The two most notable theorists on the issue of forced savings are Fredrick von Hayek and John Maynard Keynes. They both have different views on the issue and provide different interpretations of forced savings. Hayek is of the opinion that the reason for forced savings is the easy money available for investments and low interest artificially created by government policies on monetary issues, which do not represent the actual situation in the market because of lack of increase in the income of individuals. On the other hand, Keynes defines forced savings as a situation where there are excess savings with regard to a situation where there is full employment stating that it would be a rare occurrence.
The main reason for forced savings according to Keynes is the lack of demand and as stated by him, it is a good thing because it leads to the transfer of resources. According to Wong, “Forced saving transfers real resources from the production of consumption goods to working capital and this results in a larger wage fund available for production and employment in the next period. This mechanism of transference of resources by means of forced saving proposed by Keynes can be supplemented by the following discussion in a letter to Robertson” (523). Consequently, there is a clear difference in the way that the two individuals define forced savings. Comment by Achlys: Paraphrase it rather than directly quote.
Hayek is of the opinion that forced savings might lead to a dangerous situation while Keynes views forced savings as a way to redistribute wealth and create employment. In looking at the subject and especially the importance placed by Hayek on the matter, I can say that the issue of forced savings is important. The general idea provided by forced savings is to show the ways that monetary policies can result in the redistribution of wealth and cause a change in the production of goods and services. Forced savings can occur when people spend less than they earn because of the shortages or when the prices of commodities are too high and people without credit have to accumulate their money over a period.
The forced savings concept applies to the issue of expansionary monetary policies that can lead to artificial booms. Forced saving happens in an involuntary manner and people have no control over it. The concept of forced savings occurs especially with the intervention of government, which has the ability to come up with monetary policies that can lead to boom-busts in the economy. In my view, forced savings is as important as highlighted by Hayek. It helps people and governments understand the effects that monetary policies that seek to improve investment can have on the economy and the way the policies can affect the consumers and the producers leading to a huge impact on the rate of production and the affordability of products.
The issue of forced saving is crucial especially on the use of the forced savings as investments. The use of forced savings to fund investments can lead to changes in the business cycle. The forced savings can cause artificial booms, which after a while will lead to a recession when there is the realization that the booms were artificial and do not come from an increase in the actual income of people. Forced savings make it seem as if people are saving but the reality is that the saving by individuals is forceful because they do not have a choice but to save. It leads to a misguided notion of investment. Forced savings leads to a notion that there is money to invest and therefore banks can lend more money to investors because of its availability. The investors have the impression that they can use the money to start businesses leading to a boom.
According to Machlup, “Investments can now exceed intended saving; that is to say, capital formation can be in excess of what people saved out of their previous income; the extra capital formation is "forced," so to speak, upon the community through monetary witchcraft” (27). However, their businesses fail because people have a diminished ability to consume goods and services, which leads to a recession.
The other reason that the issue of forced savings is important is that it to provide an understanding of the way regulations can affect the economy. An example is that the regulations that occur in mortgages and real estate can lead to forced savings because people do not have the money to get into the property market. They hope that they can save enough to the point where they can afford it but it might be an elusive dream. The regulations that occur on things like expenditure and insurance can lead to forced savings. It is crucial for the government and people to understand the way the various regulations can affect them.
People need to make conscious decisions on their spending and investment and in understanding the concept of forced savings they can realize the effect that the regulations will have on their lives. Governments also need to understand the concept because they are the ones in charge of creating the regulations and they should make sure they do not come up with regulations that can lead to an increase in forced savings. According to von Hayek, “the government has it in its power to accelerate, to an unexampled degree, the augmentation of the mass of real wealth. By a proportionable sacrifice of present comfort, it may make any addition that it pleases to the mass of future wealth; that is, to the increase of comfort and security” (124).
It is clear that forced saving is important because it involves the transfer of the purchasing power of the consumers to the investors because the investors are in a position to acquire credit leading to a decrease in monetary value. The government should, therefore, make conscious decisions and ensure that it minimizes the effects brought by forced savings. I believe that the issue of forced savings is important because it helps to reduce government interference in the economy. The government has the ability to come with new ways to raise money such as through taxes. It can impose new regulations when there is a need for funds to run the activities of the government.
The actions of the government to raise money through taxes can lead to forced savings, which can be detrimental to the economy. The concept of forced savings helps to reduce the number of regulations that the government can employ to raise money. The market in most cases operates with minimal government interference. Without forced savings, the government could be in a position to interfere with businesses always because it would not have to worry about the repercussions of its actions to the economy. Forced savings, therefore, play a huge role in maintaining a free market and consequently, businesses operate under market forces with minimal control from the government.
In conclusion, in the world of economics, many theories exist with different scholars coming up with different ideas to explain phenomena that occur in the economy. The theories help to explain and provide knowledge to people on different issues. However, there are times when there can be competition between scholars on different issues. The concept of forced savings is one of the most controversial economic concepts with different scholars having varied options on the issue. One of the notions is from Fredrick von Hayek. It is crucial to look at the subject from different angles to determine whether it is as important as Hayek thinks it is, or it is much a do about nothing. In my view, the issue is as important as Hayek thinks it is because forced savings has the ability to have a huge impact on the economy especially on government monetary policies and the production activities in the economy. Comment by Achlys: More details on How u agree with Hayek in conclusion.
References
Machlup, Fritz. "Forced or induced saving: an exploration into its synonyms and homonyms." The Review of Economic Statistics (1943): 26-39.
von Hayek, Friedrich A. "A Note on the Development of the Doctrine of" Forced Saving"." The Quarterly Journal of Economics 47.1 (1932): 123-133.
Wong, Ho-Po Crystal. "From the Treatise on Money to the General Theory: John Maynard Keynes's Departure from the Doctrine of Forced Saving." History of Political Economy 48.3 (2016): 515-544.
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