A basic question. Has someone thoroughly debunked the paradox of saving? Particularly why the economy wouldn’t go into a saving-induced downward spiral?
It is implicitly “debunked” in a sense by value subjectivism. First problem is the assumption that maximizing production at all times is some objective good (as connotated by “down spiral”). Second problem is the assumption of a time preference; always maximizing short term output with no longer view at all.
The paradox of saving has been thoroughly debunked many times. The most recent that I’m aware of was Dr. Reisman’s just a couple of weeks ago:
My favorite simplified explanation is to ask: how many people do you know who literally keep all of their savings under their mattress? This is what’s required in order to “hoard” savings as the paradox suggests. Even in this case, these people are usually saving up for something and will eventually spend their savings.
Anyone who puts their savings in a bank or any investment is providing financial capital to the market, which will eventually result in increased productivity.
Actually, even this does not harm the economy at all. Hoarding paper or specie money just increases the demand for such money, thus increasing the value of everyone else’s by the amount hoarded. This increases the value consumed and invested by others, and increases production to the extent that others actually do invest their (consequently more valuable) money. In fact, it serves to “trick” business men into under estimating their profit in nominal (paper or specie) terms, in the opposite way as the ABCT, nullifying it slightly…
The gold bugs and paper hoarders are probably doing more good to society than if they just donated all their savings away, even to respectable charity!
Two simple points to consider:
- In a free market economy, as more and more people save, the interest rate will fall, which will provide an incentive to save less, and borrow more. The system is self-regulating, just like pretty much everything else in economics.
- People must consume at least a bare minimum for subsistence, but in reality, when you think about all the luxuries we enjoy today in “developed” economies, I don’t see people abandoning their well being and reverting to living on the streets eating out of garbage cans of their own volition.
The far better question to ask, is why it would go into a saving-induced downward spiral? The only time this could happen is if some sort of major deflation occured, but as we know serious and long-lasting deflation can only occur during a recession in the wake of a credit-driven boom (see Austrian Business Cycle Theory), in which case any long-lasting and serious deflation can only really occur as a result of intervention (monetary policy) and not as a result of the free market’s normal functioning. In fact, the ABCT describes how deflation due to prior inflation can actually be good due to a shift in time preferences which will more closely resemble the malinvestments made during the boom (see Rothbard’s take on deflation).
Hayek actually wrote a paper called “The Paradox of Saving” back in the late 1920’s when two self-proclaimed economists, Fosters and Catchings, came out with various works demonizing the act of saving. In fact, they were so confident that saving was detrimental to society that they devised a contest where any economist could attempt to debunk their theories.
At the end of the contest there was no clear refutation of their hypotheses, even Hayek agreed on this point. This is where Hayek came in and destroyed the propositions of Fosters and Catchings. The problem was that few could actually comprehend the work of Hayek. Some of his works are quite difficult to sift through. Thus, despite the fundamental correctness of Hayek’s work, men like Keynes couldn’t comprehend it (unless he purposefully ignored it) and consequently, went on to revive the same old theories of Fosters and Catchings. This same ridiculous debate has been going on for ages yet it never seems to be cleared up.
Simple minds cannot comprehend the benefits of saving because they lack the ability to break up production into stagess. They forget that production consists of more than present consumption goods. This is, by and large, a product of mainstream economics.
I read the article on it when I first started looking for an answer, but to be honest, I didn’t quite get it. I probably should be read it more thoroughly.