I'm a Registered Nurse and not an economist, so forgive me if my questions seem a bit naive. I've only been researching Austrian Economics for a few months. It has certainly exposed some of the major flaws of Keynesianism. For example, if I'm stranded on a desert island with all the employment and all the money I could ever desire, but no stuff (i.e. food, clothing, shelter), I will die. Conversely, I can be stranded on that same island with no job and no money, but all the stuff I could ever desire, and I'll do just fine. Keynes gives almost no thought to the importance of "stuff" and even when he mentions stuff, it really doesn't seem to matter what that stuff is. So, I could be stranded on that same island with a job, money, and thousands of Celine Dion CDs; according to Keynes, I'd be doing quite nicely. This is clear nonsense. "Stuff" is at the heart of any economy and, more importantly, it must be stuff that meets the needs of the individuals within that society.
There are still a few Keynesian arguments, however, that I do not feel have been answered to my satisfaction. One is on the "paradox of thrift". I understand that increased productivity would tend to lower prices in a sound-money free market. In that case, it would not be problematic, because the increase in productivity would allow producers to make more, without hiring more workers. Thus, maintaining wages despite lower prices. In the event that prices are lowered due to hoarding of money, however, prices could go down in the absence of increased productivity.
1) Wouldn't this sort of deflation necessitate constant pay cuts?
a) If so, would it matter?
2) Wouldn't a constant tendency toward deflation create a moral hazard, which encourages people to default on loans (as the goods purchased would always eventually end up being worth less than the price of the loan)?
If I understood Lee Kelly's post, I believe he was only explaining the arguments behind the paradox of thrift (not trying to make a case for it himself) and intends to expose weaknesses in the argument later on, showing that the paradox does not hold true in a free market, but only in a fettered Keynesian economy (feel free to correct me, Lee Kelly, if I am incorrect). If that's the case, I'm hoping that it will clear up some of my questions.
Still, your arguments helped me to better process this problem. In particular, it made me consider the fact that production creates its own demand; if people are producing what others want, then someone will buy. I imagine that it's unlikely that everyone would stop spending at once, unless every businessman started making really dumb choices at once. I'm still not convinced, however, that deflation (whether from increased productivity or hoarding) would not make lending impractical. Then again, would we really need to borrow and lend in a world in which our money actually increased in buying power? I'll probably open a related discussion, instead of the question format that I posted here. This seems like it might be better suited to ongoing discourse.
Rob:1) Wouldn't this sort of deflation necessitate constant pay cuts? a) If so, would it matter?
Yes, and no. What matters isn't the nominal amount of money the worker is receiving as a wage, but the goods and services he can purchase with that money. If prices lower by 75%, and your weekly paycheck lowers by 50%, then that's still the same thing as if prices stayed the same and your paycheck doubled. This is what we mean when we talk about "Real Wages." So long as prices lower faster than income your standard of living is still increasing.
No more than what already exists. After all, what stops you from taking out all the loans you want and just never paying them back now? Why would this be any better or worse in a deflationary environment?
I started writing an essay about the paradox of thrift yesterday. Here's the opening:
The paradox of thrift is often cited as justification for government to engage in monetary and fiscal stimuli. In this view, an unfettered market is intrinsically unstable. Capricious and rapid declines in total spending are responsible for periodic and spiralling recessions. Although prices ordinarily coordinate economic activity toward productive ends, the normal equilibrating properties of markets cease to function. A non-market institution must intervene and combat recession by stimulating total spending. Only government is capable of satisfying this role, and so it must be empowered to pursue monetary and fiscal policy. At the heart of this view is the paradox of thrift. The paradox is related to the observation that what is true for a part of an economy may not be true for an economy as a whole. Although an individual may expand his savings by reducing spending and increasing income, spending and income must be equal for the economy as a whole. One man’s spending is another man’s income, and vice versa. Any change in total spending must correspond to an equal change in total income. Unlike an individual, it is impossible for the economy as a whole to expand its savings by reducing spending and increasing income. Analysing the consequences of an attempt to expand the savings of the economy as a whole reveals the paradox. As total spending and income declines, profits shrink, inventories accumulate unsold goods, and workers begin to be laid off. A surplus of goods and labour develops, because there is not enough spending to buy all that is produced. Any expanded savings merely result in the unemployment of resources, stifling economic growth and causing human suffering. The notion of saving for a better future is turned on its head. As long as one man’s expanded savings are offset by another man’s increased spending, there is no problem. However, the attempt to expand savings for the economy as a whole is futile, and only impoverishes the future by causing recession in the present. Basic economic theory informs us that a surplus of goods reduces prices, and so the price of goods and labour must fall until total spending is again able to purchase available resources. However, prices in a real economy may respond unevenly and sometimes very slowly, e.g. the unemployed may be unwilling to accept a lower wage, producers may hold out for the economy to recover, contractual obligations may enforce old prices, and unions may hold up wage cuts to name but a few problems. Although a new general level of prices will assert itself in the long run, the interim will likely be fraught with political upheaval, economic distress, foregone opportunities, and wasted time. Is there any truth to the paradox of thrift? I think so, but it requires peculiar conditions to hold; ironically, these conditions are the product of government intervention. That is really what I intend my finished essay to be about.
The paradox of thrift is often cited as justification for government to engage in monetary and fiscal stimuli. In this view, an unfettered market is intrinsically unstable. Capricious and rapid declines in total spending are responsible for periodic and spiralling recessions. Although prices ordinarily coordinate economic activity toward productive ends, the normal equilibrating properties of markets cease to function. A non-market institution must intervene and combat recession by stimulating total spending. Only government is capable of satisfying this role, and so it must be empowered to pursue monetary and fiscal policy. At the heart of this view is the paradox of thrift.
The paradox is related to the observation that what is true for a part of an economy may not be true for an economy as a whole. Although an individual may expand his savings by reducing spending and increasing income, spending and income must be equal for the economy as a whole. One man’s spending is another man’s income, and vice versa. Any change in total spending must correspond to an equal change in total income. Unlike an individual, it is impossible for the economy as a whole to expand its savings by reducing spending and increasing income.
Analysing the consequences of an attempt to expand the savings of the economy as a whole reveals the paradox. As total spending and income declines, profits shrink, inventories accumulate unsold goods, and workers begin to be laid off. A surplus of goods and labour develops, because there is not enough spending to buy all that is produced. Any expanded savings merely result in the unemployment of resources, stifling economic growth and causing human suffering. The notion of saving for a better future is turned on its head. As long as one man’s expanded savings are offset by another man’s increased spending, there is no problem. However, the attempt to expand savings for the economy as a whole is futile, and only impoverishes the future by causing recession in the present.
Basic economic theory informs us that a surplus of goods reduces prices, and so the price of goods and labour must fall until total spending is again able to purchase available resources. However, prices in a real economy may respond unevenly and sometimes very slowly, e.g. the unemployed may be unwilling to accept a lower wage, producers may hold out for the economy to recover, contractual obligations may enforce old prices, and unions may hold up wage cuts to name but a few problems. Although a new general level of prices will assert itself in the long run, the interim will likely be fraught with political upheaval, economic distress, foregone opportunities, and wasted time.
Is there any truth to the paradox of thrift? I think so, but it requires peculiar conditions to hold; ironically, these conditions are the product of government intervention. That is really what I intend my finished essay to be about.
We are in a "Liquidity Trap" of sorts, just not the one created by the Keynesian "Paradox of Thrift". The Current Liquidity Trap is the result of the central banks making interest rates so low that banks on margin prefer to lend to governments or just store their excess reserves at tiny interest rates instead of lending to private borrowers as who are not worth the risk of default to the bank. If banks raise the interest rates overcoming the risk of default by private borrowers then the private borrowers can not afford the loan payments. So the suppliers to the private borrowers go without the borrower purchases which means the suppliers must cut staff and reduce expenses. Keep in mind that the government loves this situation. It can argue incorrectly that they are in a Keynesian Liquidity Trap so they need to spend more and loan more, the central banks get to make a lot of new money that goes to their members to pay off their bad debts and private borrowers go without financing their projects thus weakening the economy. This is effectively where the entire country of Japan has been for the past 20 years.
The solution is easy, Ignore Keynesian solutions, shutdown the central banks, allow financial markets to set interest rates. The rates will rise and the governments will not be able to loan as much money at the higher rates. Banks with excess reserves will not have interest from the central banks or be able to lend to the government. So they will either sit on their reserves and make no money or compete by lowering rates for private borrowers.
Thanks! I look forward to seeing the rest of the essay.
I understand your point about "real wages," but I would still think that shrinking income could lead to defaults on loans. If the value of money starts to climb due to hoarding and my salary goes down significantly, I may not be able to pay my mortgage anymore. I might not have a choice but to default. Am I missing an important detail?
Rob: I understand your point about "real wages," but I would still think that shrinking income could lead to defaults on loans. If the value of money starts to climb due to hoarding and my salary goes down significantly, I may not be able to pay my mortgage anymore. I might not have a choice but to default. Am I missing an important detail?
The same problem exits in reverse when there is inflation. The lender gets paid in zimbabwe type money when he originally released good money. Why is nobody losing sleep over this side of the problem?
Truth is, of course deflation is bad for the borrower, as inflation is bad for the lender. But they both knew when sitting down to arrange the loan. They could have chosen to write in something to protect themselves but figured they would take their chances, right? So why should anyone else care?
Now about defaulting. You make it sound like defaulting on a loan is an advantage to the borrower. In normal times [like 30 years ago or so], banks knew very well this was a problem, in fact THE problem of lending money. How do I know I will get it back? They made good and sure they would, by insisting on collatteral. And in the case of a loan on a house, by demanding a 20% down payment, which the borrower stood to lose besides his house.
Nowadays they don't care anymore, because the govt has promised [until very recently] to give the bank govt money should there be a default. Such a scheme, however, is a recipe for eventual inflation, because the money has to come from somewhere to repay the bank. meaning it will be printed, meaning inflation. So that deflation is extremely unlikely to happen.
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It's easy to refute an argument if you first misrepresent it. William Keizer
First, thank you for laying it out so clearly. I look forward to the rest of the essay.
Now I'll try my hand at responding to the argument, for practice.
Lee Kelly: I started writing an essay about the paradox of thrift yesterday. Here's the opening: The paradox of thrift is often cited as justification for government to engage in monetary and fiscal stimuli. In this view, an unfettered market is intrinsically unstable. Capricious and rapid declines in total spending are responsible for periodic and spiralling recessions. Although prices ordinarily coordinate economic activity toward productive ends, the normal equilibrating properties of markets cease to function. A non-market institution must intervene and combat recession by stimulating total spending. Only government is capable of satisfying this role, and so it must be empowered to pursue monetary and fiscal policy. At the heart of this view is the paradox of thrift. First paragraph needs no rebuttal, being only unsubstantiated statements. The paradox is related to the observation that what is true for a part of an economy may not be true for an economy as a whole. Although an individual may expand his savings by reducing spending and increasing income, spending and income must be equal for the economy as a whole. One man’s spending is another man’s income, and vice versa. Any change in total spending must correspond to an equal change in total income. Unlike an individual, it is impossible for the economy as a whole to expand its savings by reducing spending and increasing income. Meaning somebody is gonna get left holding the bag. If consumers start spending less, someone is gonna wind up not selling what he has to offer. Will EVERY SINGLE thing be left on the shelves? Or only the crappy stuff, the things people decided they don't need or want right now? The crappy stuff, of course. More on this later. OK so far so good. we are agreement. Analysing the consequences of an attempt to expand the savings of the economy as a whole reveals the paradox. As total spending and income declines, profits shrink, inventories accumulate unsold goods, and workers begin to be laid off. In every single industry, or only the crappy industries? Of course, if people are really badly broke, like now, then their definition of '"stuff I don't really need now" is going to be pretty comprehensive. So yes this will happen. Of course the question should be asked, in any given historical situation, why did so many people decide to save more, enough to alter the whole economy? After all, in a modern productive economy, prices are always going down, as we see with computers and cell phones and so forth. So people should find more to spend on. What happened? This is an important question. If we knew the answer, we would solve our problem. If people don't want to spend as much, find out why and convince them to spend again. But let's put this aside. A surplus of goods and labour develops, because there is not enough spending to buy all that is produced. By the law of supply and demand, when there is a surplus, the price of it goes down, and people buy it. Is this a problem? Any expanded savings merely result in the unemployment of resources, Yes it does. But not forever. When people have gobbled up the stuff that was sold cheaply, and the workers took their pay cut, the goodies are gone, the workers are all working [albeit for less], and now those resources will have to be used to make more of what people want. stifling economic growth Not really. This is taking a very one sided view of things. Just as one man's spending is another man's income, so too one man's loss of income from having to sell cheaper than he wanted is another man's increased income, having spent less on whatver it is. So that the consumer will have more money and things than otherwise. The economy [=the people of the country] has not suffered. For very dollar of one guy getting poorer, there is an equal dollar of someone getting richer. [If you are a socilaist who believes in spreading the wealth, you should be happy, because the masses have benefited by this. Just saying.] Who has gotten poorer? The guy who made stuff people didn't want at his high price. That's the risk of being as businessman, and the punishment for guessing wrong. It makes for smarter businessmen if their dumb decisions make them lose money. and causing human suffering. Yes that's true. Someone is going to take a hit. And someone else is going to benefit, as we explained above. The notion of saving for a better future is turned on its head. No it's not. The people have spoken, and they got what they wanted. They spoke with their closed wallets, saying "We are not willing to pay what you want." They got what they wanted, when it was sold cheaper. "Ah, but what about the masses of unemployed? All those people losing their jobs?" "You mean the guys working hard at making things people decided they don't want?" "Yes, them. Shouldn't we keep their jobs for them, ensure they continue to produce things people don't want?" "Huh?" As long as one man’s expanded savings are offset by another man’s increased spending, there is no problem. However, the attempt to expand savings for the economy as a whole is futile, True. However there is the possibility of NOT SPENDING ON UNIMPORTANT STUFF [things people don't want] and spending instead on important stuff [things people want]. If people stop spending and start saving, they are saying "We don't wnat what you have to offer. We prefer to use our money for something else. Saving for a rainy day. Putting in a bank and getting some interest. Investing in some new idea of mine to create a new widget." and only impoverishes the future by causing recession in the present. A recession in the present does not impoverish the future. It enrichens the future. The recession rearranges the use of resources so that they are use dto make things people want, instead of things they don't want. And guess what? Making things people actually want enriches the future. Basic economic theory informs us that a surplus of goods reduces prices, and so the price of goods and labour must fall until total spending is again able to purchase available resources. Ah, so you agree! However, prices in a real economy may respond unevenly and sometimes very slowly, e.g. the unemployed may be unwilling to accept a lower wage, So you are saying they will be willing to remain unemployed for years, holding out for the higher wage? Are you kidding me? producers may hold out for the economy to recover, This is their decision, right? Are you suggesting the govt should buy their stuff now with taxpayer money? Why? The producer has a choice, freely reached. The taxpayer does not. contractual obligations may enforce old prices, If thereis a contract, it means the stuff is getting sold, right? So what's the problem? and unions may hold up wage cuts Yes, unions are indeed a problem. You hit the nail on the head. If the workers had a free choice to opt out of the union whenever theywished and take the pay cut, that would solve the union problem, wouldn't it? to name but a few problems. I suspect you mentioned the biggies. And they have been shown not to be problems at all. Although a new general level of prices will assert itself in the long run, Ho wlong ar ewe talkiong about? Japan has been waiting 20 years for Keynesian mesasure to save them. Whereas the longer of the depressions that did NOT have Keynesian ideas "helping" them sorted out in about a year. the interim will likely be fraught with political upheaval, This last line is just a scare tactic. What evidence do you have for this? economic distress, foregone opportunities, and wasted time. No. As explained above, the recession is the setup economic blessing, new opportunities, and a valuable use of time. Is there any truth to the paradox of thrift? I think so, but it requires peculiar conditions to hold; ironically, these conditions are the product of government intervention. The only thing I can think of is when the govt produces zimbabwe inflation, it is foolish to hang on to your paper money. But that's not a paradox of thrift. For the individual will gain nothing by saving, either. That is really what I intend my finished essay to be about. Like I said right away, I look forward to it. You stated the case for the paradox of thrift very clearly, very convincingly [until I thought about it a little deeper], and very eloquently.
The paradox of thrift is often cited as justification for government to engage in monetary and fiscal stimuli. In this view, an unfettered market is intrinsically unstable. Capricious and rapid declines in total spending are responsible for periodic and spiralling recessions. Although prices ordinarily coordinate economic activity toward productive ends, the normal equilibrating properties of markets cease to function. A non-market institution must intervene and combat recession by stimulating total spending. Only government is capable of satisfying this role, and so it must be empowered to pursue monetary and fiscal policy. At the heart of this view is the paradox of thrift. First paragraph needs no rebuttal, being only unsubstantiated statements. The paradox is related to the observation that what is true for a part of an economy may not be true for an economy as a whole. Although an individual may expand his savings by reducing spending and increasing income, spending and income must be equal for the economy as a whole. One man’s spending is another man’s income, and vice versa. Any change in total spending must correspond to an equal change in total income. Unlike an individual, it is impossible for the economy as a whole to expand its savings by reducing spending and increasing income. Meaning somebody is gonna get left holding the bag. If consumers start spending less, someone is gonna wind up not selling what he has to offer. Will EVERY SINGLE thing be left on the shelves? Or only the crappy stuff, the things people decided they don't need or want right now? The crappy stuff, of course. More on this later. OK so far so good. we are agreement. Analysing the consequences of an attempt to expand the savings of the economy as a whole reveals the paradox. As total spending and income declines, profits shrink, inventories accumulate unsold goods, and workers begin to be laid off. In every single industry, or only the crappy industries? Of course, if people are really badly broke, like now, then their definition of '"stuff I don't really need now" is going to be pretty comprehensive. So yes this will happen. Of course the question should be asked, in any given historical situation, why did so many people decide to save more, enough to alter the whole economy? After all, in a modern productive economy, prices are always going down, as we see with computers and cell phones and so forth. So people should find more to spend on. What happened? This is an important question. If we knew the answer, we would solve our problem. If people don't want to spend as much, find out why and convince them to spend again. But let's put this aside. A surplus of goods and labour develops, because there is not enough spending to buy all that is produced. By the law of supply and demand, when there is a surplus, the price of it goes down, and people buy it. Is this a problem? Any expanded savings merely result in the unemployment of resources, Yes it does. But not forever. When people have gobbled up the stuff that was sold cheaply, and the workers took their pay cut, the goodies are gone, the workers are all working [albeit for less], and now those resources will have to be used to make more of what people want. stifling economic growth Not really. This is taking a very one sided view of things. Just as one man's spending is another man's income, so too one man's loss of income from having to sell cheaper than he wanted is another man's increased income, having spent less on whatver it is. So that the consumer will have more money and things than otherwise. The economy [=the people of the country] has not suffered. For very dollar of one guy getting poorer, there is an equal dollar of someone getting richer. [If you are a socilaist who believes in spreading the wealth, you should be happy, because the masses have benefited by this. Just saying.] Who has gotten poorer? The guy who made stuff people didn't want at his high price. That's the risk of being as businessman, and the punishment for guessing wrong. It makes for smarter businessmen if their dumb decisions make them lose money. and causing human suffering. Yes that's true. Someone is going to take a hit. And someone else is going to benefit, as we explained above. The notion of saving for a better future is turned on its head. No it's not. The people have spoken, and they got what they wanted. They spoke with their closed wallets, saying "We are not willing to pay what you want." They got what they wanted, when it was sold cheaper. "Ah, but what about the masses of unemployed? All those people losing their jobs?" "You mean the guys working hard at making things people decided they don't want?" "Yes, them. Shouldn't we keep their jobs for them, ensure they continue to produce things people don't want?" "Huh?" As long as one man’s expanded savings are offset by another man’s increased spending, there is no problem. However, the attempt to expand savings for the economy as a whole is futile, True. However there is the possibility of NOT SPENDING ON UNIMPORTANT STUFF [things people don't want] and spending instead on important stuff [things people want]. If people stop spending and start saving, they are saying "We don't wnat what you have to offer. We prefer to use our money for something else. Saving for a rainy day. Putting in a bank and getting some interest. Investing in some new idea of mine to create a new widget." and only impoverishes the future by causing recession in the present. A recession in the present does not impoverish the future. It enrichens the future. The recession rearranges the use of resources so that they are use dto make things people want, instead of things they don't want. And guess what? Making things people actually want enriches the future. Basic economic theory informs us that a surplus of goods reduces prices, and so the price of goods and labour must fall until total spending is again able to purchase available resources. Ah, so you agree! However, prices in a real economy may respond unevenly and sometimes very slowly, e.g. the unemployed may be unwilling to accept a lower wage, So you are saying they will be willing to remain unemployed for years, holding out for the higher wage? Are you kidding me? producers may hold out for the economy to recover, This is their decision, right? Are you suggesting the govt should buy their stuff now with taxpayer money? Why? The producer has a choice, freely reached. The taxpayer does not. contractual obligations may enforce old prices, If thereis a contract, it means the stuff is getting sold, right? So what's the problem? and unions may hold up wage cuts Yes, unions are indeed a problem. You hit the nail on the head. If the workers had a free choice to opt out of the union whenever theywished and take the pay cut, that would solve the union problem, wouldn't it? to name but a few problems. I suspect you mentioned the biggies. And they have been shown not to be problems at all. Although a new general level of prices will assert itself in the long run, Ho wlong ar ewe talkiong about? Japan has been waiting 20 years for Keynesian mesasure to save them. Whereas the longer of the depressions that did NOT have Keynesian ideas "helping" them sorted out in about a year. the interim will likely be fraught with political upheaval, This last line is just a scare tactic. What evidence do you have for this? economic distress, foregone opportunities, and wasted time. No. As explained above, the recession is the setup economic blessing, new opportunities, and a valuable use of time. Is there any truth to the paradox of thrift? I think so, but it requires peculiar conditions to hold; ironically, these conditions are the product of government intervention. The only thing I can think of is when the govt produces zimbabwe inflation, it is foolish to hang on to your paper money. But that's not a paradox of thrift. For the individual will gain nothing by saving, either. That is really what I intend my finished essay to be about. Like I said right away, I look forward to it. You stated the case for the paradox of thrift very clearly, very convincingly [until I thought about it a little deeper], and very eloquently.
First paragraph needs no rebuttal, being only unsubstantiated statements.
Meaning somebody is gonna get left holding the bag. If consumers start spending less, someone is gonna wind up not selling what he has to offer.
Will EVERY SINGLE thing be left on the shelves? Or only the crappy stuff, the things people decided they don't need or want right now?
The crappy stuff, of course. More on this later.
OK so far so good. we are agreement.
Analysing the consequences of an attempt to expand the savings of the economy as a whole reveals the paradox. As total spending and income declines, profits shrink, inventories accumulate unsold goods, and workers begin to be laid off.
In every single industry, or only the crappy industries? Of course, if people are really badly broke, like now, then their definition of '"stuff I don't really need now" is going to be pretty comprehensive. So yes this will happen.
Of course the question should be asked, in any given historical situation, why did so many people decide to save more, enough to alter the whole economy? After all, in a modern productive economy, prices are always going down, as we see with computers and cell phones and so forth. So people should find more to spend on. What happened? This is an important question.
If we knew the answer, we would solve our problem. If people don't want to spend as much, find out why and convince them to spend again. But let's put this aside.
A surplus of goods and labour develops, because there is not enough spending to buy all that is produced.
By the law of supply and demand, when there is a surplus, the price of it goes down, and people buy it. Is this a problem?
Any expanded savings merely result in the unemployment of resources,
Yes it does. But not forever. When people have gobbled up the stuff that was sold cheaply, and the workers took their pay cut, the goodies are gone, the workers are all working [albeit for less], and now those resources will have to be used to make more of what people want.
stifling economic growth
Not really. This is taking a very one sided view of things. Just as one man's spending is another man's income, so too one man's loss of income from having to sell cheaper than he wanted is another man's increased income, having spent less on whatver it is. So that the consumer will have more money and things than otherwise. The economy [=the people of the country] has not suffered. For very dollar of one guy getting poorer, there is an equal dollar of someone getting richer. [If you are a socilaist who believes in spreading the wealth, you should be happy, because the masses have benefited by this. Just saying.]
Who has gotten poorer? The guy who made stuff people didn't want at his high price. That's the risk of being as businessman, and the punishment for guessing wrong. It makes for smarter businessmen if their dumb decisions make them lose money.
and causing human suffering.
Yes that's true. Someone is going to take a hit. And someone else is going to benefit, as we explained above.
The notion of saving for a better future is turned on its head.
No it's not. The people have spoken, and they got what they wanted. They spoke with their closed wallets, saying "We are not willing to pay what you want." They got what they wanted, when it was sold cheaper.
"Ah, but what about the masses of unemployed? All those people losing their jobs?"
"You mean the guys working hard at making things people decided they don't want?"
"Yes, them. Shouldn't we keep their jobs for them, ensure they continue to produce things people don't want?"
"Huh?"
As long as one man’s expanded savings are offset by another man’s increased spending, there is no problem. However, the attempt to expand savings for the economy as a whole is futile,
True. However there is the possibility of NOT SPENDING ON UNIMPORTANT STUFF [things people don't want] and spending instead on important stuff [things people want].
If people stop spending and start saving, they are saying "We don't wnat what you have to offer. We prefer to use our money for something else. Saving for a rainy day. Putting in a bank and getting some interest. Investing in some new idea of mine to create a new widget."
and only impoverishes the future by causing recession in the present.
A recession in the present does not impoverish the future. It enrichens the future. The recession rearranges the use of resources so that they are use dto make things people want, instead of things they don't want. And guess what? Making things people actually want enriches the future.
Basic economic theory informs us that a surplus of goods reduces prices, and so the price of goods and labour must fall until total spending is again able to purchase available resources.
Ah, so you agree!
However, prices in a real economy may respond unevenly and sometimes very slowly, e.g. the unemployed may be unwilling to accept a lower wage,
So you are saying they will be willing to remain unemployed for years, holding out for the higher wage? Are you kidding me?
producers may hold out for the economy to recover,
This is their decision, right? Are you suggesting the govt should buy their stuff now with taxpayer money? Why? The producer has a choice, freely reached. The taxpayer does not.
contractual obligations may enforce old prices,
If thereis a contract, it means the stuff is getting sold, right? So what's the problem?
and unions may hold up wage cuts
Yes, unions are indeed a problem. You hit the nail on the head. If the workers had a free choice to opt out of the union whenever theywished and take the pay cut, that would solve the union problem, wouldn't it?
to name but a few problems.
I suspect you mentioned the biggies. And they have been shown not to be problems at all.
Although a new general level of prices will assert itself in the long run,
Ho wlong ar ewe talkiong about? Japan has been waiting 20 years for Keynesian mesasure to save them. Whereas the longer of the depressions that did NOT have Keynesian ideas "helping" them sorted out in about a year.
the interim will likely be fraught with political upheaval,
This last line is just a scare tactic. What evidence do you have for this?
economic distress, foregone opportunities, and wasted time.
No. As explained above, the recession is the setup economic blessing, new opportunities, and a valuable use of time.
Is there any truth to the paradox of thrift? I think so, but it requires peculiar conditions to hold; ironically, these conditions are the product of government intervention.
The only thing I can think of is when the govt produces zimbabwe inflation, it is foolish to hang on to your paper money. But that's not a paradox of thrift. For the individual will gain nothing by saving, either.
That is really what I intend my finished essay to be about.
Like I said right away, I look forward to it. You stated the case for the paradox of thrift very clearly, very convincingly [until I thought about it a little deeper], and very eloquently.
Rob:Then again, would we really need to borrow and lend in a world in which our money actually increased in buying power?
I think so. I mean if your money went up 5% a year, that's nice. But what if you wnated to make, say, a new movie, and needed a lot of money to make it? Big projects will always need loans.
I was actually just posting that exact same thought in a related thread: http://mises.org/Community/forums/p/15388/318146.aspx#318146