Austrian vs Keynesian Economics - Investment from Savings vs Debt

This is the second in a series of posts where this particular layconomist tries to understand the major differences between the Austrian and Keynesian approaches towards future investments. Austrians claim that all investments have to come necessarily from society's savings whereas Keynesians are okay with taking on debt to make that investment.

In this post, we will describe some examples that illustrate the thought process behind the two approaches.

Austrian Village: Imagine a village that sustains itself through agriculture. The entire village is required to till the fields, sow the seeds, water the crops and finally harvest the grains. The harvested grains can sustain the village for a year. The villagers sustain themselves on the previous year's harvest while they prepare the ground for next year.  This cycle repeats every year. Note that the villagers' investments for the future (preparing the ground for the next cycle) have to come necessarily from their savings (i.e. the villagers have to sustain themselves from the previous year's harvest).

Austrian Village 2: Imagine another village that sustains itself through agriculture. Only half the village is required to till the fields, sow the seeds, water the crops and finally harvest the grains. The second half is required to scour the forest for arable land and lay the ground work for next year. The harvested grains can sustain the entire village for a year but the grains belong to only the first half of the village (that is responsible for growing the crops). However, the new lands found belong to the second half. While the scouting party goes looking out for new land it sustains itself by borrowing the grain from the first half which it repays by giving away the right to farm the new lands. This way the villagers sustain themselves on the previous year's harvest while they prepare the ground for next year.  This cycle repeats every year. Here, note that even though the second half builds up a debt which it repays at the end of the year, the overall debt for the society is still zero. Why? Because the debt built up by the second half is offset by the first half's savings. This way, again, the villagers' investments for the future (scouting and preparing the ground for the next cycle) come necessarily from village's savings (even though the savings actually belong to the first half).

Keynesian Village: Imagine another village that sustains itself through hunting. Here again, only half the village is required to go hunting but they have to go hunting everyday to bring enough meat for the entire village. The villagers do not have the ability to hunt enough meat and store the meat even for a day to have any "savings". Their investment for the future is to be able to identify new hunting grounds in time for sustainable hunting. The other half of the village is engaged in this task while the first half is off hunting. Here, there are no "savings" that future investments can arise from. The investments are actually coming from building up "debt" which is repaid as soon as the search party finds new hunting grounds. Till new hunting grounds are found, the searchers have to sustain themselves by borrowing from the hunters (with blessings from the village) with a promise of future repayment. This debt built up by the second half is not offset by any savings by the first half. So, over the course of the year the village as a whole builds up debt that it owes to the first half of the village. The village's debt is repaid as soon as the second half is able to identify new hunting grounds that allows the first half to engage in a fresh season of hunting.

As can be seen, both approaches are appropriate for their respective scenarios painted here. More importantly, the Austrian approach would have been completely inappropriate for the Keynesian village.

Since, modern societies are a complex mix of both scenarios and multiple others, investments for the future have to come from a mix of savings and debt. Here again, it is appropriate to highlight that in modern economies a fraction of population can sustain the whole society in terms of basic necessities - 1) food 2) clothes 3) shelter and 4) health.