Thursday, 5 March 2009

The Paradox of Thrift: “Wrong” [updated]

Why, in the current crisis, are governments so keen to promote spending?  What’s the theory behind all the giveaways and the shopping subsidies?  It’s based on something Keynes called the Paradox of Thrift, and like most of his nostrums it’s wrong, wrong, wrong

Bernard Hickey investigates the Paradox of Thrift in this four-minute video, and finds its wrong -- which means saving more makes sense and government handouts don’t make sense.

Fancy that.

It might sound like Economics 101, but what Bernard’s trying to remedy is some of the Keynesian crap students are actually taught in 101.

UPDATE:  On the subject of Econ 101, CATO’s Clifford Thies looks at the evolution of this particular bad idea through the textbooks.  Read The Paradox of Thrift: RIP.

And Robert Murphy points out, contra Krugman, that just because we're in a situation like this, it doesn’t mean that normal economic rules don't apply.   Does "Depression Economics" Change the Rules? No, it doesn’t.  Foolishness is foolishness, whenever and wherever it occurs.

1 comment:

  1. So what you're saying is that the paradox of thrift doesn't exist? That it's based on the fallacious conclusion that saving money causes unemployment, which causes more savings, which causes more unemployment and so on until the entire economy descends into a black hole? So Keynes, who came up with this nonsense, basically lived in the short term, and did not understand that people save with the intention of spending later. My question is: what really happens, then? Or, in other words, if savings does not create a downward spiral of economic collapse as the paradox suggests, then what really happens? Is it like this: savings translates into capital for increased production, which creates more employment, which creates more prosperity, which in turn creates more capital, which in turn creates more savings, and so on, until the entire global economy grows so large the planet can't support it and we all descend into a black hole? I know there's a fallacy in my nihilistic conclusion, but I can't fit that into my comment...Great rant, you articulated it better than I could. Thanks!


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