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On debunking "The Paradox of Thrift"

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JeffB posted on Wed, Apr 20 2011 6:51 PM

I came across another article which brought up the old Keynesian "Paradox of Thrift" argument and was wondering if there were good resources I could link to &/or read up on for myself.

I searched this site & came up with one that looked like it was on topic, but after reading it, I felt it was off base as he actually agreed with what I thought was a facetious headline:

Cause of Today's Economic Crises: Too Much Thrift

This Lilburne article wasn't on that specific topic, though in critiqueing Krugman it was obviously discussed:

The Second Coming of Keynes

That article also linked to:

Feasts to cure famine

Which did a pretty good job on it as well. But I'm curious if there are other good resources on the topic.

Thanks for any help anyone might be able to provide.

 

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Answered (Not Verified) Rcder replied on Wed, Apr 20 2011 7:35 PM
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To be honest, I'm not so sure that a great many articles are needed to debunk the paradox of thrift.  It's ridiculous on its face.  When money is saved, it doesn't just sit there, it's loaned out and invested in lengthening the structure of production and building up capital.  Resources aren't immobile when saving occurs, they're just used for producing capital as opposed for producing consumer goods.

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I would read Chapter 8 (Production: Entrepreneurship and Change), section 2 (The Net Effect of Investment) of Man, Economy, and State  http://mises.org/books/mespm.pdf, which starts on page 517. In my opinion, this does a great job of eplaining the effect of an increase in savings in the economy. The conclusions drawn are in stark contrast to the Paradox of Thrift and I believe it's a much more convincing argument. 

 

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Consumers Don't Cause Recessions

Paul Krugman and the Consumption Myth

The Paradox of Thrift: RIP

Krugman and the Paradox of Thrift

The Campaign Against Cost Cutting

Hayek on the Paradox of Saving

Is the Economy a Perpetual Motion Machine?

 

And a previous thread:

The Paradox of Thrift

 

(Generally a good rule of thumb when you're looking for resources/writings about a topic is to simply go to Google, and run a search for whatever you're looking for + "mises")

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Hayek did it in P&P.

My personal Anarcho-Capitalist flag. The symbol in the center stands for "harmony" and "protection"-- I'm hoping to illustrate the bond between order/justice and anarchy.

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Rcder:

To be honest, I'm not so sure that a great many articles are needed to debunk the paradox of thrift.  It's ridiculous on its face.  When money is saved, it doesn't just sit there, it's loaned out and invested in lengthening the structure of production and building up capital.  Resources aren't immobile when saving occurs, they're just used for producing capital as opposed for producing consumer goods.

saving doesn't always go to  the means of production factories ect.if i put gold under my bed for years im simply delaying my consumption the advantage for every body else is while im deciding not to buy goods the price of  other goods they buy  may fall until i decide to use it.the truth is any one with money is being thrifty delaying consumption.the real problem is governments trying to make people spend money while individuals  have decided its in their interest to delay consumption for reasons government's could never calculate with macro models.like job uncertainty or saving for a car.

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JeffB replied on Wed, Apr 20 2011 10:59 PM

Rcder:
To be honest, I'm not so sure that a great many articles are needed to debunk the paradox of thrift.  It's ridiculous on its face.  When money is saved, it doesn't just sit there, it's loaned out and invested in lengthening the structure of production and building up capital.  Resources aren't immobile when saving occurs, they're just used for producing capital as opposed for producing consumer goods.

I thought it was kind of funny when I first read it, but I've seen it a number of times with slight variations in the way it's expressed and it seems to be considered almost a "truism" by many people. And it isn't just the rank and file. It seems that the mainstream economists take it as a given. I've seen articles by economists and commentators who appear on TV or teach economics at major universities writing articles about how our problem now is "too much saving" or that the government has to pick up the slack because the people aren't spending their money.

As you say the money is virtually always put in the bank anyway where it would be loaned out soon and would be pretty much in continual circulation either way. I don't think it would matter if it was spent first and then put in the bank by the new owner(s) or if you just put it there first. One weird thing about our current situation, thouth, is that much of the money is now stored in the bank's reserve accounts at the Fed. They say it is because no one wants to take out loans right now (because everyone is 'hoarding their money'), but I wonder how much of that is because the Fed wants it that way. They just recently received authorization to pay interest on those reserves and it is another tool for them to pull money out of circulation to reduce the money supply & price pressures.

Thanks for the thoughts, but it seems to me that some people, perhaps many people need more persuasion than one might think should be the case.

 

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JeffB replied on Wed, Apr 20 2011 11:00 PM

David Sherin:
I would read Chapter 8 (Production: Entrepreneurship and Change), section 2 (The Net Effect of Investment) of Man, Economy, and State  http://mises.org/books/mespm.pdf, which starts on page 517. In my opinion, this does a great job of eplaining the effect of an increase in savings in the economy. The conclusions drawn are in stark contrast to the Paradox of Thrift and I believe it's a much more convincing argument.

Thanks. I'll have a look at it.

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JeffB replied on Wed, Apr 20 2011 11:07 PM

John James wrote the following post at Wed, Apr 20 2011 8:21 PM:

Consumers Don't Cause Recessions

Paul Krugman and the Consumption Myth

The Paradox of Thrift: RIP

Krugman and the Paradox of Thrift

The Campaign Against Cost Cutting

Hayek on the Paradox of Saving

Is the Economy a Perpetual Motion Machine?

 

And a previous thread:

The Paradox of Thrift

 

 Thanks! It looks like there's probably a lot of meat there. It may take a little while to read it, but I'm sure it will be worth it.

(Generally a good rule of thumb when you're looking for resources/writings about a topic is to simply go to Google, and run a search for whatever you're looking for + "mises")

Thanks for that tip as well. It'll probably come in handy in the future.

 

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JeffB replied on Wed, Apr 20 2011 11:23 PM

Beefheart wrote the following post at Wed, Apr 20 2011 8:24 PM:

Hayek did it in P&P.

That sounds like some sort of perverted bumper sticker or something.

I did find it via Google, though, and it looks like it's even available online compliements of Mises.org: Yay!

http://mises.org/books/pricesproduction.pdf

I did a quick search of the document for "Paradox of Thrift" and it came up with 0 hits, but it had 5 for "Paradox of Saving". Unfortunately they were all footnotes, though. But it looks like it will give me some more good info on the question.

Thanks for the heads up.

 

 

 

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JeffB replied on Wed, Apr 20 2011 11:28 PM

s burgess wrote the following post at Wed, Apr 20 2011 8:26 PM:

saving doesn't always go to  the means of production factories ect.if i put gold under my bed for years im simply delaying my consumption the advantage for every body else is while im deciding not to buy goods the price of  other goods they buy  may fall until i decide to use it.the truth is any one with money is being thrifty delaying consumption.the real problem is governments trying to make people spend money while individuals  have decided its in their interest to delay consumption for reasons government's could never calculate with macro models.like job uncertainty or saving for a car.

Thanks. That's a good point and one I hadn't thought through yet. Maybe I'm being a little too cynical, but I'm thinking that might be a little hard to convince some people with, even though it's obviously true. In any event, it's a good piece of info to have.

Thanks again.

 

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JeffB:
Thanks for that tip as well. It'll probably come in handy in the future.

No problem.  Got one more for you...it'll help you with quoting.

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one of tom woods lectures deals with this topic.i cant remember what one but i guessing you would love it he does a good smack down  on it.i would go find it 4 you but I've got drugs  up higher  on my order of preference today.

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Rcder replied on Thu, Apr 21 2011 12:43 AM

JeffB:
I thought it was kind of funny when I first read it, but I've seen it a number of times with slight variations in the way it's expressed and it seems to be considered almost a "truism" by many people. And it isn't just the rank and file. It seems that the mainstream economists take it as a given. I've seen articles by economists and commentators who appear on TV or teach economics at major universities writing articles about how our problem now is "too much saving" or that the government has to pick up the slack because the people aren't spending their money.

It certainly is one of the more pernicious fallacies, isn't it?  The paradox of thrift and fiscal stimulus seem to have infected both mainstream conservatives and liberals, though both groups seem to be unaware of it.  Just the other day I was listening to Rush Limbaugh, and he said that Barack Obama's problem was that he didn't know how to "create demand", i.e. get people to spend money.  The man seems completely oblivious to the logical conclusion that one would have to draw from that line of reasoning.  If spending is truly the only component of economic growth, then he should be trumpeting the stimulus packages, not defaming them.  But I digress.

As a previous poster said, there is the possiblity of people keeping money in their cash balance as opposed to investing it.  After all, most people keep at least a few twentys in their wallet as opposed to in a bank.  But this by no means will cause economic armageddon.  Prices will fall and the purchasing power of money will rise, and then people will be induced to spend that money now that they have a more "effective" cash balance.  I suppose that if literally everyone stopped buying and investing that the economy would shut down, but that would just be the market responding to the fact that people no longer desired goods or services of any sort.

JeffB:
One weird thing about our current situation, thouth, is that much of the money is now stored in the bank's reserve accounts at the Fed.

If this is true, then that's very odd for the Federal Reserve to be doing so.  If their goal is lowering interest rates then they'd want to be injecting as much liquidity into commercial banks as possible, not keeping it stored in Washington, D.C. or at the regional Fed banks. 

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JeffB:
One weird thing about our current situation, thouth, is that much of the money is now stored in the bank's reserve accounts at the Fed.

If this is true, then that's very odd for the Federal Reserve to be doing so.  If their goal is lowering interest rates then they'd want to be injecting as much liquidity into commercial banks as possible, not keeping it stored in Washington, D.C. or at the regional Fed banks.

The Fed is doing it because otherwise the banks would go broke. They have nobody to lend to. To help the banks, the Fed lends money to the big banks at a low rate, then borrows it right back at a slightly higher rate.

Interest rates are low anyway, because the country is in a recession, meaning businesses don't see any pooint in borrowing money to expand when they can barely sell what they already are producing. Lending to consumers is an inherently risky business, as the housing bust underlined.

The Feds didn't want the banks to lend out that money to the real world, because they know full well it will cause high inflation.

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