Chapter 33: Saving and Investment
Updated: 4/13/20
Let Pharaoh appoint officials over the land, and let them take a fifth of the crops of Egypt in the seven abundant years. Let them gather all the food of these good years that are coming and store up grain under the authority of Pharaoh, for food to be used in the cities. They should preserve it. The food will be a supply for the land for the seven years of famine which will be in the land of Egypt. In this way the land will not be devastated by the famine (Genesis 41:35–36).Now there was no food in all the land; for the famine was severe. The land of Egypt and the land of Canaan wasted away because of the famine. Joseph gathered all the money that was in the land of Egypt and in the land of Canaan, by selling grain to the inhabitants. Then Joseph brought the money to Pharaoh's palace (Genesis 47:13–14).
I have discussed this in Chapter 33 of my commentary on Genesis. This is the most famous story of entrepreneurship in ancient literature. God had given Pharaoh a dream. Pharaoh could not interpret it. His cupbearer remembered that Joseph had interpreted his dream and the baker’s dream two years earlier. He told Pharaoh about Joseph. Pharaoh brought Joseph up out of prison to interpret the dream. This was the famous dream about the seven fat cattle and the seven thin cattle. Joseph interpreted the dream as follows. There will be seven highly productive agricultural years, and they will be followed by seven years of famine. Pharaoh believed Joseph, and asked Joseph for advice. Joseph provided this advice. Pharaoh agreed with it, and he appointed Joseph as second-in-command in the nation. Joseph administered a program of state-enforced savings.
1. Egypt and Canaan
The dream proved to be accurate. In the first year of the famine, Joseph took advantage of the enormous stores of grain that he had collected during the previous seven years. The text says that there was no food in Egypt and Canaan in the first year. “Now there was no food in all the land; for the famine was severe.” It cannot mean that there was no food at all. Jacob had enough grain to send his sons to Egypt in search of grain in year one (Genesis 42). This indicates that the famine was not total in Canaan. The sons had food reserves for the journey. Their large households remained behind. God’s promise to Abram said that the Canaanites would occupy the land until the family of Abram returned from Egypt. “In the fourth generation they will come here again, for the iniquity of the Amorites has not yet reached its limit” (Genesis 15:16). The Canaanites controlled the Promised Land during the time of Jacob’s descent into Egypt. They were sufficiently numerous so that Israel could not completely defeat them with an army of 601,000 (Numbers 26:51). This indicates that the famine did not last seven years in Canaan. There is nothing in the text of Genesis to indicate that Joseph sold grain to Canaan after year one. There is also no evidence that the famine persisted in Canaan after year one. The famine was thereafter confined to Egypt. It was God’s judgment on Egypt, not Canaan. The famine in Canaan had this purpose: to lure Jacob into Egypt, thereby fulfilling God’s prophesy to Abram.
We are also not told that Egypt’s annual famines meant no food grown in the six years that followed. Joseph had collected 20% of the total output of Egypt’s farms. The stored-up grain would not have sufficed to feed the people of Egypt for six more years if there was no food grown at all. Then how did Pharaoh’s grain reserves last for seven years? A reasonable explanation is this. The grain that Joseph sold them was what we call seed corn: grain that had to be planted for the next year’s crops. Families consumed most of their land’s meager output each year. They had insufficient grain for planting. Joseph supplied it. It was Egypt’s capital. It kept Egyptians alive.
2. Joseph’s Entrepreneurship
Joseph knew what was going to come over the next 14 years. At least, he knew in general terms: seven fat years followed by seven lean years. This information was sufficient for him to devise a plan of action. Pharaoh would use coercion to collect a tax of 20% of the grain for seven years. Joseph would put the grain into enormous warehouses. Then he would wait for the famine to strike. It struck exactly on schedule. So, from the point of view of entrepreneurship, Joseph was the greatest entrepreneur in history. He knew what would happen to the nation, and it did. He had a plan of action to deal with the problem, and he executed it. The plan of action was successful. At the end of the process, Joseph had purchased all of the land of Egypt, except only land owned by the priests, in the name of Pharaoh. He then imposed a permanent 20% income tax on the Egyptians.
In the seven good years, the 20% tax was not an extreme imposition by the state. There was plenty of food for the people of Egypt. Joseph imposed a system of forced saving on the nation. It was not sufficient that he knew what was going to come in terms of prosperity and famine. He also had to have a plan of action. This plan of action had to be funded. It was funded by the power of the Egyptian state. The state confiscated 20% of the output of the farmers. It put the grain reserves aside. It did not spend grain to increase the military power of the state. Joseph used the grain exclusively for the purpose at hand: to prepare for seven years of famine. Here was a case in which the interest of the state’s senior planner was in accord with the long-term interests of the people. Had Joseph not interpreted the dream correctly, and had Pharaoh not appointed him to administer the program, the people of Egypt would have starved. It was not in their long-term interest that they starve.
The value of the grain confiscated by the state would otherwise have been owned by the people of Egypt in years one through seven. So, the people of Egypt could not use this grain to buy consumption goods. They could not exchange it with purchasers of grain who came to Egypt from Canaan and other nearby nations. There is no question that this reduced consumption on the part of the Egyptians was what financed the creation of grain reserves for the days of famine. Joseph’s program relied on the productivity of the people of Egypt in the seven fat years to fund the creation of grain reserves for the seven lean years. This was not a program of stones into bread. It was a program of forced saving by the state. The state acted on behalf of the Egyptians in the seven lean years. As it turned out, it also acted on behalf of the family of Joseph, which came into Egypt out of Canaan when the famine struck Canaan. But Joseph did not know this in advance. He was acting on behalf of the people of Egypt.
The people of Egypt restricted their consumption in the seven fat years. This capitalized the program of national saving that Joseph had devised. There could be no capital creation apart from saving. Someone had to provide the grain that would serve as the economic salvation of the nation in the seven lean years. There are no free lunches in life.
Joseph’s national saving program corresponded to Pharaoh’s dream. It was not just that Joseph had accurate information in advance regarding the next 14 years. It was that he also had the power of the state to collect the reserves required to save the nation in the seven lean years. There was a program of forecasting. This was provided by the dream. There was a plan of action. It included a program of saving. This was provided by Pharaoh’s appointment of Joseph as the administrator of the program. There was consistency between the entrepreneurial forecast and the entrepreneurial plan of action.
If there had been no dream, or if Joseph had not been called out of prison to interpret the dream, there would have been no entrepreneurial vision. God provided this vision. It was an accurate economic forecast of the future. This was unique in ancient history. The interpretation was clear to Joseph. It was clear to Pharaoh. But, in and of itself, it would not have saved the people. There had to be a way to fund the program required to accumulate grain in sufficient quantity so as to deliver the people in the seven lean years.
It would be incorrect to describe this entrepreneurial program as “buy low and sell high.” It would be accurate to describe it as selling high, but it was not a voluntary transaction. It was not a matter of buying. It was a matter of confiscating. It was a matter of “confiscate low and sell high.” This is not how we normally understand entrepreneurship. Joseph confiscated the grain when it was low in price because he confiscated it during years of remarkably high output. He had those grain reserves ready to sell back to the people when the seven lean years arrived.
So, he had an investment program: the accumulation of grain reserves. The people of Egypt had to reduce their consumption below what it would otherwise have been during the seven fat years. Joseph did not waste this grain. He had an entrepreneurial vision that put this grain to productive future use, both from the point of view of the people and from the point of view of the Pharaoh. In order for this program to work, it had to be based on accurate forecast. It also had to be based on a plan of action that was consistent with this forecast. Finally, it had to be based on reduced consumption on the part of the people who provided the raw material required to implement the investment program. If any of these three features had been missing, the people of Egypt would have starved.
Fundamental to economic growth is a program of thrift. People must be willing to sacrifice present consumption for the sake of future consumption. They must be sufficiently future-oriented to motivate them to set aside resources today in order to gain a stream of income at some point in the future.
This process is easiest to understand when we discuss agriculture. There is a concept called “seed corn.” This is the corn that we must set aside in one harvest in order to provide seed corn for the next harvest. We must not consume our seed corn. That would be self-destructive. We would live more comfortably today, but only at the sacrifice of starvation in the following year. Mankind has always understood this agricultural relationship between saving in the present and consuming in the future. This is the mental model that mankind has used as a way to understand all productivity. The practice of setting aside seed corn applies to every occupation and every realm of production.
If we wish to increase our agricultural output in the following year, we must set aside a larger reserve of seed corn than we set aside in the past. Also, because there are other factors of production that we will need in order to remain productive, we must set aside these production factors, or else we must set aside money sufficient to purchase these complementary factors of production in the next planting season. In other words, we have to reduce our consumption this year beyond the mere accumulation of seed corn sufficient to equal this year’s output. This is a program of thrift.
This program would have been required in the garden of Eden. It is an aspect of finitude. While scarcity is a greater burden as a result of the curse of mankind in the ground in Genesis 3:17–19, saving would have been required in the world before the fall of man. [North, Genesis, ch. 12] It will also be required in the new heavens and new earth after the final judgment.
A fundamental principle of economics is this: we cannot get something for nothing. This is an aspect of finitude. We must pay the price of future consumption by means of reduced consumption in the present. We must always have the conditions of the future in our minds when we make plans in the present. We can be wrong about these conditions in the future, but we must have some sort of plan if we are not to find ourselves in a crisis condition in the future.
It is an aspect of growing maturity that we count the costs of our actions. Fundamental to the description of counting the costs that Jesus presented in Luke 14:28–32 is a concept of the future. [North, Luke, ch. 35:C] People count the costs in the present in terms of their assessment of the costs and benefits of a future condition. If they conclude that the costs outweigh the benefits in the future, they have to readjust their plan of action in the present.
When people have little wealth, it is difficult for them to save. The marginal utility of the money saved is high for a person who has very little money. In contrast, someone with a great deal of money finds it relatively easy to save. The marginal utility of the money set aside for savings is considerably less to the rich man than to the poor man. I say this as a Christian economist. I do not say this as a humanistic economist. If a humanistic economist follows strict methodological individualism, he is not entitled to make this judgment on a scientific basis. According to methodological individualism (nominalism), it is not possible scientifically to make interpersonal comparisons of subjective utility. Nevertheless, we know that rich people find it easier to save a high percentage of their income, while poor people find it extremely difficult to save the same percentage of their incomes. They do not have sufficient financial reserves beyond the seed corn required for the next year.
Ever since 1800, the West has found it increasingly easy to save a high percentage of its income. The constant increase in per capita wealth has made the modern world rich beyond anyone’s dreams of 1800. The superrich provide a high percentage of the savings in every nation. This is because they have so much wealth that they cannot possibly consume all of it in the time they have available to live their lives. Most of them are active investors. They are entrepreneurs. They spend a large percentage of their days finding ways to make even more money. But to make more money, they must spend more money. To fund entrepreneurial ventures, they must have capital to allocate. There is a famous saying: “The rich get richer, and the poor get poorer.” This is incorrect in a free market society. The rich do get far richer, but the poor get steadily less poor. They move into the lower middle class. Then their children move into the middle class. The constant increase in per capita wealth is made possible by per capita capital investing, which is provided mainly by rich individuals and by successful corporations.
Faithful covenant-keepers must also have a plan of action. This plan must be funded. It must be funded by wealth that would otherwise have been consumed. We are no different from the people of Egypt in the days of Joseph in the seven fat years. For a savings program to be effective, there must be entrepreneurial ventures that prove to be profitable. If the sacrifice involved in saving were applied only to visions of the future that proved to be inaccurate, then the savings program would do individuals no good and their societies no good. It would be as if Joseph’s use of the confiscated grain was to sell that grain and use the money to build chariots. Egypt would have starved. The chariots would have been useless, for they were offensive weapons, and the nations around Egypt were also starving. What made the program successful was this: Joseph had an entrepreneurial vision of the future that was accurate, and he had a plan to implement a program to deal with that future. Then he confiscated the savings required to fund the plan.
The savings program sets aside wealth. This wealth is used to purchase factors of production. People do not normally bury money in the ground. They may bury it in the ground if they expect military invasion. Or, if they are burying gold and silver coins, and the government inflates the currency, then the investment of money and the ground may prove to be profitable. But buried money is strictly defensive. It is a strategy applicable whenever the free market is being undermined by the state.
The money that people save is put to immediate productive use. It may be used to buy raw materials, lease capital equipment, purchase land, build a factory, or whatever else is necessary to complete the entrepreneurial program of the investors. The money is spent. People receive that money in payment for whatever it is they are selling to the investors. It may be land or raw materials. It may be labor time. But it is not wasted. It is reallocated in such a way as to increase output in the future. Put differently, the money is allocated to meet future consumption rather than immediate consumption. A different group of people will receive the money today. The people receiving the money today will be producers of capital goods, raw materials, and other factors of production. The money will be used to put food on the table of lots of workers.
As money is reallocated toward the capital goods industries, the prices of these goods and services will tend to rise. The market will respond to increased demand for these goods. As prices rise in these areas of the economy, other entrepreneurs will see an opportunity. They will begin to shift production in the direction of goods and services that are associated with production. So, there will initially be an increase in the prices of these goods, but, over time, increased productivity of these goods will tend to push the prices of these goods back down. This is the competitive process at work. This is how the auction process of the market functions. The rising prices of production goods and services send signals to entrepreneurs that there is now rising demand in this area of the economy. In order to take advantage of these new opportunities, producers will begin to shift production in the direction of production goods and services.
Because of this shift from the purchase of consumption goods to the purchase of production goods, people who produce consumption goods will find decreasing demand for their services. In any case, demand will not rise as much as it would otherwise have risen, had entrepreneurs not persuaded savers to transfer money to them for the sake of increases in future output. This is the auction process at work. If people have decided to save more in the present rather than consume more in the present, then their allocation of resources will reflect this desire. So, people involved in the sale of immediate consumption goods will find the markets more competitive. There will be fewer buyers of their output. But this will be true only for the period of production. When some of the entrepreneurial schemes prove to be productive, which they will, then those people who had saved money in the previous period may decide to spend this money, or a portion of this money, on consumption goods and services. The rising productivity of the overall economy, which is the product of the combination of accurate entrepreneurial forecasts, accurate plans of production, and saving, will then lead to greater output and therefore greater income for the participants in the successful ventures. At that point, people involved in the consumption side of the economy will find that their prospects have improved.
All of this has to do with time perspective. If people become more future-oriented, this is going to affect their allocation of resources. If they decide that they would rather have greater income in the future, they will have to set aside resources in the present. But it is not sufficient to reduce present consumption. They must also allocate these resources in ways that prove to be productive in the future. Again, the example of Joseph is a good one. He used the forced savings of the people to fund an investment program that was economically efficient, and which was also based on an accurate forecast of the future. He did not waste resources.
It is not true that saving money, in and of itself, is sufficient to increase a person’s future wealth. Saving is necessary, but it is not sufficient. There must also be an accurate assessment of the economic future. There must also be a plan of action that does not waste resources, and which does provide salable output in the future. There must be consumers in the future who are willing to purchase the output of the various entrepreneurial plans of action. They must be willing and able to purchase this output at prices consistent with the original entrepreneurial plans. In short, there is nothing automatic about this process. It is driven by entrepreneurship.
The structure of production in a society reflects the combination of entrepreneurial vision, entrepreneurial plans, and the savings rate.
By the phrase “structure of production,” I mean the complex and ever-shifting combination of raw materials, capital, and labor. Capital is a combination of raw materials and labor over time. This structure of production is constantly changing because individual plans of action are constantly changing. People bid in an open marketplace for the goods and services they want to buy, and their bidding produces objective prices. These prices provide signals to entrepreneurs regarding what people are willing to pay. These signals provide a portion of the knowledge necessary for the accurate combination of savings, entrepreneurial vision, and entrepreneurial plans of action. Because people’s tastes change, and their assessments regarding the future change, they are constantly bidding in new ways to achieve their goals. As they change their minds, prices change in the competitive marketplace, and these changed prices send new information to producers of future goods and services.
If an entrepreneur believes that a new approach to production will increase his profits in the future, he has to restructure his plans of action. He then has to restructure his budget. He must stop spending in some areas so that he can start spending in new areas. He will have to go into the marketplace and bid for the factors of production. If he is successful in this bidding, he will redirect factors of production away from his competitors. His competitors will find that their plans have been disrupted. They will have to devise new plans.
The most versatile factor of production is human labor. A highly complex machine that is designed to produce a specific part in a complex system of production is vulnerable to falling demand for this output. There is not much that an owner of such a machine can do to make that machine productive after demand has fallen for the final output of whatever this machine does in the structure of production. The machine may now be useful only as scrap metal: unspecialized and therefore cheap. The owner of the machine will suffer substantial capital losses as a result of the shift in consumer demand. But a laborer who is competent in one field probably is competent in another field. He will not be equally competent. He may have to suffer a reduction of his salary in order to find employment in the new circumstances. But he will not suffer a loss of value proportionate to the loss of value of a highly specialized machine.
People can learn to do new jobs. This may take time for them to gain the experience. But they are capable of learning. They are capable of responding to the new conditions of supply and demand. They will have to seek employment in fields in which, other things being constant, they would prefer not to. But conditions have changed, so their plans must change. They will be changed.
Because entrepreneurial insights are usually focused on narrow segments of a particular market, the entrepreneur who has seen an opportunity will shift his expenditures to even more specialized programs for increasing output. The constant increase in the division of labor, which is the result of a constant increase in per capita investment, produces increased specialization of production. This is why entrepreneurship tends to be focused on relatively narrow fields of production. Specialized knowledge is the primary means of profitability for entrepreneurs. They gain their leverage from their competitive edge in a narrow field.
When they begin to spend money in this field in response to their flash of insight regarding future consumer demand that is not perceived by their competitors, they focus on a more specialized niche. The more specialized the niche, the more vulnerable the entrepreneur is to a change in consumer demand. But, on the other hand, the greater is the profitability if his insight turns out to be accurate. There will be more consumers bidding against each other for the output of his venture.
In extremely rare cases, an entrepreneur who sees an opportunity in a narrow field is able to use success in this field to branch out in other fields. The most famous example of this in modern times is Amazon. It began in the mid-1990s as a company that made it easy for consumers to buy low-priced used books. Within a decade, it had expanded to other consumer goods. Within two decades, it had become the largest online retail outlet in the world. Its founder in early 2020 was the richest man in the world. He had used his knowledge and his software in the field of used books to expand on a scale never before seen. In the late nineteenth century, Sears and Roebuck achieved something similar. Richard Sears began by selling cheap watches by mail in 1879. Within three decades, Sears and Roebuck was the largest retail outlet in the world. But these stories are rare.
When an entrepreneur begins to fund his venture, it is vulnerable to swings in consumer demand. If demand is not there as expected, he will find it difficult to sell the productive capital that he has assembled. These tools are too specialized. There is no market for them at the price he paid. On the other hand, if demand is considerably greater than he expected, he will have to invest more money in order to expand production. This in turn makes the company even more vulnerable to swings in consumer demand. There is this constant increase in specialization in niche markets. This increases the vulnerability of any particular company. But, in the aggregate, this process decreases the vulnerability of society in general. There are more and more competing producers for consumers’ money, which gives consumers a much stronger position in the marketplace. They have a much wider range of choices because of the increasing specialization that is taking place in each of the markets. There is greater predictability for the consumers. This predictability is funded by the increasing unpredictability in the lives of entrepreneurs.
The example of Joseph in Egypt is the best example in ancient literature of the relationship between savings and entrepreneurship. Joseph had an accurate understanding of what would come to Egypt in the next 14 years. He was given control over a program of thrift for the whole nation. He devised a program that integrated the 20% taxation program, a system for storing the grain, and a system for selling the grain back to the Egyptians, beginning in the first year of the famine. It was a highly successful venture from the point of view of Joseph, the Pharaoh, and Joseph’s family. It was also highly successful from the point of view of the people of Egypt, who otherwise would have starved.
In a free market, God does not give unchallengeable interpretations of dreams to senior government officials. He gives speculative insights to entrepreneurs regarding the future, but not everyone has a plan to implement in order to profit from these speculative insights. Nevertheless, in a society in which there is widespread future-orientation, there is far less threat of economic disruption than in societies in which there is much greater present-orientation. The greater supply of wealth that is allocated toward future production funds many different programs of entrepreneurship. Most of these entrepreneurial ventures will not produce profits, but a sufficient number of them will produce profits so as to increase the net output of the society and therefore the net wealth of the society. This is the origin of the wealth of nations. Adam Smith understood the process far better than most of his predecessors.
Thrift does not automatically produce future wealth. To use a familiar example in the history of agriculture, someone may set aside seed corn for the next year, but the weather may be bad, the crop may fail, and the person may lose his farm, especially if he is in debt. This has been the history of agricultural production from the late eighteenth century until the present. The percentage of the population involved in farming has fallen from something in the range of 90% in the United States in 1800 to something in the range of 2%. But output has increased enormously. The cost of home-cooked food in American households is now less than 10% of most families’ budgets. In 1900, it was about 40%. In 1950, it was about 30%. This has been an answer to this prayer: “Give us today our daily bread” (Matthew 6:11). [North, Matthew, ch. 12:B] Without the enormous increase in capital investment in the agricultural industry, this prayer would not have been answered. Yet, on an individual basis, decade by decade, most American farmers saw their plans fail. They had to go into other lines of work. If they did not, then their children did. So, thrift is not sufficient to produce individual success in the future. But it is necessary to produce corporate success in the future.
Think of the process in terms of this slogan: “A forecast without a plan is impotent. A plan without savings is impotent. Output that is not validated by consumer purchases is wasteful.” Most forecasts are wrong. Most plans are inefficient. Most plans are never funded. Most new entrepreneurial ventures fail. Yet, in the aggregate, the combination of these three factors—forecast, plan, and savings—has led to the transformation of the world. Men around the world are richer today than would have been conceivable in 1800.
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