08 Dec 2012

The Paradox of Thrift

Economics 114 Comments

There seems to be some confusion about what this is. Wikipedia knows what’s up:

The paradox of thrift (or paradox of saving) is a paradox of economics, popularized by John Maynard Keynes, though it had been stated as early as 1714 in The Fable of the Bees,[1] and similar sentiments date to antiquity.[2][3] The paradox states that if everyone tries to save more money during times of economic recession, then aggregate demand will fall and will in turn lower total savings in the population because of the decrease in consumption and economic growth. The paradox is, narrowly speaking, that total savings may fall even when individual savings attempt to rise, and, broadly speaking, that increase in savings may be harmful to an economy.[4] Both the narrow and broad claims are paradoxical within the assumption underlying the fallacy of composition, namely that what is true of the parts must be true of the whole. The narrow claim transparently contradicts this assumption, and the broad one does so by implication, because while individual thrift is generally averred to be good for the economy, the paradox of thrift holds that collective thrift may be bad for the economy.

Exactly. Very straightforward. Whether or not you agree with it, that’s what the “paradox of thrift” is. It’s about saving–”thrift”–and it’s paradoxical, because when the community tries to save more, they end up saving less. Hence, “the paradox of thrift.” Very neat and tidy.

In contrast, if someone says “the paradox of thrift” is “really about” a mismatch of saving and investment, and that if the community suddenly decided to invest less, that this too would be “the paradox of thrift”…well no, that not only is wrong, but it would make no sense at all.

If you open any textbook that has the actual phrase “paradox of thrift” in it, I am quite sure it will define it along the above lines. If someone can show me a textbook saying that a community deciding to invest less–where that is the starting point of the analysis–is an example of the paradox of thrift, I will PayPal the first such person $25. And I will take it out of my investment spending.

114 Responses to “The Paradox of Thrift”

  1. Major_Freedom says:

    If anyone does find an example of an author writing that, then they should take the $25 prize and buy DK an additional month of internet access, so that he too can visit wikipedia on what the paradox of thrift means.

    Oh what do I know, I am “not a towering mind in economics.”

    http://factsandotherstubbornthings.blogspot.ca/2012/12/pick-up-book-kids.html

    • Daniel Kuehn says:

      I’ve said twice now that if Bob cares this much about calling the premise and the conclusion the “paradox of thrift” and insists on leaving out consideration of the actual argument that gets us to premise and confusion, then I am befuddled by fine with that if he really cares about that choice.

      It’s all nomenclature, MF.

      The point is you made a thoroughly Keynesian argument that did appear in the book and complained Keynes never talked about it.

      That’s the point.

      • Daniel Kuehn says:

        *but fine with it

      • Major_Freedom says:

        I’ve said twice now that if Bob cares this much about calling the premise and the conclusion the “paradox of thrift” and insists on leaving out consideration of the actual argument that gets us to premise and confusion, then I am befuddled by fine with that if he really cares about that choice.

        Well then I guess I will say for the second time that this started when you incorrectly called my explanation of something I argued Keynes did not consider (namely, a reduction in investment spending that is not accompanied by a corresponding increase in consumption spending), “the paradox of thrift”. I will also say for the second time that the paradox of thrift actually (and allegedly) occurs when everyone tries to save more, i.e. when everyone tries to consume less.

        If you can’t see the difference between investing less and consuming less, if you call both of these the paradox of thrift, then we are in deep trouble.

        The point is you made a thoroughly Keynesian argument that did appear in the book and complained Keynes never talked about it.

        I considered two concepts that I argued Keynes never talked about. The two concepts were “the paradox of consumption”, and “the marginal propensity to invest”. I specifically designed them as mirror images of the concepts Keynes did talk about, namely, the paradox of thrft and the marginal propensity to cosnume.

        You continue to assert that the paradox of consumption and the marginal propensity to invest are “thoroughly Keynesian arguments”. That quite honestly baffles me. It baffles me because

        1. for the paradox of consumption, Keynes not only not mentioned anything like it, but he spefically ruled it out, when he argued that no unemployment would rise if the marginal propensity to consume was equal to unity. That means he didn’t consider any paradox of consumption, despite the fact that an MPC equal to unity would “paradoxically” result in less consumption for everyone as well!

        2. for the marginal propensity to invest, I argue Keynes also did not consider this. Yes, he discussed “inducements to investment”, but he did not consider the marginal propensity to invest out of incomes the way he did so for consumption. No, he charged that there is a limit to investment, limited by too low returns that will allegedly prevail in a free market. That is why he wanted government deficits.

        The point is not “nomenclature”. The point is the two concepts I said Keynes did not consider, and your attempt to characterize a fall in investment spending without a corresponding rise in consumption, as an example of the paradox of thrift. Bob has nothing to do with this, other than, of course, his statement that echoes mine, that you are wrong about the paradox of thrift.

  2. xgsmmy says:

    Bob, the paradox of thrift does have to do with investment as investment may rise to offset any decrease in consumption. The idea is that the central bank will let the interest rate fall and this will induce more investment but at the zero lower bound they cannot so investment and consumption fall together.

    It’s theoretically possible investment will boom as consumption falls but the problem is that it won’t in time and output will fall instead. (Without a central bank it’s likely the rate won’t fall fast enough. With a central bank you may hit the zero lower bound.)

    I don’t have a textbook, but I do read Dean Baker who says the problem today is the collapse of the housing bubble and that consumption is actually historically high and investment in software and equipment is almost back to pre-recession levels. I’ve read him saying we shouldn’t expect the savings rate to fall unless we expect another bubble. The implication being that the government should invest more as private sector investment is supposedly fairly constant over time.

    Here he says: “The non-residential investment share of GDP has fluctuated in a fairly narrow range over the post-war period. If the deficit hawks tell you they have some elixir that makes it suddenly soar through the roof, then they have been smoking something funny. That ain’t going to happen.”

    If something he says contradicts Keynes, I’d imagine he’d say Keynes was wrong.

    • Bob Murphy says:

      It’s theoretically possible investment will boom as consumption falls but the problem is that it won’t in time and output will fall instead.

      Right. So Keynes et al. are showing how, if people save more, then invest might not rise and therefore we’re in trouble. Thus, they are worried about people saving more. In contrast, a Rothbardian (say) is going to argue that when people save more, investment will go up, and so we’re not in trouble.

      It’s odd to me that you guys spell out the Keynesian fear over why saving *might* be bad, as if that proves that Keynesians don’t think savings are bad.

      Let me put it this way: Your guys’ position would be a lot more straightforward if, when MF and John Papola bring up “the paradox of thrift” as their trump card, you just said, “We only think that applies at the ZLB. Otherwise there is no paradox of thrift.” I wouldn’t have had a problem with that; that would have been a decent reply.

      But what seems very tortured to me is how you guys are arguing that the “paradox of thrift” was never a cautionary tale about the dangers of thrift, that instead it was a tale about investment.

      • Lord Keynes says:

        “It’s odd to me that you guys spell out the Keynesian fear over why saving *might* be bad, as if that proves that Keynesians don’t think savings are bad.

        You clearly can’t – perhaps won’t – understand the difference between micro versus macro effects.

        The very definition you have cited above makes it clear – as any Keynesian would believe – that saving can and is good for the individual (e.g., paying down debts, increasing his pool of money available for future liquidity problems, reducing his fear of future economic uncertainty) – the micro way that it is “good”.

        The problem is deleterious macro effects from individual acts of saving: fall in investment, fall in demand for goods, depressing effect on business expectations.

        There is no problem in saying saving is good for the individual, but possibly bad for the whole economy in some instances.

        • Joseph Fetz says:

          In other words, you’re looking at total output, and then noticing that certain aggregates of that output haven’t met your expectations? Is this about correct?

          Would it not also be correct that in Keynesian theory, that income is the source of both spending and investment? And that spending is ultimately the source of income?

          • xgsmmy says:

            Joseph, it’s the belief that the productive capacity didn’t just disappear like it would in a supply side shock so that there are idle resources.

            My spending is someone else’s income. How could it not be?

            Investment is spending and a source of income. Income isn’t “the source” of investment. You can invest your income or you can borrow money to invest.

            You could say that investment leads to growth and so it’s ultimately the source of income that way, maybe, but that’s probably semantics.

          • Lord Keynes says:

            “In other words, you’re looking at total output, and then noticing that certain aggregates of that output haven’t met your expectations? “

            If there were mass unemployment, do you think these aggregates would have met the expectations of millions of unemployed?

            Spending is also someone’s income, yes.

            Is this something you dispute?

            • Joseph Fetz says:

              No, I don’t dispute it in a certain sense, but I think that it misses the point of why we are able to spend in the first place.

        • Bob Murphy says:

          From Lord Keynes’ own lips MF:

          The very definition you have cited above makes it clear – as any Keynesian would believe – that saving can and is good for the individual (e.g., paying down debts, increasing his pool of money available for future liquidity problems, reducing his fear of future economic uncertainty) – the micro way that it is “good”.
          The problem is deleterious macro effects from individual acts of saving: fall in investment, fall in demand for goods, depressing effect on business expectations.

          Daniel, tell me which of the following you believe:

          (a) LK above is wrong for saying saving leads to “fall in investment, fall in demand for goods, depressing effect on business expectation.”

          (b) You think that “fall in investment, fall in demand for goods, depressing effect on business expectation” are good things.

          This is hilarious. John says Keynesians are afraid of increased savings hurting the economy, and then you say stuff like this. I try to be a diplomat and say “OK you really mean just at the ZLB, not as a general rule” and Daniel you come back saying no, as a general rule it’s a negative shock when people save more.

          • Lord Keynes says:

            “LK above is wrong for saying saving leads to “fall in investment, fall in demand for goods, depressing effect on business expectation.””

            You seem to have misunderstood those quoted words.

            I do not say saving must ALWAYS or necessarily lead to a “fall in investment, fall in demand for goods, depressing effect on business expectation”.

            Saving – money not spent on consumption or not invested in capital goods production – if on a large enough scale will lead to a fall in investment, fall in demand for goods, depressing effect on business expectation.

            • Lord Keynes says:

              And that’s not even considering collapse of credit when businesses have poor expectations.

              If people increase their saving but banks are unwilling to lend much and businesses generally shun significant new credit, no amount of money savings will induce the necessary investment.

              Even massive open market operations do not lead to the sufficient level of investment.

              Witness the failure of QE1, QE2, and QE3. If that money had been people saving money from income streams, the economy would have collapsed to an even greater extent.

              • Major_Freedom says:

                And that’s not even considering collapse of credit when businesses have poor expectations.

                What does “poor expectations” mean? If you mean “expected sales are lower”, then competition will compel factor prices downward.

                If people increase their saving but banks are unwilling to lend much and businesses generally shun significant new credit, no amount of money savings will induce the necessary investment.

                People don’t decide to reduce consumption, hoard cash, and then decide whether to invest it or not. They decide three things with their income: consume, invest and hold cash.

                If there is an increase in cash holding, then you cannot assume it changes the consumption-investment ratio. If there is a change to the ratio, then it signifies a change to time preference, and the economic structure, when not hampered with, will change to reflect the new time preference.

                There is no reason why a change in time preferences must be counter-acted by government policy, to make the economic structure one that is not in line with actual individual preferences.

                Even massive open market operations do not lead to the sufficient level of investment.

                If there is a reduction in consumption spending, and no rise in investment spending, then this reflects lower time preferences. People want to consume relatively less as compared to investment, or, equivalently, people want to invest relatively more than consumption.

                If the government does not interfere, then competition will lead to relatively less investment in consumer goods and relatively more in capital goods. Labor will be attracted away from consumption and into investment. If the government does not pay people to be unemployed, and does not make certain wage rates illegal, then there is no reason why wage earners and wage payers won’t find each other at appropriate wage rates.

                If wages rates fall, then so will business costs: capital goods costs, and consumer goods costs.

                Witness the failure of QE1, QE2, and QE3. If that money had been people saving money from income streams, the economy would have collapsed to an even greater extent.

                Except aggregate demand did not only fall because people held more cash. Aggregate demand fell because (credit expansion) money was literally destroyed.

              • Lord Keynes says:

                If there is a reduction in consumption spending, and no rise in investment spending, then this reflects lower time preferences. People want to consume relatively less as compared to investment, or, equivalently, people want to invest relatively more than consumption.”

                The increased savings do not tell you at all whether the people all wanted to see investment and employment fall.

                In the real world, people have many other reasons for increasing cash holdings – and not from a desire to cause recessions.

                Again this micro versus unintended macro effects.

              • Major_Freedom says:

                The increased savings do not tell you at all whether the people all wanted to see investment and employment fall.

                Red herring.

                People don’t not save because they want to ensure employment remains high. They spend money to acquire goods. Consumers don’t generally care if a product takes more or less labor to produce it.

                The market is a place where individuals trade with each other. They aren’t cells in a larger organism.

                In the real world, people have many other reasons for increasing cash holdings – and not from a desire to cause recessions.

                Increased cash hoarding is not what causes recessions. It is what caused the increased cash holding. The problem is not during the correction, it’s during the time prior.

                People don’t suddenly and capriciously decrease their consumption/investment for no reason. It would be foolish to then “solve the problem” by doing what caused the sudden decline in spending in the first.

                Again this micro versus unintended macro effects.

                There aren’t any macro effects that aren’t already micro effects.

            • Joseph Fetz says:

              I think that you’re erroneously attributing an addition to cash balances as saving.

              Saving is deferred consumption, not deferred investment. If I make additions to my cash balance, I will either spend or investment that money at some point in the future, whatever is not ultimately spent on consumption (in the long run) must necessarily be saving.

              Additions to cash balances is merely a period where somebody has not yet decided whether to spend or invest that sum, and is a temporary condition (i.e. ultimately that cash balance will either be spent or invested).

              • Lord Keynes says:

                “Saving is deferred consumption, not deferred investment. “

                And Keynes included cash hoarding in his definition of saving – so all we have here is hair splitting about nomenclature.

                Change “paradox of thrift” to “paradox of additions to cash balances” and tell me: Do “additions to cash balances” done on a large enough scale by many people (that might be good to each individual) have deleterious macro consequences, if the level of investment is depressed?

                If the depression of investment (and resulting unemployment) is most decidedly NOT the intention of individuals adding to cash balances?

              • guest says:

                Nobody is entitled to employment. I don’t see the problem.

                Get the government out of the way, and things will be cheaper.

                “Macro” (code for “other-minded”) is a non issue.

                Defending the Undefendable (Chapter 30: The Scab) by Walter Block
                http://www.youtube.com/watch?v=2IiW7WgDcHA

                Defending the Undefendable (Chapter 31: The Rate Buster) by Walter Block
                http://www.youtube.com/watch?v=t86a0-ouQSM

              • Ken B says:

                Drunk again? You just argued that I cannot build up my cash balance as part of deferring my consumption. I recall doing exactly that with a piggy bank.

              • Joseph Fetz says:

                “Do ‘additions to cash balances’ done one a large enough scale … ”

                Only if you make an arbitrary value judgement on what the level of investment should be.

                There’s obviously a reason why people would make additions to their cash balances, and that reason is usually uncertainty about the future (thus, they add to cash balances rather than spending or investing those sums). Nothing wrong with allowing the market to reflect economic realities.

                Also, if you equate saving with additions to cash balances, then S can never equal I, because under such a definition any addition to a cash balance will necessarily make S>I (cash balances will *always* exist in some form or another).

                Further, defining cash balances as saving is inconsistent because a portion of any given cash balance will necessarily be spent rather than invested (if one is to live they must consume/spend). So, defining saving in this way ultimately leads to the conclusion that spending is saving (which is obviously false).

              • Joseph Fetz says:

                No I did not, Ken B. I argued that saving is deferred consumption, and that a cash balance will necessarily be spent or invested in the future. This means that whatever portion of a cash balance that is not spent must necessarily be saving. Let me ask, what did you ultimately do with the money in your piggy bank? If you spent it all on consumption, then it is not saving. If you invested it all, then all of it was saving. It matters what the cash balance is ultimately used for in order to determine whether it is saving or not.

              • Ken B says:

                Do you know this cool word “defer”? I’ll explain it LATER.

              • Ken B says:

                “I think that you’re erroneously attributing an addition to cash balances as saving.”

                If this is not a denial that a piggy bank is savings I have a soul.

              • Joseph Fetz says:

                I understand what defer means. Let me be more clear. Deferred consumption for investment is saving. Deferred consumption for consumption, is consumption. If this weren’t true, then S would never equal I, and spending would be saving.

              • Ken B says:

                What about deferred consumption whose purpose is unknown? I might spend invest or just keep for safety.

                Anyway for the purpose at hand, paradox of thrift, cash hoarding is savings.

              • Lord Keynes says:

                “Only if you make an arbitrary value judgement on what the level of investment should be. “… etc.

                Yeah, this is just an evasion of my question.

                .I repeat:
                Do “additions to cash balances” done on a large enough scale by many people (that might be good to each individual) have deleterious macro consequences, if the level of investment is depressed?

                If the depression of investment (and resulting unemployment) is most decidedly NOT the intention of individuals adding to cash balances?

                Note the words in bold.

              • Joseph Fetz says:

                “What about deferred consumption whose purpose is unknown”

                That’s just an addition to a cash balance (hoarding), whose level is based upon uncertainty (I explained all of this above).

                There’s nothing inherently wrong with this, because that cash balance will either be spent or invested in the future. Like I said, it’s a temporary condition, and one that will always exist in a monetary economy. After all, income is not instantaneously spent or invested, it will always exist as a cash balance at some point.

                More uncertainty tends to increase the level of cash balances at any given time, but that too is temporary, and is reflective of the market conditions (this is why people tend to hoard more often in a downturn, they are uncertain about the future due to the condition of the market).

              • Major_Freedom says:

                What about deferred consumption whose purpose is unknown? I might spend invest or just keep for safety.

                Unless you intend to keep it stashed away forever (doubtful), you will eventually consume, invest, or give it away for charity, and that person will eventually spend, invest, etc.

              • Major_Freedom says:

                And Keynes included cash hoarding in his definition of saving – so all we have here is hair splitting about nomenclature.

                That’s why Keynes not only confused himself, but his followers too. Saving as such does not only mean cash holding. Every time someone invests, they are saving.

                Change “paradox of thrift” to “paradox of additions to cash balances” and tell me: Do “additions to cash balances” done on a large enough scale by many people (that might be good to each individual) have deleterious macro consequences, if the level of investment is depressed?

                Tell me, if one individual holding more cash reduces aggregate demand ceteris paribus, and you do not feel compelled to advocate for initiations of force from the state, then at what point exactly do acts of additional cash holding go from you refraining from advocating for violence, to advocating for violence? Why is 1% unemployment not cause for violence, but 10% unemployment is?

                If the depression of investment (and resulting unemployment) is most decidedly NOT the intention of individuals adding to cash balances?

                So if one individual doesn’t intend to reduce aggregate demand by holding more cash, but his actions nevertheless do reduce aggregate demand, then that means you advocate for initiations of force by the state after all?

              • Lord Keynes says:

                “Tell me, if one individual holding more cash reduces aggregate demand ceteris paribus, and you do not feel compelled to advocate for initiations of force from the state, then at what point exactly do acts of additional cash holding …”

                When recessions occur and unemployment rises, because this is a clear indication of the deleterious macro effects – which is not difficult to understand.
                .

              • Major_Freedom says:

                When recessions occur and unemployment rises, because this is a clear indication of the deleterious macro effects – which is not difficult to understand.

                But that is historical. You are admitting government borrowing and spending is backward looking, and therefore could be counter-productive in the PRESENT, where such historical events are no longer even applicable.

              • Major_Freedom says:

                For example, how can you know if current government borrowing and spending isn’t reducing private investment? You can’t say it’s because private investment was lower last year or the year before. I’m talking about the present.

                The fact that the government is borrowing and spending NOW could be preventing additional private investment NOW, is something that you cannot claim is not taking place. After all, you cannot observe the counter-factual of what would have otherwise taken place had the government not been borrowing and spending in the now.

                What if the government’s borrowing and spending $1.00, is making $0.50 or $0.75 of private investment impossible? How can you know? We might be being impoverished relative to the counter-factual and you don’t even know it.

            • Ken B says:

              Yes, Bob is misinterpreting (never call me uncharitable) LK here, who is arguing can not must.
              Does Bob exclude geffen goods in every sentence about prices?

              • Major_Freedom says:

                Why is it that the “can not must” is always accompanied by a practical “must not can”?

                Government borrowing and spending necessarily makes investment that may have been financed by that saving impossible.

                So that means any time the government borrows and spends for the purposes of avoiding the “can not must” occurrences of “too much saving”, they are behaving as if too much saving “must not can” lead to problems.

                It would be like me taking your cash holdings and then spending it, and then telling you “I am not saying you will necessarily not spend that money, just that you may not spend it.”

            • Major_Freedom says:

              LK:

              I do not say saving must ALWAYS or necessarily lead to a “fall in investment, fall in demand for goods, depressing effect on business expectation”.

              So ex ante, how in the hell do you know when more saving will and will not be accompanied by additional investment, given that government budget deficits are actually being carried out on the basis of a fear that saving will not be accompanied by investment?

              If budget deficits are actually taking place, then you have no basis for claiming that the saving would have not been associated with more investment! Can’t you see this?

              Saving – money not spent on consumption or not invested in capital goods production – if on a large enough scale will lead to a fall in investment, fall in demand for goods, depressing effect on business expectation.

              That is cash hoarding. You are describing cash hoarding. Saving is not abstaining from consumption AND investment. Saving is abstaining from consumption.

              Moreover, if you are going to call cash hoarding “saving”, then you are going to have to admit that anytime any one single individual holds more cash, then that will reduce investment, it will reduce demand for goods, and it will depress business expectations! If I decide to hold more cash and spend/invest less, then ceteris paribus, my action will reduce the aggregates, such as aggregate demand.

              You are fallaciously claiming that only when this ridiculous fuzzy logic, nebulous, undefined concept “large enough scale” for saving occurs, then that is when demand falls. But demand falls, the way you understand it to fall, when a single individual holds more cash!

              It may be small when an individual does it, but it is non-zero. When exactly do additional people, one by one, adding to their cash balances, become a problem? If a single individual doing it is not a problem, and if two individuals doing it is not a problem, then when exactly?

              If you are OK with an individual holding more cash, despite the fact that this will, ceteris paribus, reduce aggregate demand and/or investment, however so much, then that means you are inherently OK with falling aggregate demand, sucker!

              • Lord Keynes says:

                “So ex ante, how in the hell do you know when more saving will and will not be accompanied by additional investment, given that government budget deficits are actually being carried out on the basis of a fear that saving will not be accompanied by investment?”

                Why should remedial government intervention be done ex ante when the standard way to do it is when data on real output contraction is available?

                “That is cash hoarding. You are describing cash hoarding. Saving is not abstaining from consumption AND investment.”

                More Austrian semantics.

                “Moreover, if you are going to call cash hoarding “saving”, then you are going to have to admit that anytime any one single individual holds more cash, then that will reduce investment, it will reduce demand for goods, and it will depress business expectations”

                False and ridiculous.

                “When exactly do additional people, one by one, adding to their cash balances, become a problem? “

                When real output falls and unemployment rises, idiot?

                “If you are OK with an individual holding more cash, despite the fact that this will, ceteris paribus, reduce aggregate demand and/or investment,

                That does not follow at all: we have FR banking system and endogenous money: so new credit flows can more than make up for some private sector saving in some instances.

              • Major_Freedom says:

                Why should remedial government intervention be done ex ante when the standard way to do it is when data on real output contraction is available?

                Because the decision of the government to spend is made ex ante. They intend to spend more in the future to avoid a potential future from transpiring, namely, too much saving and not enough investment.

                If you are saying the government borrows and spends more on the basis of historical data, then you are admitting the government is backward looking and that their borrowing and spending more NOW can be reducing private productive investment NOW.

                If they do borrow and spend more now, then they make it impossible for the free market process to lead to increased investment.

                More Austrian semantics.

                No, it’s not semantics. Saving is not abstaining from consumption and investment. Saving is abstaining from consumption.

                False and ridiculous.

                Desperate hand waving and evasion. It is neither false nor ridiculous.

                When real output falls and unemployment rises, idiot?

                You are using circular logic.

                According to Keynesian theory, a fall in output and employment occurs when there is a fall in aggregate demand. So if one individual holding more cash leads to a fall in aggregate demand, then according to Keynesian theory, they are bringing about a fall in real output and employment, however small it is.

                If one individual holding more cash does not lead to a fall in output or employment, and if two individuals holding more cash does not lead to a fall in output or employment, then when does it?

                If you say “it is an empirical question”, then you are again admitting it’s merely a historical issue, which means going forward, any government borrowing and spending you advocate NOW may be solving a problem that doesn’t even exist NOW, where there may in fact be a reversal of declines in output and unemployment but it’s a part of your historical observations.

                In other words, you are admitting Keynesian policies are backward looking, not forward looking.

                That does not follow at all: we have FR banking system and endogenous money: so new credit flows can more than make up for some private sector saving in some instances.

                That isn’t ceteris paribus. My argument was ceteris paribus.

                Sure, if the banks expand more credit, then “spending” need not fall, but then you are only claiming that it isn’t saving per se that is the problem, it’s a lack of debt.

                Why would a bank expand more credit merely by virtue of someone holding cash for longer than they used to hold cash? There is no reason why banks would care about the aggregate money supply.

        • Major_Freedom says:

          Thanks LK for showing not only why Murphy is right, but why most Keynesians don’t even understand the Austrian critique, nor the paradox itself.

          You are conflating saving with cash hoarding, for that is the only way that declines in consumption spending are associated with declines in spending as such. You said more saving leads to a fall in demand for goods. But if the saving (abstaining from consumption) is brought about by investment itself (all investment is abstaining from consumption, i.e. saving), then there is no decline in the demand for goods as such. This is why Murphy made a point about the zero bound, to show you how you Keynesians can avoid the “label” of “fearing saving” as such, only if abstaining from consumption may not necessarily be accompanied by increased investment. But the way you just described things, you are saying too much saving is per se deleterious, when that is not the case at all.

          If you can understand that declines in investment spending and corresponding rise in consumer spending (we can call this “anti-saving”) is not problematic, then you should be able to understand that declines in consumption spending and rise in investment spending (saving) is also not problematic.

          If you really want to claim that saving includes cash hoarding, then fine, but bear in mind that the economy as a whole cannot save more in cash, unless there is a rise in the quantity of money. It is a fallacy of composition to assert that because one individual can hold more cash by accumulating it from trades, that everyone collectively can hold more cash in the same way. The only way anyone can hold more cash, is if others hold less cash (i.e. trade with the cash accumulator).

          • Ken B says:

            Can hoarding cash reduce velocity or the amount of credit available from banks whose reserve is depleted? If either answer is yes, can it take time for a new equilibrium to form? If yes, can there be costs to that transition?

            • Major_Freedom says:

              Can hoarding cash reduce velocity or the amount of credit available from banks whose reserve is depleted?

              Cash hoarding is only associated with a lower velocity if the turnover of money for goods falls. In other words, only if the rate of goods sales falls.

              If either answer is yes, can it take time for a new equilibrium to form?

              All adjustments take time. Human action takes place in time, not outside of time. Even a fall in investment spending and rise in consumption spending (Keynesian dream) takes time. Even government spending (Keynesian utopia) takes time.

              If yes, can there be costs to that transition?

              All actions have costs. Even governmental activity has costs (I know!).

      • xgsmmy says:

        In contrast, a Rothbardian (say) is going to argue that when people save more, investment will go up, and so we’re not in trouble.

        I imagine they’d say that because the increase in saving causes the interest rate to fall though, right?

        It’s odd to me that you guys spell out the Keynesian fear over why saving *might* be bad, as if that proves that Keynesians don’t think savings are bad.

        I don’t think Keynesians think savings are bad, though. They think waste is bad. It’s a sudden rise in the rate of savings from some shock that’s the problem, not savings in general. (The rate of savings can rise but with less total savings because of lower income if investment doesn’t rise in response.)

        Increased consumption could help the economy even now, but there’s no reason to believe consumption will rise, just like their is no reason to expect the level of investment to rise dramatically.

        But the economy didn’t suddenly lose the capacity to produce more and so we have idle resources and unnecessary unemployment.

        People and businesses are unwilling to invest more at this time, but they are willing to lend the government money at low rates so it makes sense for the government increase spending.

        The difference between Keynesians and Austrians is that Austrians would like to see the economy bottom out I think. Whereas Keynesians think this would do more harm than good.

      • xgsmmy says:

        But what seems very tortured to me is how you guys are arguing that the “paradox of thrift” was never a cautionary tale about the dangers of thrift, that instead it was a tale about investment.

        It can be a tale of investment, though, unless you don’t believe the government can invest.

        People and businesses aren’t willing to invest more, but they are willing to lend the government money at low rates. If there’s something the government could be doing it probably should do it.

        • Tel says:

          Which is saying that if the private investors can’t think of anything to put the surplus financial savings into, then government will just decide, OK we will invest in XYZ end of story.

          This presumes that government knows something the private investors don’t know, or government has some special power the private investors don’t have, or it presumes that the decision of XYZ is arbitrary and probably loss making.

          • xgsmmy says:

            No, Tel, there are things the government does that the private sector does not do or does not do enough of like infrastructure, research, development and education.

            I’m sure you can imagine a collective action problem or natural monopoly like a sewer system.

            • Matt Tanous says:

              “there are things the government does that the private sector does not do or does not do enough of like infrastructure, research, development and education.”

              All of that is garbage. The private sector is better and infrastructure, it is better at directing useful research, and the government system of education is abysmal.

              • xgsmmy says:

                Matt, is the private sector going to run our sewers too? (Serious question.)

                But I’m talking about things things as they exist not as you’d like them to be.

                Other education systems like Finland’s have less private schools and better outcomes. (As far I know.)

              • Tel says:

                Well in Australia plenty of households run their own sewage handling, but there’s a minimum size block you are legally allowed to do that on, and the only approved design is a really old design (and unlikely any modern, smaller design will ever get approved) and if government facilities are available you are pretty much forced to use them.

                So, yes it could very easily be done privately, and in many cases is being done privately, except mostly government forces you to do it their way.

                In the case of a block of apartments or something, there would have to be some coordination between the individual owners of the apartments but there is a body corporate anyhow, and all of that is handled by private contract when you buy the apartment.

                When you talk about “things as they exist not as you like them to be” why not just give up all action then? I mean, don’t fix anything, just leave it as it is, not as you might like it to be.

      • Tel says:

        In contrast, a Rothbardian (say) is going to argue that when people save more, investment will go up, and so we’re not in trouble.

        Yeah, but it only works in a Rothbardian world where investment projects are not actively being sabotaged by central planners.

        I might have a great idea for a new medical treatment — but the rules are changing in the medical industry faster than I can keep track of and the established companies have a stranglehold anyway.

        I might want to start a new manufacturing facility — but after seeing the government step in and just snatch property from the hands of the GM shareholders I’m not so sure it’s a good idea.

        Besides they are getting ready to “soak the rich” so I’ll just put my idea on the shelf for the minute, let things settle down.

        Besides the US is getting ready to send troops into Syria, I’d rather my business didn’t get coopted into the war effort, maybe later.

        … and so it goes.

        So what I’m saying is that if investment opportunities are being throttled by some obstruction (whether that be a real obstruction, or just pining over the untimely death of the confidence fairy) then financial savings have no place to go into.

      • Daniel Kuehn says:

        re: “Let me put it this way: Your guys’ position would be a lot more straightforward if, when MF and John Papola bring up “the paradox of thrift” as their trump card, you just said, “We only think that applies at the ZLB. Otherwise there is no paradox of thrift.””

        But is that even true? Why does it have to be at the ZLB? I’m confused – why would that be the case.

        Nick had a point the other day that it’s about hoarding. I think it’s somewhat broader than that – I would just say that the liquidity of the savings has a lot to do with it. I don’t think it just has to be hoarding cash. Any kind of increase in the liquidity of your savings is going to be a negative supply shock in the loanable funds market, right – and you don’t need ZLB for that to be problematic for output.

        It seems like this also largely depends on the relative elasticities of the demand and supply of loanable funds. If demand for loanable funds was highly inelastic you would have a substantial decline in consumption, not much change in investment, lower interest rates, and a depressed economy. I don’t think any of this depends on ZLB at all.

        It’s about the problems of low investment as much as it is about the problems of high savings. I don’t think you can get around this Bob. And since high savings could come with high investment, I really think you have to consider the two together and talk about imbalances between them.

        I’m confused about why this is so controversial.

        • Major_Freedom says:

          But is that even true? Why does it have to be at the ZLB? I’m confused – why would that be the case.

          It’s not so much that is HAS to be at the ZLB, just that it will almost certainly only take place at the ZLB. This is because during “normal times”, there is no good reason why more abstaining from consumption and making available loanable funds, won’t be accompanied by additional investment spending out of those funds. The theory is that more saving will lower interest rates, and lower interest rates will stimulate more investment. This is why Murphy is bringing up the ZLB, because interest rates are already at their minimum, and so additional saving cannot reduce interest rates any more.

          When Nick said they should call it “paradox of hoarding cash” instead of paradox of thrift, he was bang on, because the problems Keynesians are envisioning with more saving, can only arise if there is a rise in cash preference. LK’s comment above showed this is indeed the case when he claimed that savings can be a problem because it can lead to a fall in the demand for goods. But saving can only lead to a fall in the demand for goods as such if the abstaining from consumption leads to additional cash hoarding.

          I find it rather amusing when you said:

          If demand for loanable funds was highly inelastic you would have a substantial decline in consumption, not much change in investment, lower interest rates and a depressed economy. I don’t think any of this depends on ZLB at all.

          The reason I find it amusing is that you don’t seem to understand how the ZLB would be associated with declining interest rates.

          • Major_Freedom says:

            Not that I necessarily fully agree with “the theory” I laid out.

      • Bob Roddis says:

        Who could possibly deny that if everyone in a society decided to store their savings under a mattress and not “Invest” in business start-ups that the standard of living might go down? Suppose most people decided to become Amish or anti-materialist? It’s none of the government’s damned business if a single person’s non-aggressive non-fraudulent behavior allegedly decreases total “wealth”. That’s what guns are for, to protect citizens from rampaging statist government.

        Further, there is no historical period the statists can point to where the “problem” of “hoarding while not investing “ actually existed, just as they can’t point to a period of the unregulated market invariably resulting in permanent unemployment.
        It’s just another phony lying dishonest Keynesian attempt to distort the language by employing jargon in order to make total B.S. sound “scientific” but impenetrably dense.

        • guest says:

          Who could possibly deny that if everyone in a society decided to store their savings under a mattress and not “Invest” in business start-ups that the standard of living might go down?

          If everybody decided to do that, then their standard of living would go up, by definition – they are deciding to BECAUSE they prefer that lifestyle. To them it’s better.

          But people typically save IN ORDER TO have an increased standard of living after they have enough to trade for capital – and then their capital takes some of the work load, making them more productive.

          If EVERYBODY saved for THAT purpose, though, then you would have less competitors in capital intensive industries, and prospect of huge profits (because in this particular scenario people are saving in order to increase their standard of living) would lead to investment in capital.

          At any rate, yeah, it’s none of the government’s damned business.

      • Silas Barta says:

        In contrast, a Rothbardian (say) is going to argue that when people save more, investment will go up, and so we’re not in trouble.

        If that’s the alternative, then the Rothbardian isn’t much better. Investment doesn’t somehow “need” (in the normative sense) to go up to “fix” the “problem” of increased savings, nor does savings imply (or necessarily go towards) investment.

        Saving can just mean “keeping your wealth in liquid form”, such as in cash or precious metals (or, in underground markets, as drugs).

        Now, I would actually accept that this kind of saving (*because* of its deferral of consumption) is usefully regarded as a species of investment, in that it reduces the requirement for lower-order (i.e. closer-to-consumption) goods to be produced, and so has the same ultimate effect as investment: to divert production into higher-order goods. Kind of counterintuitive, though, considering that you’re not e.g. having some bank loan out funds for such “investment”. But I would accept the economic equivalence.

        But … do Rothbardians actually make that claim?

        • Bob Murphy says:

          Now, I would actually accept that this kind of saving (*because* of its deferral of consumption) is usefully regarded as a species of investment…

          Right, that’s what I do, Silas. If someone puts a $100 bill under his mattress, I say he just invested in increased cash balances. But be careful, a lot of Austrians will bite your head off for going that route.

          • Silas Barta says:

            Yikes! In any case, I take a similar position to you, but would say that it’s an investment in a combination of option value (liquidity) and insurance (against the possibility of not being able to earn money or otherwise procure what you need).

            When you can assume away this implicit “yield from money held”, you’re only a few steps away from full blow Sumnerism and Keynesianism, where you have to believe that these savers are evil terrorists who need to spend more of their money or else the economy will suffer.

        • guest says:

          Kind of counterintuitive, though, considering that you’re not e.g. having some bank loan out funds for such “investment”. But I would accept the economic equivalence.

          But … do Rothbardians actually make that claim?

          Austrians only make that claim about the need to fix the problem of malinvestment.

          People trade in the first place because they don’t want to make something for themselves. This is why goods will have a different value IN TRADE than if one is self-sufficient.

          Trade is a lowering of labor costs. Proof?: There’d be no reason to trade if the thing that was received was worth less than or equal to the thing given – unless what they had produced was a malinvestment, in which case he would need to find the trade value at which it could be liquidated in order to determine whether he could profitably continue producing that good.

          All this to say that there is no such thing as a problem that needs to be fixed with an increase in the money supply. If people want to trade, they’ll trade for their own purposes.

          Tricking people into engaging in malinvestment will remove a lot of options for people when the crash happens. That’s not the fault of hoarders, but of the central planners.

  3. Gene Callahan says:

    Bob, please pay attention to the model: the “paradox of thrift” occurs when S > II. The model contains no hysteris, so it makes no difference how that condition came about.

    The “right” way to deny that this paradox is of importance is not to say it implies savings is bad, because it doesn’t, but to try to show that II shifts along with S, which you understand: “In contrast, a Rothbardian (say) is going to argue that when people save more, investment will go up, and so we’re not in trouble.”

    Yes, you’ve got it here! A gap between S and II would generate this “paradox,” but per Rothbard (and all advocates of the classical understanding of the market for loanable funds), such a gap won’t arise, because a change in S will also change II!

    Now, we;ve gotten to the real issue under contention: do changes in S and changes in II endogenously equilibrate, or don’t they? If they do, Say’s Law holds, and the classical view is correct. If they don’t, Keynes is correct, and the market economy is not inherently stable.

    • Matt Tanous says:

      ” Every such attempt to save more by reducing consumption will so affect incomes that the attempt necessarily defeats itself.” – Keynes, General Theory, p. 84

      What does this have to do with investment, Callahan?

      Commodities exchange against commodities, in the final analysis. Keynes didn’t refute this – he flat out ignored it. His “refutation” of Say’s Law amounts to a complicated-sounding “nuh-uh”, of no more value than a child’s repeated naysaying.

      • xgsmmy says:

        What does this have to do with investment, Callahan?

        Because unless investment rises to offset the fall in consumption, output and employment fall.

        Normally the central bank will try to increase investment by lowering interest rates.

        • Matt Tanous says:

          Keynes said nothing of the sort there. He said that if we attempt to save more by reducing consumption, this will “affect” (i.e. lower) incomes in a manner that means we don’t get any more. Not only does this say absolutely NOTHING about investment (except that, according to Keynes, savings = investment, by definition), it’s flat-out wrong.

      • Lord Keynes says:

        “Commodities exchange against commodities, in the final analysis. “

        No, they don’t. They might or might not.

        Often they exchange for debt instruments and other credit money.

        • Matt Tanous says:

          No, they don’t. That merely adds a step.in the process. If I take out a loan, then I obtain some money – which was earned by someone creating something, and then saved.

          • Ken B says:

            ?
            What happened to FRB?

          • Lord Keynes says:

            ” If I take out a loan, then I obtain some money “

            You aware businesses sell factor inputs/goods for negotiable debt instruments all the time?

            You do not have to have produced anything at all at the point you write your bill of exchange and buy goods with it and receive them.

            • Tel says:

              And the transaction is not complete until the debt instrument is cancelled out again.

            • Major_Freedom says:

              You aware businesses sell factor inputs/goods for negotiable debt instruments all the time?

              That isn’t money. Bank credit is money, because the state accepts them for taxes.

              You do not have to have produced anything at all at the point you write your bill of exchange and buy goods with it and receive them.

              If the lender is not a counterfeiter, the person lending to you must have earned that money via productivity, and they are counting on you to be productive to earn money to pay them back.

              • Tel says:

                If the lender is not a counterfeiter, the person lending to you must have earned that money via productivity

                Unless the seller voluntarily chooses to accept an IOU note and thus offer services “on account”. The IOU note comes from thin air, anyone can just write one. It’s merely a matter of who accepts it.

                Since you have demonstrated that you know how central banking operates, you must be voluntarily choosing to accept the government’s IOU note every time you accept Federal Reserve Notes.

                When you pay your tax the government makes good its obligation to you, offering you material benefit (i.e. not getting hurt) in return for their paper.

              • guest says:

                Unless the seller voluntarily chooses to accept an IOU note and thus offer services “on account”. The IOU note comes from thin air, anyone can just write one. It’s merely a matter of who accepts it.

                An IOU is just another step before the transaction is complete.

                A note is an IOU for money. Yes, anyone can write an IOU, but the reason an IOU is accepted is because it is presumed that it can be redeemed for money.

                When you treat IOUs as money is when the problems start.

      • Gene Callahan says:

        Matt, you have never heard of “ceteris paribus”?!

    • Ken B says:

      Ahhh, so then this is where cash hoarding mattress stuffing comes in. With mattress stuffing there will be delays etc in the resultant price changes. Savings up, mattresses crinkle, no new investment.

      • guest says:

        If people have as much as they are willing to pay for, at the moment, then prices are going to come down.

        This is true in barter, too.

        But at no point is anyone ever entitled to a job or to labor or to goods.

        Besides, causing prices to rise through artificial credit expansion isn’t helping the people you think it’s helping. It’s making the cost of living go up for everyone.

  4. Tel says:

    Presuming Wikipedia is correct:

    The paradox states that if everyone tries to save more money during times of economic recession, then aggregate demand will fall and will in turn lower total savings in the population because of the decrease in consumption and economic growth.

    Note that important word there — MONEY.

    What is money exactly? It is a financial instrument, that is to say it makes one person a into creditor and another into a debtor. So the “paradox” is nothing more than saying that credits and debits must add up to the same. It only applies to financial instruments, not to physical items.

    I can save tins of beans by stacking them on the shelf. If I know that I will be happy to eat beans in future and I know the tins are good for a few years then that is an absolutely guaranteed saving. I may even make a profit (if the price of beans goes up) and possibly I can sell those tins in future. That’s a physical saving, not involving any financial instruments, and thus unrelated to the “paradox of thrift”.

    I could also start building a rail road from my house to the beach, and that’s also a saving (and an investment) because in future this rail road will be amazingly useful to me (and probably to others) and quite likely I can sell tickets. If I want to save, and I also want to build the rail road myself (or even hire others to do it) then once again, no saving of money has happened here. This is a physical object (iron rails and wooden sleepers)… also unrelated to the “paradox of thrift”.

    The confusion of course is that people think all saving must somehow be monetary saving, because they mentally connect savings with bank accounts and certificates and stuff like that.

    That’s where the match between savings and investment comes from. Suppose I want to save, and suppose I don’t want to stack tins of beans and I don’t want to build any rail roads but Joe Schmoe down the road does want to build a rail road, then the financial instrument comes to our rescue.

    I become the creditor, and Joe Schmoe becomes the debtor (but Joe has the physical asset to offset his debt). People strangely believe that a financial instrument can do the job of a real world physical object. Actually, all a financial instrument can do is facilitate exchange between people (often deferred exchange), it can never create saving, but it can allow one person to save while a different person accumulates physical assets.

    • Matt Tanous says:

      “What is money exactly? It is a financial instrument, that is to say it makes one person a into creditor and another into a debtor.”

      No, no, no. Money is not a financial instrument, and it makes no one a debtor. Money is a medium of exchange.

      What Keynes’ “paradox” is saying is that if I dare to take in an income and don’t spend or invest every cent of it, then this will cause economic problems. It’s utter bunk, relying on the fallacious idea that prices cannot fall, even a slight amount, without causing disaster.

      • Lord Keynes says:

        “What Keynes’ “paradox” is saying is that if I dare to take in an income and don’t spend or invest every cent of it, then this will cause economic problems”

        False.

        What Keynes said is that when saving on a large enough scale happens it CAN have deleterious effects on output and employment, if the level of investment is not maintained.

        Different thing from your straw man.

        • Major_Freedom says:

          False. Any quantity of saving accompanied by investment does not bring about problems. Saving on large scales and investment on large scales will lead to a shift towards more capital goods spending and production, and less consumer spending and production (in the short term). In the long term, when the additional capital goods are finished, and they are used to produce more capital goods and more consumer goods, then the quantity of consumer goods produced and sold will go up, even as the nominal expenditures for them are now at a lower level. This can occur because the prices of the consumer goods falls as more are produced and sold, without causing losses since unit costs fall as well.

          Keynes did not show any understanding of this.

      • Tel says:

        Well surely we can at least agree that the “Paradox of thrift” does not apply to physical goods being stockpiled (as a material saving) nor does it apply to humans putting their effort into speculative construction (be that building rail road, or extending the house). These activities are not limited by credit and debit, nor do they need to balance any ledger.

        So we can quibble over the definition of “financial instrument” but the point is that you put real labour into a job and what you get back is a piece of paper (or electronic record). Thus, the transaction is not complete, because no actual “exchange” has happened yet.

        You might spend some of this money quickly (and thus a genuine exchange of goods) or you might think about saving it for future spending, so you are a creditor (i.e. you entrust other people to take your money at a future date and give you something of genuine intrinsic value). The corresponding debtor is whoever signs off those notes (in effect government).

        No one any more stores actual cash notes in a locked box. We just have a bank account. You are a creditor to the bank, and the bank is in your debt… now the roles are formalized, but the bank is pretty much an agent of government so it isn’t a lot different.

      • guest says:

        No, no, no. Money is not a financial instrument, and it makes no one a debtor.

        Exactly.

        Money is a good just like any other good, except it is used as the medium of exchange.

        Using IOUs as the medium of exchange is where the problem lies.

        Smashing Myths and Restoring Sound Money | Thomas E. Woods, Jr.
        http://www.youtube.com/watch?v=HAzExlEsIKk

        “What is Money?” with Joseph T. Salerno — Ron Paul Money Lecture Series, Pt 1/3
        http://www.youtube.com/watch?v=vowbrq_g5NM

        • Tel says:

          Money is a good just like any other good

          What happened to Say’s Law?

          Money performs but a momentary function in this double exchange; and when the transaction is finally closed, it will always be found, that one kind of commodity has been exchanged for another.

          The implication being that the person holding money is a creditor, and further implication that some (possibly nominal) debtor must exist to balance that.

          • guest says:

            The point of all trades is to exchange something that is less valued for something that is more valued.

            (Stay with me. LOL)

            If you don’t have something the other guy wants, then you can’t trade with him. But you might be able to get what you want, indirectly, if you can find someone else to trade with who will give you that which CAN be traded for what you want.

            Here’s my point:

            In order for you to get what you want, indirectly, that which will be used as the money must have the value you think it has, such that acquire what you do want at a later date.

            Therefore, the money has to have value in terms of the two goods you’re ultimately trading.

            The only way to be reasonably sure that it does is if the money, itself, is a commodity.

            For example, if I want a cookie, but the guy who has a cookie wants two apples, and the guy that has apples will accept the three eggs I have, then I can determine that

            - one of my eggs is worth 2/3 apples or 1/3 cookie, and

            - one apple is worth 1 1/2 eggs or 1/2 cookie

            But I can’t know what a piece of paper is really worth to people because nobody values it for its own sake, and the supply keeps increasing.

            If it’s not increasing, then why hold circulating paper at all?; Especially given the tendency for the supply of notes to be inflated.

            (The supply of eggs, apples, and cookies can be increased as well, but that’s just another reason to use an inelastic commodity such as gold.)

            In short, I need to know that what I use as money represents the value I’m willing to accept for the good I offer in trade. Only a commodity can do that, especially if I’m saving for something in the future.

            Notice, though, that at no point were any of the goods debt. I HOPE that the guy with the cookie will accept the apples after I get them, but my purchase of the apples is an entrepreneurial risk.

            If I guessed right, I get a cookie. If not, well, the guy isn’t obligated to sell to me. I made a malinvestment. Perhaps next time I’ll check to see if the cookie guy is regularly trading for apples.

            Now, you CAN go into debt IN TERMS OF commodity money, but the money isn’t the debt.

            • Tel says:

              Yes a gold or silver coin (or apple) does not require a debtor and a creditor. We don’t use gold and silver coins for common trade these days. Maybe we should, but we don’t.

              I’m pretty sure that both Keynes himself and Krugman are talking about paper money when they discuss the “Paradox of Thrift”. However, even if money was gold coins and everyone wanted to hoard gold coins then that would also dry up the available liquidity for gold coins (if people were free to jump to something else like silver coins then they quickly would jump to whatever was liquid at the time, people being adaptable).

              As I mentioned elsewhere fiat paper money is pumped by tax collection, and tax collection is driven by the force of the State. They are literally selling you the opportunity not to get hurt. That is a material commodity (your good health), however the transaction is only complete when the tax is paid (after which, the money is gone). Up until that point, the State “owes you one”. After you pay your tax everything comes into balance again (until the govt goes out spending again). That is why I say fiat paper money is a financial instrument (an IOU note and nothing more).

              Notice, though, that at no point were any of the goods debt. I HOPE that the guy with the cookie will accept the apples after I get them, but my purchase of the apples is an entrepreneurial risk.

              But if the worst thing happens and you are stuck with the apple then you can eat that. Not what you wanted, but better than starving. Apples have intrinsic value.

              If the worst happens and you are stuck with Federal Reserve Notes, are you going to eat those?

              If it’s not increasing, then why hold circulating paper at all?; Especially given the tendency for the supply of notes to be inflated.

              That’s an excellent question, but lots of people seem to be doing just that. The banks are holding excess reserves, and many corporations have decent cash balances they are reluctant to spend. People in debt are trying hard to get out of debt.

              Your basic premise is right as I see it — there’s no good reason to hold cash when faced with an inflationary scenario. Krugman has said as much, indeed that seems to be the plan behind all the QE and ZIRP, to deliberately drive inflation to make people spend.

              We argued that out a few weeks ago, needless to say the Austrians are horrified by inflation and money printing. I personally think there are much deeper problems and money printing might paper over those for a while, but it won’t fix them.

  5. Ken B says:

    If you have no kids you’ll be richer in old age and be able to pay youngsters to take care of you.

    If no-one has kids you won’t.

    A f*cking paradox?

    • guest says:

      If no one has kids, then the riches can be used to hire adults to take care of you. But you need a supply of riches.

      Though you would actually tend to be richer WITH kids, if the government got out of the way:

      Defending the Undefendable (Chapter 32: The Employer of Child Labor) by Walter Block
      http://www.youtube.com/watch?v=hATyrGIHbcM

      • Lord Keynes says:

        “If no one has kids, then the riches can be used to hire adults to take care of you. But you need a supply of riches.

        Yeah, I am sure the end of the species (unintended at the micro level of individuals deciding not to have children , since they think other people will) will be perfectly alright too! After all, there’s no such thing as a macro problem!

        • Major_Freedom says:

          if everyone chooses to have no kids, then that isn’t a macro problem at all. Every individual is getting what they want. It doesn’t matter to me if the human race dies out 200 years from now. I’ll be dead anyway.

          The only way a voluntary ending of the human race as such can represent a problem for you today, is if you believe the living should be sacrificed for the sake of the unborn. I wouldn’t be surprised if you supported a governmental program of mandatory procreation by force, if too many individuals decided not to have kids and that would otherwise lead to a progressive ending of the human race as the remaining people die of old age.

          You are just assuming that a voluntary ending of the human race 200 years from now or whatever, somehow represents a “problem” today. But does it, if you don’t believe you’ll turn into a ghost after you die?

        • guest says:

          Yeah, I am sure the end of the species … will be perfectly alright too!

          Why wouldn’t it be perfectly alright? No one owes anyone anything.

          Besides, I think the Environmentalists would prefer an end to the human race:

          Genocidal Green Quotes
          http://factsnotfantasy.blogspot.com/2012/04/genocidal-green-quotes.html

        • Bala says:

          “Yeah, I am sure the end of the species (unintended at the micro level of individuals deciding not to have children , since they think other people will) will be perfectly alright too! After all, there’s no such thing as a macro problem!”

          OMG!! I realise the error of my ways. It is indeed possible that we face the macro problem of the end of the human race. Let’s get the central planners out and force everyone to have a child. Incidcentally, why stop at 1? Let’s have 2. That way, there would be greater stability of the population in the long run. And while we are about it, let’s also regulate how long they will be allowed to live and when exactly they would have to bear children. And in case people die prematurely, the planners could track that as well and hand out additional child licenses.

          Wow!! Macro problem solved. LK! You are really a genius at identifying macro problems.

    • Lord Keynes says:

      “If you have no kids you’ll be richer in old age and be able to pay youngsters to take care of you.

      If no-one has kids you won’t.”

      Great example of the difference in micro versus unintended macro effects!

      • Major_Freedom says:

        Except there is no macro “problem” with voluntary childlessness! Everyone who LIVES got what they wanted!

        • Tel says:

          Yes, 100 years down the track the problem will be sorted.

        • Lord Keynes says:

          “Everyone who LIVES got what they wanted!”

          No they didn’t: they wanted “to pay youngsters to take care of” them. Except there are none.

          Too bad you can’t read.

          • guest says:

            Seems like a supply problem to me.

    • Tel says:

      Good example, but it only makes sense if an entire generation coordinates their efforts to all simultaneously not have kids.

      In practice, all the generations are overlapped, so without some massive external force driving the coordination you might get some generation having significantly fewer kids, but those kids become vastly more valuable when they grow up. Since those kids can inherit a lot more from the aging generation before them, they have plenty of resources for their own kids, so it balances out again (give or take some dynamic effect).

      The Chinese are going to find this out as they swing the balance towards boy babies — it makes the girl babies more valuable when they grow up.

      In other words, there’s a strong incentive to be the guy not doing what everyone else is doing in these “paradox” situations. Thus, if we ever meet a real life “paradox” we can presume that either people are just too silly to understand the incentive (unlikely) or some cultural force is driving them such that they are unable to act in their own interests.

      • Ken B says:

        Well I’m just illustrating the logic, I’m not recommending any particular social policy.
        :)

        • Tel says:

          My point is that the incentive points towards stability.

          Each year, people thinking about kids should in theory take a look at the demographics and at some point they will see that the value of not having kids has fallen sufficiently that they want to go through the effort of having kids after all.

          That’s presuming people have access to information and the ability to assess their situation. Out of any crowd of people, some will assess more one way, some more the other way, but it works out on average.

        • guest says:

          Giggity.

      • Lord Keynes says:

        No, that is just changing the hypothetical – an invalid way of dealing with it, for by this route you can simply change ANY and ALL hypotheticals and cowardly avoid the points they raise.

        • Tel says:

          By pointing out that this hypothetical requires a billion or more people to simultaneously act against their own individual interests, repeatedly for at least 30 years running, I think it is largely pointless to worry about what to do it this ever did happen.

          I’m sure I could invent a bunch of highly improbable hypothetical situations that big government could not deal with and then call you cowardly if you didn’t have a good answer, but it would be a waste of everyone’s time.

    • Tel says:

      Let me follow this up by saying this is fundamentally different to “the Tragedy of the Commons” situation because in that case no automatic stabilizing incentive pops up for any individual to not deplete the commons.

      The answer to a “Tragedy of the Commons” is to agree on property rights that create the missing incentive (if everyone else is over-grazing their paddock, then I know grass will be more valuable in future so I leave mine to grow).

      The “Paradox of Thrift” already contains all the stabilizing incentives, there is no need for interference here.

      • Ken B says:

        Property rights have been applied to births too. On the John C Calhoun Memorial Blog we know THAT!

        • Tel says:

          It is possible to apply property rights to anything, just like it is possible to apply a hammer to anything.

          I’m drawing the distinction here of a situation where applying property rights would be useful and beneficial.

          • Ken B says:

            So was John C Calhoun. He argued slavery was good for society, and good for the slave. Thats why contra Bob, it’s fair to call him pro slavery in a way it’s not fair of Jefferson, despite his hypocrisy on slavery.

    • Bala says:

      This is not a parallel to the “What if everyone saves?” situation. The decision to save is reversible with time while the decision not to have children is not reversible after a certain point in time. By presenting this situation, therefore, you are presenting a strawman argument and a life-boat situation.

  6. Ken B says:

    So on a post dedicating to clearing up confusion on “the paradox of thrift” we are told by commenters that it applies only to cash, and not to cash. The paradox of teaching: it works best where needed least.

  7. skylien says:

    @ Keynesian and MM side:

    What if the increase in savings/reduction in consumption that sometimes is not accompanied by accordingly higher investment (this may be called increased cash balances/hoarding) is caused by an unsustainable liability structure becoming apparent to savers (big amounts of bad debt/malinvestments), that is supported (= kept from defaulting) by low interest rates induced by a central bank and government guarantees?

    If this is a theoretical possibility, could this be the case now? How could an economist ever know that there is not an unusual high amount of unsustainable liabilities in the economy that need to be cleared, therefore justifying fiscal and monetary stimulus projects? ( Else, I hope that everyone agrees, such policies could actually be detrimental to a real recovery, no matter if you are at the ZLB or not).

  8. Transformer says:

    “Increased Savings” in the wikipedia article appears to mean any reduction in expenditure compared to the previous period. This reduction could come from either investment or consumption expenditure.

    As this expenditure is also people’s income then this additional savings will lead to a fall in nominal income that if prices do not move downwards sufficiently will lead to to a lowering of economic activity.

    If one assumes that the additional savings are hoarded and not put up for lending then there is no reason why interest rates will fall and allow S and I to realign so this is not really a ZLB problem (That would only occur if the govt used conventional monetary policy to address the situation and found that even at 0% interest rates output still remained depressed)

  9. Bob Roddis says:

    THE PARADOX OF LORD KEYNES

    Lord “Rain Man” Keynes likes to preach that life in the galaxy is nonergodic and thus one can never expect whatever data set exists today to provide a reliable guide to future outcomes.

    The concept of uncertainty in economic life was used by Keynes in the General Theory (1936) and also in an article defending his new theory the next year (see Keynes, “The General Theory of Employment,” Quarterly Journal of Economics 51 [1937]: 209–223).

    Paul Davidson notes the nature of uncertainty in the Keynesian/Knightian sense:

    “Keynes’s description of uncertainty matches technically what mathematical statisticians call a nonergodic stochastic system. In a nonergodic system, one can never expect whatever data set exists today to provide a reliable guide to future outcomes. In such a world, markets cannot be efficient” (Davidson 2002: 187).

    “Keynes … rejected this view that past information from economic time-series realizations provides reliable, useful data which permit stochastic predictions of the economic future. In a world where observations are drawn from a non-ergodic stochastic environment, past data cannot provide any reliable information about future probability distributions. Agents in a non-ergodic environment ‘know’ they cannot reliably know future outcomes.

    http://socialdemocracy21stcentury.blogspot.com/2011/03/uncertainty-and-non-ergodic-stochastic.html

    If “past data cannot provide any reliable information about future probability distributions”, how can there be an “output gap”? There is no reason to think that past output says anything about what latter output should have been, right? Further, at any one moment, how do we know if some anti-social type who is hoarding his money and not investing his money to help humanity as whole is really harming society since whatever problems that might have been caused by past* hoarding cannot say anything about the likelihood that such hoarding would have a similar impact in the future?

    *The idea that “hoarding” is a problem for society is just more of the never-ending line of Keynesian B.S.

    • Lord Keynes says:

      (1) Because not every system or process is non-ergodic. Even in non-ergodic systems you can reduce uncertainty. Even agents on the free market can reduce the degree of uncertainty they face in some transactions or processes (e.g., the way futures contracts reduce uncertainty for farmers or insurance for other agents).

      (2) I have already dealt with these issues of epistemology and justification of government intervention:

      http://socialdemocracy21stcentury.blogspot.com/2010/12/risk-and-uncertainty-in-post-keynesian.html

      http://socialdemocracy21stcentury.blogspot.com/2011/10/how-can-government-overcome-uncertainty.html

      • Bob Roddis says:

        I have already dealt with these issues of epistemology and justification of government intervention:

        Since you refuse to understand economic calculation, which involves the irreplaceable process of unadulterated prices providing essential information to billions of actors and how government interventionism short circuits that information feedback loop, you’ve only spouted more of your B.S. gibberish.

        And I’m going call your avoidance of my points about the output gap and hoarding as even more wins for me.

  10. Economic Therapist says:

    “There is no reason to think that past output says anything about what latter output should have been, right?”

    If past output has fallen precipitously from a previous value, resulting in mass unemployment and idle capacity, economists not suffering from some kind of mental disorder believe that actual output is less than potential output. The unpredictably of time series does not negate drawing inferences from hard economic facts.

    • Major_Freedom says:

      Actually it does.

  11. Jahfre Fire Eater says:

    Everyone won’t.

    The Paradox of Thrift is a nifty diversion that gets the attention of some college freshmen but most learn to see through it’s fallacious premise. The rest become apologists for Keynes and leftist policy based on Keynes’ work.

    Ignoring the fundamentals facts of human action in the real world is an ignorant and fallacious premise. Absolutely anything can be proven from a false premise…even a so-called paradox.

    Economics describes the consequences of human action over time. Starting from a premise that first excludes the real-world characteristics of human action (everyone won’t) and then eliminates the aspect of time by substituting a snapshot based on the original false premise, makes the entire debate an academic navel gazing exercise. The Paradox of Thrift is just a distraction from which no valid conclusions may arise and which cannot inform future actions.

    Subtracting time from one side of the equation may be less blatantly manipulative if it is similarly removed from the other side. For instance, “if everyone would just save” must be balanced with “If every incremental increase in savings would just be automatically invested in businesses”. While that is better, and eliminate the so-called paradox, two wrongs don’t make a right.

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