future. Many natural and living things allow this sort of simple investment. We now know that by not clear cutting a forest or fishing a species to extinction we can ensure an adequate supply for the future.

The builder: Some projects take a lot of time and effort before they yield any value. 10 people might have to work for half a year to build a house. Bigger projects like highways and dams can occupy hundreds or thousands of people for years. Of course all of those people need food, shelter and all the other necessities of life. Which brings us to the fourth answer to our big question. When I consume less then I produce, my surplus can sustain those who are working on larger projects. In exchange, I expect to receive some of the benefit of the completed project.

The parent: Over the course of ones life ones needs and abilities change. A new born infant is completely helpless to meet its basic needs. By providing for young children during their peak production years, the parent can count on their children to sustain them as they age. This familial relationship has been a cornerstone of nearly every society in human history. In modern societies this function is often aggregated, in that governments invests in education for children and pensions and medical care for the elderly. The logic is basically the same, individuals in their prime working years consume less then they produce, while the surplus goes to supporting children and the elderly.

The creator: The greatest achievements often require years of effort with only a small possibility of creating anything of value. Great works of literature, billion dollar corporations and medical breakthroughs all follow this pattern. An individual researcher may toil for 20 years with no tangible results before a discovery that creates millions of dollars of value. The artists, entrepreneurs, scientists and writers depend on the savings of the general population to support them in their efforts.

The financial sector is responsible for taking the excess production of today and using it to meet the needs of the future. Some goods can be stored for the future, but the vast majority of the production is services or perishable goods that cannot be stored. Forsaking consumption today does not guarantee that there will be plenty tomorrow.

1 comment to What is Saving?

  • SteveVanLoon

    I guess there are two most basic functions that banking provides. First of all it is a safe place to store your wealth where it will not likely get stolen or lost. Second, a bank links up lenders and borrowers, and for that service, they earn a profit. I am disregarding fractional reserve banking for this reply.
    The amount of money available to be loaned is set by the public, and the amount of people wanting to borrow constitutes the parameters of supply, and demand for credit. A *natural rate of interest* will result from the interactions of these free acting participants in the credit market. Those who have more than the amount of cash on hand that need for daily activity will gain by putting the excess to work as the natural rate of interest. At the same time, an entrepreneur will gain by using the money to produce wealth, and sell it for his cost plus mark up, so everyone gains from the money that was put in savings.

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