into the productive sector and the service sector, as if those who provide services arent productive. Some lament the growth of automation and mechanization saying that it is forcing labor to move into the service sector and that therefore the pool of skilled and educated labor will continue to decline. Services, they declare, act only to redistribute wealth rather than generate it. This is a very short-sighted and mistaken view that arises from a mistaken concept of economic value and wealth.

An economic value is anjihing that fulfills a need, is recognized as such, and is attainable -which includes both commodities and services. I use "need" here in the widest sense to mean that which is required, desired, or wanted; and I assume that only one person can determine need-the individual. If enough individuals desire and are willing to pay for the same economic value, then it has market value.

It is a businesss goal to recognize or create market value and profit by satisfying consumers desires. In pursuing this goal, businessmen use mechanization, automation, and other innovations to make more products and services available to more people at a cheaper price. The laborers who are temporarily displaced by technological improvements may move into the service industry, but they may also be absorbed by the manufacturers of the complex capital goods which make mechanization and automation possible. No matter which, both are a new source of wealth. The savings gained in mechanization are invested in new products and services, and the net wealth of the nation is increased. You might call it natures way of upgrading and improving mankind. New, more economical methods of production replace old ways, forcing people at all levels of society to upgrade their knowledge and skills in order to compete in the markets.

While there are strong factions, especially in organized labor, that would prefer stagnation to growth, those who embrace change and continually expand their knowledge are likely to grow, not only financially, but also personally. Continually thinking, learning, and producing are fundamental requirements for gaining a sense of self-esteem and self-worth. If this fact were more widely understood and applied, it would contribute to a healthier, happier, and more productive culture.

The idea that the service industry is unproductive is totally unfounded. Beyond attaining the subsistence commodities of food, shelter, and clothing, there are an unlimited number of options available for individuals to dispose of the products of their efforts; to use their wealth. If they choose to spend money in an expensive restaurant, they are consuming their wealth, but in so doing helping to pay the

construction workers who built the structure, the landlord who owns it, the furniture manufacturer who built the tables and chairs, the wages of the waiter who serves them, and so forth. Their consumption supports, in part, the ability of countless others to produce.

Economists often divide the nation into "producers" and "consumers" as if they were a different species, perhaps even at odds with one another. While this division has some value for analytical purposes, actually every producer is a consumer and every consumer is a producer (unless you are talking about someone who spends away an inherited fortune or who lives on the govemment dole). The man who works in an automobile assembly plant contributes to creation of the finished product. Even though his role is as an intermediary in the process, he is nonetheless productive. The same is tme for a waitress in a restaurantshe creates a portion of the atmosphere and service that is paid for. These people are wage eamers, producers who trade their product for wages, and then in tum trade their wages for the goods and services of others. For each individual, the simultaneous role of producer-consumer-the chain of action consisting of produce and trade, produce and trade is the only way people can legitimately achieve their ends in a free market economy.

To produce is to create potential wealth. Wealth is an accumulation of unconsumed goods, whether products or services-anjihing that is considered to be of value by individuals in the marketplace. In this sense, a waiters as yet unused services (if he is employed at a profitable restaurant) are wealth. The fact that today we generally measure wealth in monetary terms does not change its essential nature. An accumulation of money is simply an accumulation of claims on market goods and services, but one which varies in value over time.

The measure of success in the marketplace is the ability to accumulate wealth by either creating or anticipating the demand for ones products or services at a price that will sustain not only survival, but economic growth. Production is the first step in this process; saving is the next.

SAVINGS, INVESTMENT, CREDIT, AND WEALTH

Savings is investment. -Henty Hazzlit

While production is the prerequisite to survival, savings is the prerequisite for economic growth. To accumulate wealth, the first step is to produce more than is required for immediate consumption. Then, two alternatives are possible: the surplus can be stored for consumption at a later date, which is called plain saving; or the stored product can be used either to enhance future productivity or for sustenance while working toward ends that take longer to achieve, which is called capital saving or capital accumulation.

With plain saving, products are set aside but sooner or later will be consumed leaving nothing in their place. With capital saving, goods are accumulated which are designed for either improving the production process or creating new products altogether. It is capital savings which leads to the improvement of mans material condition and frees him to further enhance life, not only by leaming and producing more, but also by enjoying leisure and recreational activities. Capital saving is an investment in the future, and in this way, savings is investment.

Saving is an act of choice based on a discounting of the value of consuming future products against the value of consuming existing products. The ratio of the value assigned to existing products and the value assigned to future products is called originary interests-it is a measure of the interest in consuming now versus consuming later. The higher originary interest is, the lower will be the rate of capital savings, and conversely, the lower it is, the higher will be the rate of capital accumulation and therefore the rate of growth of wealth.

Originary interest shows itself in the financial markets through the rate of growth or decline of capital goods, 16 which is directly tied to the level of individual savings and the supply of and demand for credit. Capital accumulation is not directly tied to the interest rate. The market interest rate is the cost of credit of which originary interest is only one component. But originary interest is the underlying driving force which determines whether people will consume now or later. It varies fro m person to person and is dependent on a wide range of conditions. The reason for this distinction will become apparent when I discuss the effects of monetary policy on the business cycle in the next chapter. Ultimately, the decision to save is based on the ability and desire to forgo consumption now in exchange for higher retums in the future; it is the choice not to consume today at the expense of growth tomorrow.

The engine of growth is new technology, which arises from creative innovation and the inves tment of knowledge, time, energy, and resources gained through savings. Technology is applied knowledge, and innovation is an act of creation. Therefore, technological innovation is the act of creating new ways to apply knowledge. The first fisherman who thought of catching fish with a net was an innovator, and the net was his new technology. In effect, the net was a form of savings-a capital good used to simplify the process of production.

The first net fisherman had to save in order to acquire the knowledge, time, energy, and materials to constmct the net. Once he created the net and leamed how to use it, he saved enormous amounts of productive energy by making each of his working hours more fmitful. He could not only provide fish for himself and his family, but could trade his surplus for the products of others. Fish became less scarce because they required less labor to attain, and therefore his neighbors could afford to specialize in producing other necessities to trade with him for his fish. This exa mple, on a primitive scale, shows how the efficiencies gained from one mans saving, innovation, investment, and capital accumulation filter through the community and make everyone more productive.

At each step in the progress of civilization, we inherit the knowledge of other people and improve on it. This too is a form of savings that leads to growth. We in

herit the canoe and make a sailboat. The sailboat becomes a steamship. The steamship becomes a diesel-powered supertanker. And so on. Underpinning the whole process is the savings and preparatory

work arising from earlier generations and ultimately from the creativity of individuals. If our fishing ancestors had simply consumed their nets and canoes without bothering to invest the time to replace them; if our ancestors hadnt passed down the knowledge of how to grow wheat and make flour; if human beings, like other animals, were pure consumers, civilization as we know it would not exist. It is savings, of products and of knowledge, which makes inve stment and growth possible.

It is easy to see at a primitive level of social development how savings makes investment possible. It is not so easy to see the process at work in a complex market economy. For example, when a manufacturing company borrows money to invest in capital goods such as new and more efficient machinery, it is difficult to see where savings comes into play. It is so difficult in fact, that economists like John Maynard Keynes convinced (or at least provided a rationalization for) other influential economists and govemment policy makers that production and savings are not the prerequisite for growth.

In Keynesian terms, aggregate demand, as measured in dollars of disposable income, is the driving force behind production. Put a few extra dollars into everyones hand, he said, and theyll spend it, thereby increasing demand and inducing industry to produce more (assuming of course that businesses dont respond simply by increasing prices). Savings on the other hand, promotes "underconsumptio n," takes away from aggregate demand, diminishes the GNP, and stifles growth. According to this view, govemment can guarantee prosperity by pumping money into the economy through deficit spending and easy credit policies and by encouraging spending rather than saving. The problem for Keynesian thinkers is simply one of careful management of govemment spending and of the money supply.

I mentioned earlier that money serves as a medium of exchange and a store of value, and that when someone saves money he or she is withholding claims against unconsumed goods and services. On the surface of it, based on these two observations, it may seem that saving is unproductive, that in fact savings and investment are not directly tied. You might argue that by not buying anything, the saver reduces demand for the products available on the market, diminishes the profits of industry, and therefore contributes to a decline in business activity. Nothing could be further from the tmth.

Consider the two basic types of savers: the miser who stuffs money into the mattress, and the typical saver who puts money into a bank or into some other instmment such as bonds, gold, or stocks. There arent many Scrooges in the world who hoard money in mattresses for no other reason than for t he love of holding it. But to the extent that this happens, the result is a reduction in the supply of money in circulation relative to other commodities, producing a downward pressure on prices and an increase in the purchasing power of money. Remember th at money is a commodity no more and no less subject to the laws of supply and demand than any other commodity. If its supply is diminished, its value relative to other

products will go up. Wealth cannot be equated with a quantity of money without reg ard to the purchasing power of money.

In the last few decades of the nineteenth century, industrial expansion and the standard of living in the United States grew at the fastest rate in the history of the world, before or since. But an economist measuring wealth in terms of dollars wouldnt necessarily recognize this. Over a 20 -year period, during the height of the expansionary period, the gold- and silver-based money supply remained relatively stable, and the general level of prices fell about 50%. In fact, throughout the eighteenth and nineteenth centuries, except during war time when the govemment financed expenditures through the issue of paper money, declining prices were the mle, not the exception.

Today, because we are so completely indoctrinated to our govemments inflationary monetary policy, this seems almost bizarre. But if you think of money as a commodity, then it makes sense. Just as businessmen today attempt to account for continually rising prices in their pricing and retum calculations, so businessmen used to anticipate the effects of falling prices. Businesses actually increased profits during periods of declining dollar revenues, because the value of the dollar was constantly increasing. The difference is that market factors, not the govemment, were the principle determinant of the supply of money and credit.

Many modem economists equate falling prices with economic decline. The reason is that since the late 1920s the only time the general level of prices has declined is during periods of depression or recession. A careful examination of these periods will show govemment intervention at its worst. For