I started writing an essay about the paradox of thrift yesterday. Here’s the opening:
The paradox of thrift is often cited as justification for government to engage in monetary and fiscal stimuli. In this view, an unfettered market is intrinsically unstable. Capricious and rapid declines in total spending are responsible for periodic and spiralling recessions. Although prices ordinarily coordinate economic activity toward productive ends, the normal equilibrating properties of markets cease to function. A non-market institution must intervene and combat recession by stimulating total spending. Only government is capable of satisfying this role, and so it must be empowered to pursue monetary and fiscal policy. At the heart of this view is the paradox of thrift.
First paragraph needs no rebuttal, being only unsubstantiated statements.
The paradox is related to the observation that what is true for a part of an economy may not be true for an economy as a whole. Although an individual may expand his savings by reducing spending and increasing income, spending and income must be equal for the economy as a whole. One man’s spending is another man’s income, and vice versa. Any change in total spending must correspond to an equal change in total income. Unlike an individual, it is impossible for the economy as a whole to expand its savings by reducing spending and increasing income.
Meaning somebody is gonna get left holding the bag. If consumers start spending less, someone is gonna wind up not selling what he has to offer.
Will EVERY SINGLE thing be left on the shelves? Or only the crappy stuff, the things people decided they don’t need or want right now?
The crappy stuff, of course. More on this later.
OK so far so good. we are agreement.
Analysing the consequences of an attempt to expand the savings of the economy as a whole reveals the paradox. As total spending and income declines, profits shrink, inventories accumulate unsold goods, and workers begin to be laid off.
In every single industry, or only the crappy industries? Of course, if people are really badly broke, like now, then their definition of
'“stuff I don’t really need now” is going to be pretty comprehensive. So yes this will happen.
Of course the question should be asked, in any given historical situation, why did so many people decide to save more, enough to alter the whole economy? After all, in a modern productive economy, prices are always going down, as we see with computers and cell phones and so forth. So people should find more to spend on. What happened? This is an important question.
If we knew the answer, we would solve our problem. If people don’t want to spend as much, find out why and convince them to spend again. But let’s put this aside.
A surplus of goods and labour develops, because there is not enough spending to buy all that is produced.
By the law of supply and demand, when there is a surplus, the price of it goes down, and people buy it. Is this a problem?
Any expanded savings merely result in the unemployment of resources,
Yes it does. But not forever. When people have gobbled up the stuff that was sold cheaply, and the workers took their pay cut, the goodies are gone, the workers are all working [albeit for less], and now those resources will have to be used to make more of what people want.
stifling economic growth
Not really. This is taking a very one sided view of things. Just as one man’s spending is another man’s income, so too one man’s loss of income from having to sell cheaper than he wanted is another man’s increased income, having spent less on whatver it is. So that the consumer will have more money and things than otherwise. The economy [=the people of the country] has not suffered. For very dollar of one guy getting poorer, there is an equal dollar of someone getting richer. [If you are a socilaist who believes in spreading the wealth, you should be happy, because the masses have benefited by this. Just saying.]
Who has gotten poorer? The guy who made stuff people didn’t want at his high price. That’s the risk of being as businessman, and the punishment for guessing wrong. It makes for smarter businessmen if their dumb decisions make them lose money.
and causing human suffering.
Yes that’s true. Someone is going to take a hit. And someone else is going to benefit, as we explained above.
The notion of saving for a better future is turned on its head.
No it’s not. The people have spoken, and they got what they wanted. They spoke with their closed wallets, saying “We are not willing to pay what you want.” They got what they wanted, when it was sold cheaper.
“Ah, but what about the masses of unemployed? All those people losing their jobs?”
“You mean the guys working hard at making things people decided they don’t want?”
“Yes, them. Shouldn’t we keep their jobs for them, ensure they continue to produce things people don’t want?”
“Huh?”
As long as one man’s expanded savings are offset by another man’s increased spending, there is no problem. However, the attempt to expand savings for the economy as a whole is futile,
True. However there is the possibility of NOT SPENDING ON UNIMPORTANT STUFF [things people don’t want] and spending instead on important stuff [things people want].
If people stop spending and start saving, they are saying “We don’t wnat what you have to offer. We prefer to use our money for something else. Saving for a rainy day. Putting in a bank and getting some interest. Investing in some new idea of mine to create a new widget.”
and only impoverishes the future by causing recession in the present.
A recession in the present does not impoverish the future. It enrichens the future. The recession rearranges the use of resources so that they are use dto make things people want, instead of things they don’t want. And guess what? Making things people actually want enriches the future.
Basic economic theory informs us that a surplus of goods reduces prices, and so the price of goods and labour must fall until total spending is again able to purchase available resources.
Ah, so you agree!
However, prices in a real economy may respond unevenly and sometimes very slowly, e.g. the unemployed may be unwilling to accept a lower wage,
So you are saying they will be willing to remain unemployed for years, holding out for the higher wage? Are you kidding me?
producers may hold out for the economy to recover,
This is their decision, right? Are you suggesting the govt should buy their stuff now with taxpayer money? Why? The producer has a choice, freely reached. The taxpayer does not.
contractual obligations may enforce old prices,
If thereis a contract, it means the stuff is getting sold, right? So what’s the problem?
and unions may hold up wage cuts
Yes, unions are indeed a problem. You hit the nail on the head. If the workers had a free choice to opt out of the union whenever theywished and take the pay cut, that would solve the union problem, wouldn’t it?
to name but a few problems.
I suspect you mentioned the biggies. And they have been shown not to be problems at all.
Although a new general level of prices will assert itself in the long run,
Ho wlong ar ewe talkiong about? Japan has been waiting 20 years for Keynesian mesasure to save them. Whereas the longer of the depressions that did NOT have Keynesian ideas “helping” them sorted out in about a year.
the interim will likely be fraught with political upheaval,
This last line is just a scare tactic. What evidence do you have for this?
economic distress, foregone opportunities, and wasted time.
No. As explained above, the recession is the setup economic blessing, new opportunities, and a valuable use of time.
Is there any truth to the paradox of thrift? I think so, but it requires peculiar conditions to hold; ironically, these conditions are the product of government intervention.
The only thing I can think of is when the govt produces zimbabwe inflation, it is foolish to hang on to your paper money. But that’s not a paradox of thrift. For the individual will gain nothing by saving, either.
That is really what I intend my finished essay to be about.
Like I said right away, I look forward to it. You stated the case for the paradox of thrift very clearly, very convincingly [until I thought about it a little deeper], and very eloquently.