Friedrich A. Hayek, “Saving” (1939)

Hayek’s encyclopedic article treats “saving” not as a single moral habit or accounting residual, but as a family of distinct economic acts whose confusion has misled theories of capital, interest, banking, and depression. His first move is conceptual: the word has drifted from its ordinary sense into uses covering postponed consumption, money holding, capital maintenance, investment, taxation, and credit expansion.

The original meaning of the term saving, keeping or preserving something for future use, has gradually been extended to cover a number of different activities more or less directly connected with the original sense of the word.

The article’s central distinction is between saving and investment. An individual may abstain from present consumption without thereby adding to productive capital; in a money economy, the saved income first appears as money, and the saver must still decide whether to hold it idle or place it at the disposal of investors. This separation becomes decisive once banks, deposits, and securities mediate between households and entrepreneurs.

Even at this early stage in the development saving and investment become distinct activities; even an isolated individual may save without investing; but the distinction assumes much greater importance when we consider the process of saving in a money economy.

Hayek’s classification accordingly separates saving in natura from monetary saving, and voluntary individual saving from corporate saving, compulsory public saving, and “forced saving” generated by credit creation. Only one of these corresponds to ordinary usage. The others may contribute to capital formation, but calling all of them saving obscures rather than clarifies the causal process.

Of these different types of “saving,” only II, 1, is generally understood by the more familiar use of the term saving.

This matters especially when economists speak of society as saving. Hayek resists treating aggregate capital formation as if it were simply the enlarged counterpart of household thrift. Capital may grow through reinvested profits, taxation, credit expansion, or changes in the value and composition of assets; conversely, individual saving may remain a hoard. Gross and net saving are also difficult to define, since maintaining capital intact requires judgments about depreciation, replacement, and technical change.

Historically, Hayek argues, the regular investment of small private savings is comparatively modern. Earlier saving often meant hoarding precious metals or accumulating durable wealth, while productive capital was supplied chiefly by merchants and entrepreneurs reinvesting profits. The modern connection between saver and investor depends on banking, securities markets, insurance institutions, building societies, and other channels through which abstention from consumption can be transformed into command over productive resources.

The monetary problem is therefore central. If savers merely hold money or idle bank balances, expenditure falls without a corresponding increase in investment. Such saving resembles hoarding and can have deflationary effects. When saving is actually invested, however, it redirects resources from consumption goods toward longer production processes and capital goods. Temporary restraint in consumption can then yield greater future output.

Hayek’s position is thus anti-underconsumptionist but not indifferent to monetary disequilibrium. A general glut cannot be explained simply by an excessive willingness to save; difficulties arise when saving is not invested, when the rate of saving changes violently, or when credit expansion simulates saving and induces malinvestment. He also rejects claims that economists can specify an objectively correct division between present and future consumption: intertemporal preference must be inferred from choices, not imposed by theory.

The essay closes by linking saving to the stability of a changing economy. A steady flow of voluntary saving can help absorb population growth, technical innovation, shifts in demand, and disturbances caused by credit fluctuations. The determinants of saving include income level and regularity, security of investment, opportunities for self-investment, social insurance, income distribution, and the rate of interest. Hayek’s lasting contribution in this article is the disciplined separation of saving, hoarding, investment, capital formation, and credit creation.

But the use of the term saving in this connection must be regarded as an instance of the misleading practice of treating the term as equivalent to “capital formation.”