Speculative Consumption

Catallactics defines two categories of capital use, consumption and production. Products are produced and consumed. Production, or the creation of products, requires time and therefore saved capital (investment). Consumption also requires time, and therefore saved capital (hoard).

Human energy can be expended in leisure or labor, where the depreciation of stored human energy is a factor (cost) of production. In either case conversion of this potential energy to work is a consumption of stored capital. Labor may produce food and the person may immediately eat it. This is an absolute subsistence economy, where the only savings is potential energy stored in one's body. The product of labor, time and nature-given factors is continuously consumed, either in production (e.g. picking berries) or leisure (e.g. sleep). This is sometimes referred to as living "hand to mouth." The property saved in this process is the person's own body. A child begins life with potential energy gifted by its mother.

Savings is therefore the only source of both production and leisure. The question then arises, to which is the savings applied? Even in the case of food that has been digested, the question remains. Capital applied to production is traded for the ownership of what is eventually produced. This ownership of a future good is called a "savings-investment" (or simply "investment"). Capital not applied to production is called a "savings-hoard" (or simply "hoard"). Savings is the sum of one's hoarded and invested capital. The process of applying hoarded capital to investment or leisure is called "dishoarding".

After he sells his services, he acquires his money income from production, thereby adding to his money stock. He then allocates this income between consumption and savings-investment, and we are assuming no hoarding or dishoarding.

Murray Rothbard: Man Economy and State

Catallactics deals with human action, explicitly rejecting analysis of human thoughts. Thoughts are subjective, expressed objectively only in the action of a trade. This principle is embodied in the theory of subjective value. As a necessary factor of both production and leisure, time is assumed to have objective value. There is no expression of whether one's savings is to be used in production or leisure until it is dishoarded. One may prefer savings for production, but then oversleep, consuming the savings in leisure. Similarly one may generally prefer apples, but trade an apple for an orange. The only objective expression of a preference is a trade, including the trade of savings for consumption by production or leisure. As not applied to production, hoarded capital is called "unproductive", just as is a person not engaged in production.

Hoarding is a necessary consequence of uncertainty. As uncertainty rises people tend to increase their level of hoarding, either restricting leisure or production. This allows their hoarded capital to be applied to either in the future. Yet unproductive capital incurs time costs. Time is objectively valuable. The opportunity to use the capital in production has been traded for increased certainty. This is the opportunity cost of certainty, an expense. Both productive and unproductive uses of capital trade opportunity for certainty. The hoard is referred to as "liquidity" and is necessary only due to the fact of uncertainty.

As shown in Savings Relation, the ratio of savings hoarded to that invested is an expression of human time preference. As with all valuations, that of certainty relative to opportunity cost is subjective. While time has objective value (i.e. more time is worth more than less), the value remains relative and subjective. Yet, as with all valuations, the consequence is an objective price for capital over time, expressed by exchange and referred to as the rate of interest. Interest is both the return on capital and the cost of capital. Opportunity cost is the loss of productive gain that arises from hoarding capital, measured by the rate of interest.

A hoard represents the subjective valuation that it is worth more over time than the opportunity cost that it represents over that time. This is called "speculation". It is the expression of a preference for owning a good over parting with it, with its cost measured by interest foregone. The opportunity to invest the hoard over the time hoarded is lost forever. In other words, the act of not investing capital is the consumption of capital. With all capital hoarded, there is no production of new capital and eventually all capital is consumed.

How the speculation is "justified" is not relevant to this distinction, as value is subjective. Yet some level of hoarding is necessary due to the fact of uncertainty (i.e. of the future). A preference for capital in the present, as opposed to the future, is always expressed in hoarding. One may certainly hoard at a level beyond the liquidity intended to offset uncertainty. For example, one may hoard for the entertainment value of games of chance. The opportunity cost in this case is an entertainment expense. One may hoard while timing a sale. The opportunity cost of in this case is called "cash drag". It matters not whether the person anticipates a net gain or realizes one, the hoard necessarily represents an expense - because time has value.

However, time preference is sometimes misinterpreted as a relation between consumption and saving. This is often loosely described as "deferred consumption" or "delayed gratification". Yet as has been shown, hoarding is consumption. The consumption has not been deferred; the gratification has not been delayed. Offsetting uncertainty is gratification (peace of mind), entertainment is gratification (leisure activity), the potential gain on successful market timing is gratification (anticipation of better price). All of these consume capital. The distinction made by the concept of time preference is in the exchange of capital over time in exchange for interest. A speculation makes no such trade.

All of a person's property (savings) is either hoarded or invested. Hoarding erodes that property over time. Cars wear out, food gets converted to energy, furniture wears out, capital decays. Money is no different, it decays in a hoard due to both its carry cost and its opportunity cost. The present value of money is always discounted against its future value. This is described as the "time value of money". By expending the future value, the money hoard is actually depreciating by the amount of the discount over the time hoarded.

As shown in Depreciation Principle the act of purchasing goods is not consumption. There is no actual consumption except to the extent that property depreciates. As such there is no distinction between deferring the purchase of goods and purchasing them. This is just a trade of one type of property for another, both subject to depreciation. Time preference is not a distinction between consumption and saving, it is a distinction between hoarding and investment.

Entrepreneurship necessarily entails speculation and investment. Capital is required for production, and the entrepreneur is speculating on the price of what is to be produced. This speculation on a future good is the unavoidable side effect of producing products with no established price. Entrepreneurship is therefore "speculative production", while depreciation of a present good is "speculative consumption". Given that any future price estimate is subject to error, all investment is to some extent entrepreneurial. Investment is speculative production and hoarding is speculative consumption. This is evident in the fact that, with all capital hoarded, there is no production.

The above discussion makes a distinction between productive and consumptive use of capital, in the context of a single person. In the interest of simplicity we have discussed only leisure consumption (i.e. of a consumer's hoard), avoiding productive consumption (i.e. of a producer's hoard). While a single person may be both consumer and producer, a producer must also consume in production. As the terms thus become overloaded, it is easier to think of a person's investment as being in another person's production business.

The objective of a person is leisure while that of a business is production. Both objectives are consumptive in nature, yet consumption in the context of a business is for production, not leisure. Just as any person, a business must determine its ratio of hoard to investment based on time preference. The investments of a business cannot be in its own production, just as those of a person cannot be in his own leisure, as either would be circular. A business acquires assets and depreciates them over time. While these are often colloquially referred to as investments, a business does not pay itself interest. These assets are hoarded capital in the process of consumption, for the objective of production. Its remaining capital is invested in other businesses, such as investment funds or interest-bearing bank accounts. As each person and business hoards a fraction of its capital and invests the remainder, credit expands on money as a function of time preference.

The idea of a person being both consumer and producer raises the categorical question of labor. While all people must consume, most are also producers. A person engaged in salaried labor is a producer. A salaryman invests capital in his person (e.g. education, reputation, food) and invests time without his human capital when his person is away from his objective of leisure. Salary and associated benefits are his return on investment. Due to labor competition, this return seeks the level of interest on his marketable "value" over the time laboring.

Speculation is a necessary consequence of error inherent in both consumption and investment. Hoarding is consumptive and investing is productive. The economic concept of time preference is specifically the distinction between hoarding and investment. This is evident in the identity relation between time preference and economic interest. A higher proportion of hoarding to investment reflects a higher time preference and implies less production.