Free Capitalist Network - Community Archive
Mises Community Archive
An online community for fans of Austrian economics and libertarianism, featuring forums, user blogs, and more.

Help me understand Hayek vs. the Paradox of Saving

rated by 0 users
Not Answered This post has 0 verified answers | 17 Replies | 4 Followers

Top 200 Contributor
390 Posts
Points 7,705
Prashanth Perumal posted on Wed, Mar 27 2013 2:49 PM

I don't get how exactly Hayek solved the paradox of saving - which was basically the argument that if people are going to save more than they consume, the amount of investment made in the production of final consumer goods would be higher than the amount spent on consumption of these final consumer goods that are produced. So what results is producers not being able to sell their goods to the consumers at remunerative prices.

To cite an example, if society saves and invests $200 but spends only $100 on the final consumer goods that are produced as a result of investing $200, since the cost of production would be higher than the price of the final consumer goods, producers would have to take up losses and there would be a depression.

I think Hayek argued this was wrong. He said that businessmen would lengthen the structure of production in such a way that the final products can actually be sold at remunerative prices to the final consumers. But I really don't understand how it happens. I have read Hayek's paper (check the chapter named "paradox of saving" here: multiple times, but I still don't get it. Can you guys help me understand this?

I've spent quite some time reading this multiple times, butI seem to be missing something about it. Lengthening, widening, stages of production etc sound very abstract to me. Can any one of you guys explain this stuff with a simple real-life example?

Thanks for your time!

  • | Post Points: 65

All Replies

Top 50 Contributor
2,439 Posts
Points 44,650
Neodoxy replied on Thu, Mar 28 2013 10:38 AM


More or less perfect. Just make sure that you understand that, as you do indicate, it's the money saved plus the discount rate at the various stages and the length of time. The 100 dollars in consumption contains the final intererest payment on all previous stages of producton, Therefore if you just look at a single project, consumption will be greater than production by some amount racked up in interest, which will vary wildley depending on how much was spent at higher or lower stages. Even a relatively inexpensive initial stage of production will take up a larger and larger portion of total cost if it was several years before the completion of the project.

At last those coming came and they never looked back With blinding stars in their eyes but all they saw was black...
  • | Post Points: 5
Not Ranked
87 Posts
Points 1,215
Albert replied on Thu, Mar 28 2013 11:57 AM

Autolykos is right about the Keynesian point of view. They use this argument (the paradox of thrift) to justify their interference with the markets, to force people to "spend" rather than "save" because they believe "not spending or consuming"  is evil and somehow investing falls in the same category.

Neither Keynes nor the authors that Hayek was refuting explain why "Saving" is not consuming. It is as if everybody that Saves keeps gold bars under their mattress for their scenario to be true.

If saving is the same as investing in capital goods it does not detract from the "society" spending

If saving means leaving money in savings accounts, it puts more money back in circulation through bank loans

Even if saving means you hoard your paper dollars under the mattress, it takes money out of circulation therefore making the remaining money more valuable, so consumers can buy more products with the same dollar.

There is not a scenario where society can hoard too much money (much less if it is invested in more products) -none of this leads to the paradox scenario

  • | Post Points: 20
Top 25 Contributor
4,249 Posts
Points 70,775

Just for the record, there is a point that has to be cleared up here.

The OP's question, the situation Hayek talks about, is not the one Keynes is talking about.

The OP, Foster and Catchings, and Hayek are talking about when people take the money that they used to spend on consumption [=eating things up] and instead "invest" it. "Invest" is a technical term meaning using the money to increase production. Gold bars under the mattress are not what they are talking about.

Keynes is talking about gold bars under the mattress.

Foster and Catchings claimed that in their situation, more and more will be made with no one to buy it, until bad things start happening. Keynes claimed that in his situation, less and less will be made, and bad things will happen because of that.

Hayek's discussion in the essay the OP linked to does not discuss, and does not solve, Keynes's problem. He only solves Foster and Catching's problem.


My humble blog

It's easy to refute an argument if you first misrepresent it. William Keizer

  • | Post Points: 5
Page 2 of 2 (18 items) < Previous 1 2 | RSS