What Is Social Savings?

Ray Hawk

Social savings, also referred to as Fogel Social Savings, is an economics principle created in 1964 by Robert Fogel, a US scientist who won the Nobel Prize in Economics in 1993 along with Douglass North for their work in economic history. Fogel's work has focused on cliometrics, which is often referred to as new economic history, the study of history that applies mathematical models to changes produced by economic and societal influences. The social savings equation is a fundamental element of such research. It is a method for calculating cost savings in production that come about with the advent of technological innovation.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

The social savings equation is rather simple, but quantifying its input factors can be a challenge. It is stated as Social Savings = (Ct-1 – Ct)Qt where “C” represents the marginal cost of a product or service, “Q” as the total quantity of products or service instances provided, “t-1” as the value of C prior to innovation, and “t” as the influencing factor on C or Q after innovation. The formula basically states that, when innovation takes place, it reduces the cost of a product or service per unit by a fixed factor over what that cost would be if the innovation never took place at all.

Fogel first applied his concept of social savings to the innovation of railway transport. Various values for the contribution that the innovation of railroads made to lowering commercial costs can be derived from these cliometric principles. This is, in part, due to how much economic growth that the innovation of railroads brought to the local commercial environment in a nation, as well as factors that affect innovation locally, such as product surpluses and growth accounting.

The values arrived at from using the social savings approach are dependent on the input values given and how one estimates the changes that innovation has wrought. Output values are considered less important in the formula, however, than the actual quantitative process of economic change that technology brings to a society. This is a principle of real national economic savings, which refers to productivity increases that require the same amount of labor and resources as before the innovation took place. Often, savings in economic terms is a monetary value that has no direct connection to output, but real savings is meant to indicate some form of increased efficiency for the same cost.

Economists have different ways of describing one process, and, often, simplifications are used so that a basic principle can be understood, even if the output values are not considered to reflect real-world conditions. One way of simplifying the social savings calculation is to substitute the price of goods for their cost in the equation, as prices are easier for which to acquire values. This would change the equation to Social Savings = (Pt-1 – Pt)Qt with all of the same values, except price is used instead of cost. Using price is based on the assumption that markets are competitive and efficient, and that prices reflect true capital expenses relative to costs. This is, unfortunately, often not true when products are sold below cost so that a company can penetrate a new market, or for other counter-intuitive economic reasons. While price is a less reliable factor to use in social savings calculations, it is, nevertheless, the most common approach to using the formula.

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