Talk:Paradox of thrift

POV disputes

I want to either remove the sections of Criticism and Austrian Criticism, or at else condense them to their essentials and provide the standard rebuttals. To avoid an edit war I will first flag the sections and explain the fallacies here.

But mainly I want to say that the paradox of thrift is logically true.

You can say it all you want, but it remains a load of hogwash just like the rest of Keynes' blatherings. 76.103.102.240 (talk) 15:32, 9 May 2011 (UTC)

Wow, now I believe you, anonymous IP, and not the father of modern macroeconomics! — Preceding unsigned comment added by 63.73.199.69 (talk) 18:16, 5 October 2011 (UTC)

The paradox of thrift is that (1) total saving must equal total investment and (2) total saving can not be increased beyond the demand for investment.

The sections called criticism do not argue against the paradox of thrift, instead they simply restate it in different words.

Non-criticisms

Second, and perhaps more important, savings represent loanable funds. These funds represent an increase in potential lending and investing by borrowers of the said savings. Among other things, this represents an increase in the supply of such loanable funds that will lower interest rates and stimulate borrowing. So a decline in consumer spending is offset by an increase in institutional (such as banks) lending and subsequent spending.

As long as their is an unmet demand for investment, indicated by high interest rates, total savings can be increased. The paradox only applies once you reach a point where a further increase in saving, and thus a decrease in consumption, would lead to lower demand for investment. Total savings can not be increased beyond that point.

This criticism is especially significant because the extreme degree of saving, that would obviously connect saving to hard times, is rare. The aforesaid "saving for a rainy day" is never considered paradoxical. Frantic saving, in the face of a feared recession, on the other hand, may be viewed as the situation that obviously attaches the word paradox to thrift.

Fair enough, but how is this criticism? it is basically an admission that the paradox of thrift is real, but rare.

If currency is hoarded (such as placed under one's mattress) and not converted into profitable investments (such as placed in a bank), a "savings" induced recession may occur. Hoarding currency, however, is a far cry from saving money. [4] A problem with this oversimplified understanding of "hoarding" is that it fails to grasp that hoarding can occur by deposit institutions as well, when interest rates are at a zero lower bound (or near it) and savings still exceed investment demand. Moreover, the paradox assumes a closed economy in which savings are not be invested abroad (to fund exports of local production abroad). If participants in the closed economy are producing an ever greater amount than is being consumed, leading to increased savings, this can be offset by trading partners consuming a greater amount relative to their own production. Ultimately the planet is a closed economy and the paradox will hold for World GDP, but deviations are permitted at the local and national economic level.

The paradox of thrift is not about hoarding and yes, the paradox assumes a closed economy. Obviously extra savings can be exported to trading partners in need of capital.Savings represent funds that can be lent out. So higher savings will lower inter- est rates (to clear the market for loans) and stimulate borrowing, thus increasing investment. But when interest rates are already very low, e.g. close to or equal to zero (liquidity trap), then interest rates can fall no further and thus there is no way additional savings can stimulate additional borrowing/investment.

The paradox assumes a closed economy in which savings are not invested abroad (to fund exports of local production abroad), or at least that   do not respond (if assuming an open economy). Thus, while the paradox may hold at the global level, it need not hold at the local or national level: if one nation increases savings, this can be offset by trading partners consuming a greater amount relative to their own production

The supposed 'paradox' of savings was attacked by Austrian economist Friedrich Hayek in a 1929 article, "The 'Paradox' of Savings", attacking the paradox as proposed by Foster and Catchings.[5]

The reference is probably junk. If it isn't, could somebody summarize the argument?

-- Here is a summary of the argument, both from Foster & Catchings and Hayek's response: http://mises.org/daily/2804 References are given in the article. I would strongly support expanding the criticism section (especially the Hayek response) since, at least in my opinion, he clearly proves the errors of this "paradox", and as of now, the article is presenting the paradox as fact... -- —Preceding unsigned comment added by 193.69.10.1 (talk) 11:49, 15 April 2011 (UTC)

Deflation

It is agreed by all that (in some circumstances) an increase in total savings will lead to deflation (falling prices).

Keynesians point out that, because of price stickiness, deflation can wreak havoc on an economy. I.e. economic contraction, lowered productivity and lowered wealth. Also, price discovery is not free. It is hard, imperfect and it has costs, even if prices were not sticky. People are not totally rational and have limited knowledge. And changes in prices, wages especially, will affect their consumption patterns. I.e. a wage cut of 10% might cause them to cut spending by 30%.

Those who attempt to criticize the paradox of thrift by pointing to deflation do not address these issues. They implicitly assume that deflation can occur without any negative effects on the economy.

But moreover, they have not really argued against the paradox of thrift. The argument is that, as an effect of the deflation, consumers will be enticed to spend more and save less. Basically, the argument boils down to "the market will thwart any attempt to increase total saving beyond its natural level of total investment". And that is simply restating the paradox of thrift.

This argument is made twice. I propose to mention it once and include the rebuttal.

First, if demand slackens, prices will fall (barring government intervention), and the resulting lower price will stimulate demand (though at lower profit or cost – possibly even lower wages).

Austrian economists agree that if a population saves more money, total revenues for companies will decline, but they deny the assertion that lower revenues lead to lower economic growth.

Austrians believe the productivity of the economy is determined by the consumption-investment ratio, and the demand for money only tells us the degree to which people prefer the utility of money (protection against uncertainty) to the utility of goods.

They argue that hoarding of money (an increase in the demand for money) does not necessarily lead to a change in the population's consumption-investment ratio.[6] In other words, suppose the demand for money increased to the point that the level of spending in the economy fell by half. If the remaining spending is still divided into the old consumption-investment ratio, then all prices would simply fall by half and productivity would remain unchanged.

Especially ignorant is this sentence:

If the remaining spending is still divided into the old consumption-investment ratio

.

Obviously, if that is the case, then total saving has not been increased. Hence this is not an argument against the paradox of thrift.

The paradox of thrift is that a population can not endlessly increase saving/investment while reducing consumption. Eventually you reach a point where a further decline in consumption leads to less demand for investment. Total savings can not be increased beyond that point. Any attempt to do so will backfire: a recession or depression.

Possible need for a Neo-classical view

This paradox seems to be one of many points of contention between the Keyesians and the Neo-Classical economists. The latter take the more traditional view that thrift is good for the economy since it makes available more loanable funds for investment. I **believe** (but do not know with certainty) that in the scenario of an economy at full-employment, the Neo-Classical view has more empirical support. If anyone out there could present the Neo-classical argument from a reliable source (ie: from someone from the Chicago School), the result could be a more balanced article. As it is, the article is "good enough" since the paradox was placed in the context of less than full employment. Hope this makes sense. Vonkje 17:19, 6 Jun 2005 (UTC)

Sorry, I can't help you there. Leonardo 2 July 2005 05:06 (UTC)

" I **believe** (but do not know with certainty) that in the scenario of an economy at full-employment, the Neo-Classical view has more empirical support." No. Neoclassical economics predicts higher GDP Growth in the US from 1920-1932 than from 1933-1945. In fact, this has been the purest test for Neoclassical economics in the US. Total GDP growth 1920-1932 was under 10% whereas total GDP growth 1933-1945 was in the neighborhood of 190% per the Bureau of Labor. With respect to "full employment" under neoclassical economics, that has never happened except when bubbles were able to grow faster than the real economy shrank. The only two "Free Market" presidents of the last century to leave unemployment lower than they found it were Calvin Coolidge, who led into the big Herbert Hoover Crash and Ronald Reagan, who led into the George Bush Sr. Crash. The historical record is that the economy tends to move toward full employment under protectionist and labor-friendly administrations and away from full employment under "business-friendly" administrations. — Preceding unsigned comment added by 70.90.204.42 (talk) 17:48, 5 May 2014 (UTC)

Vonkje, you have to take into account that Keynesians believe that without demand for goods, there is no demand for production, and therefore no demand for investment either, so there being more "loanable funds" is not a good thing in itself. Whether there is a straightforward connection between individual savings and increased loanable funds is another question. James James 02:08, 24 September 2005 (UTC)

We should remind people that this paradox was observed during the great depression- a fact that undermines some of the criticism... mousomer 20:59, 17 January 2006 (UTC)

Vonkje, the entire Keynesian position is predicated on a macroeconomic disequilibrium. Keynesianism assumes this to be the norm because macroeconomic equilbrium (and hence full employment of factors) occurs when aggregate investment and savings are equal. However, Keynes maintained that the two were determined by different factors - aggregate savings is determined the proposenity to save of the populace at the given level of income, while aggregate investment is determined by the confidence of capitalists, who would invest according to their 'expectations' of a return. Keynes argued that nothing united the two factors, and so there was no reason to expect they would move in synchrony.

In this context, if the savings rate increases (assuming the distribution of incomes remains constant) there is no reason to expect a feedback into a higher investment rate, as this is determined by a separate force. In fact, as the higher savings implies depressed consumption (at fixed income distribution), it would not be unexpected that markets for final products would weaken, thus lowering the confidence, and hence desire to invest, of capitalists. In short, this model suggests that raising savings may even lower investment, causing the two to move away from each other, hence otu of equilibrium and therefore leading to unemployment (Kalecki demonstrated a similar result from cutting wages - that a downward spiral of both incomes and prices would result).

The rebuttal from the neoclassical view is that more savings means a higher money supply in the credit system, which means lower interest rates which counterbalances the loss of final goods markets from the extra savings. In short, this argues that while markets spoil, acting as a disincentive to investment, lower interest rates re-invigorate investment so as to balance out the effect. The result is that movements in the savings rate cannot affect growth at all (which is a result of the Solow-Samuelson growth model).

Of course, whose side you're on depends on your opinion of the interest rate. If you feel that it moves to equilbriate savings and investment, then the neoclassicals are right and the paradox collapses. However, if you believe the interest rate is the result of liquidity preference (i.e. the desire to hold fixed or monetary assets), which implies again that the 'confidence' of capitalists determines the interest rate, thus denying its equilibriating capacities, then you are likely to side with the Keynesians.

--GJaxon (talk) 10:37, 7 January 2009 (UTC): And then there's the Austrian perspective that some kind contributor referenced, which explains that free market interest rates guide savings to the best yielding investment sectors; this paradox is an illusion that arises when one ignores the duration of these savings. Eventually they're spent - once doing so puts the saved income to its highest use. While saved, the funds become available to the producers of the future goods whose consumption was delayed. In this view, savings arise from consumers shifting their capital structure and act as a buffer while the structure of production capital shifts to meet the new preferences.

Error?

"then aggregate demand will fall and will in turn lower total savings in the population."

Shouldn't it be increase savings? —Preceding unsigned comment added by Ericg33 (talk • contribs) 21:00, 23 January 2009 (UTC)

No, that is why it is the paradox of thrift. Any attempt to increase savings beyond a certain point will lead to economic contraction: unemployment, bankruptcy, etc. Wealth, and thus the value of the total savings, decreases. —Preceding unsigned comment added by 92.254.77.250 (talk) 23:41, 19 March 2010 (UTC)

Our anonymous writer, 92.254.77.250, is wrong. Keynes envisioned a short term paradox with a short term solution, on the order of 6 months to a year. In the short term, that is in the margin, rapid rises in savings rates cause an immediate drop in demand, but in the longer run a high savings rate provides cheap investment capital which is used to increase productivity and decreases the cost of production per unit. Some have chosen to imply that there exists a long term paradox of savings but there is little evidence or reason to think the paradox is anything but a short term effect. What is often perceived as a long term paradox of savings is actually a manifestation of the propensity of governments to tax away that which the government thinks the people don't really need. Those so taxed, of course, are not on the list of favored insiders —Preceding unsigned comment added by Angloguy (talk • contribs) 12:28, 9 November 2010 (UTC)

---

Spontaneous comment about the above paragraph: This comment, above, about the short term focus of when the paradox is applicable to real economies, seems to me to be something important that certainly should be mentioned in the article (if true).

In addition: common sense (perhaps infused with some economic literacy) seems to indicate that much, if not most, criticisms of the paradox are likely to revolve around the issue of applicability to real economic situations of the underlying assumption of the paradox: "Assuming that saving rises faster as a function of income than the relationship between investment and output". But I see no clear mention of this in the criticism pages. Do Hayek and pals of the Austrian school really not discuss this?!

Further addition: why is there no mention of the fact that the price of money, interest rates, is not set by markets but manipulated by central banks in most economies? That seems to me to likely have a rather large impact on the underlying argument of the paradox regarding the relation between savings and the observed propensity to invest. Surely someone must have written about this?

/Marcus Linder

Bible quote

This is really intriguing:

There is that scattereth, and yet increaseth; and there is that withholdeth more than is meet, but it tendeth to poverty.

The liberal soul shall be made fat: and he that watereth shall be watered also himself.

— Proverbs 11:24–25

But until there's economic commentary mentioning it, or biblical scholarship specifically indicating the parallels to the economic issue, I don't think it should be in the article. I've removed it, though I would be delighted to see it restored with appropriate context added. Yakushima (talk) 14:57, 23 April 2011 (UTC)

Hi Yakushima,

Thanks for thoughtfully raising this on the talk page!

The quote in question is the lead to the article

Nash, Robert T.; Gramm, William P. (1969). “A Neglected Early Statement the Paradox of Thrift”. History of Political Economy 1 (2): 395–400

and is visible in the free preview. The article was cited right before the quote “similar sentiments date to antiquity”, but not cited for the quote itself, which is probably a bit unclear citation style.

The article is an economics article on predecessors to the Keynesian statement of the paradox of thrift – this is what you’re looking for, right?

I could re-add the quote and put the ref right on the quote (citing the page too, if that helps); would changing the wording help? (Existing wording was perhaps a bit abrupt.) If you want to have a shot at fixing the wording, please go ahead, otherwise would just making the ref clearer work?

—Nils von Barth (nbarth) (talk) 17:22, 23 April 2011 (UTC)

I overlooked the biblical epigram quote in the Nash&Gramm paper; however, at least at the beginning of their paper, it's only one verse, not the two you use. I trimmed out the second verse (even though it's probably equally relevant), and tucked the first one into the footnote for Nash&Grammm. If you can think of a way to smoothly integrate it into the main text, be my guest. But if Nash & Gramm couldn't do it themselves (I don't know -- I can't see the rest of their paper), we might not be able to do it either. What you'd really need, I think, is a bible scholar making a direct link to economic theory or policy. Yakushima (talk) 06:12, 24 April 2011 (UTC)

Some other epigrammatic uses of it in an econ context: [1] [2], among others. However, the theological sources I'm seeing so far seem to restrict the sense of "scattering" to individual acts of charity or public-spirited behavior, with the benefactor gaining spiritually rather than materially. There may yet be something here, though, related to distribution of tithes. I've personally speculated that New Deal architect Marriner Eccles was converted to the Keynesian view (even prior to direct exposure to it) when he realized that Utah, as a virtual Mormon economy, couldn't rescue itself with its own expenditures from (ever-declining) tithes because it was too strongly coupled to the U.S. economy and in any case had no fiat money of its own for deficit spending. Rather, something like the Mormon system had to be nationalized, and somehow without converting the rest of the country to Mormonism. This is just my own theory, though. Perhaps someone can trace the influence of this Bible verse through to him. But without violating WP:SYNTH or WP:NOR? I don't think so. From looking at his public papers at Google book search, it appears he avoided saying anything religious about fiscal or monetary policy. Perhaps this was wise of him. Mormonism was considered more cultish in the 1930s than it is now. Even if he did have some judeo-christian rationale for the morality of stimulus spending, he might have felt it politically prudent to avoid drawing attention to his own faith. Yakushima (talk) 06:44, 24 April 2011 (UTC)

Great researching – thanks!

In the second source, English, Irish and Subversives Among the Dismal Scientists, by Noel Thompson, Nigel Allington, p. 122, the full quote is:

A suggestion that a more equal distribution of income might be a remedy for general stagnation – and that excess saving can be harmful – is implicit in the quotation from the Old Testament on the Reply to Mr. Say [by John Cazenove (1788–1879)] [then quotes verse, first line]

…which seems to be what we’re looking for – a scholar explicitly linking the epigrammatic use of the proverb to the paradox of thrift. So I don’t think we’re violating OR or SYNTH if we say something like:

Similar sentiments are implicit in the Bible verse [first line only, either as block quote or inline], which found occasional use as an epigram in underconsumptionist writings. (reference “Neglected early statement“, “Reply to Mr. Say”, “Studies” (your first reference) and Thompson & Allington)

As you note, it hasn’t been strongly linked – there’s pretty little overlap between academic economics and theology these days, as far as I can tell (there have been schools of Catholic economics and social justice, but they’ve been more involved in political & social issues than in theoretical or academic economics), so I don’t think we should make a big deal of this, but just note its occasional use.

I’ll have a shot at working it in a little more cleanly and with better referencing; thanks for the

—Nils von Barth (nbarth) (talk) 12:52, 24 April 2011 (UTC)

Done – as of this revision I’ve edited the History section as outlined above – hope it looks ok!

—Nils von Barth (nbarth) (talk) 14:16, 24 April 2011 (UTC)

Very difficult to read

I'm a member of the laity who takes more than a passing interest in monetary matters - but I found this article completely opaque. Could someone perhaps add a numerical example? (e.g. "Alice and Bob are the only two consumers, both with savings of £50 which, when combined, represents [e.g. 33%] of cash in the economy. Alice decides to increase her savings from £50 to £100 and correspondingly [SOMETHING], gaining advantage over Bob. However, if Bob decides to increase his savings from £50 to £100 as well [SOMETHING BAD HAPPENS] and both Alice and Bob are disadvantaged.". Without such an example, I can't really follow what on earth the article is trying to say. 7daysahead (talk) 10:26, 5 October 2011 (UTC)

I agree; found the overview paragraph incomprehensile (it is a sure sign of writing down when you see words like equilibrium or cetus paribu)

I don't know if the example by daysahead is the rigth way to do ti, but the current paragraph is not good. I have a PhD in moleuclar biology, and I know how hard it is to think simply sometimes; but please, give it a try (and loose the equilibrium) — Preceding unsigned comment added by 24.91.51.31 (talk) 00:28, 26 November 2011 (UTC)

I've tried to translate bits into plain English, but really, it's a pity an article on such an important subject, one which is debated daily in Congresses and Parliaments, should not be written comprehensibly.Straw Cat (talk) 11:54, 31 January 2013 (UTC)

Where is the Keynesian/ NeoKeynesian critique of the critiques?

While not being an economist or economics trained myself, I can't believe that Keynesian responses to mentioned criticism's of this Keynes argument are not available. Surely it is better for the page to refer to how the Austrian school and other criticisms are responded to by Keynesians? — Preceding unsigned comment added by 94.195.77.185 (talk) 22:15, 6 December 2011 (UTC)

Overview Misleading

The overview makes it seem like the paradox is critical of savings in general. That is incorrect. It is only savings in excess of intended investment that is held to be bad. All the rest of savings is good.

Paradox of thrift is a broken banking system

In a coin-based monetary system, demand for savings = demand for coins = demand for metal intrinsic in those coins. Paradox of thrift is not some obtuse law of economic nature. Rather it is a consequence of a)a policy choice to base the monetary system on something of no intrinsic value (eg bank/debt based money) and b)a conscious choice to avoid mentioning/analyzing why that sort of system breaks down (fraud, bank balance sheet mismanagement, etc) and to instead create a "paradox" that can be scapegoated. — Preceding unsigned comment added by 50.134.196.115 (talk) 02:30, 10 October 2013 (UTC)

- Sorry but you are unconvincing. There is not much "intrinsic" value in metal coins. It is true that, at the margin, people might prefer gold to a shaky fiat currency. But if you were in the middle of the desert with a bag of gold, you would be better served if,instead, you had a jug of water, a GPS, or a helicopter. If you are not satisfied with that explanation, then consider that metal coins were debased just as badly as fiat money during Roman Times, or how India wound up with much (if not most) of the world's gold after the collapse of Rome, and yet remained a "third world" country for most of history. My point is, money is just a placeholder, the important things are the useful assets. — Preceding unsigned comment added by 24.79.80.75 (talk) 23:41, 21 May 2016 (UTC)

"sticky wages"

From the article: "This criticism in turn has been questioned by Keynesian economists, who reject Say's law and instead point to evidence of sticky prices as a reason why prices do not fall in recession; this remains a debated point."

This criticism could be question because sticky wages provide a counter-example. The underlying problem with the criticism, though, is that it has never presented a quantitative mechanism for describing how much labor prices would fall compared with revenue levels nor any explanation as to why these two should fall at exactly the same rate. Further, they have never provided a time in history where their advice was ignored and the economy suffered. The closest I have seen is an argument that government meddling was why we were "so slow to recover from the Great Depression", however when you check the numbers, that is the only time in modern history when the US grew their GDP by 10% a year. I have read several such works and the only proof provided is proof by repeated assertion. — Preceding unsigned comment added by 70.90.204.42 (talk) 17:58, 5 May 2014 (UTC)

Flipping it around

I don't claim to be an expert in any way on Keynesian economics, but I do hear this paradox used by many mainstream economists and tv personalities on many business channels. They always say "If you know what you want to buy will be cheaper later, you will wait to buy it." This is clearly a statement used for buyers, during deflation.

But that always makes me think, what about sellers, during inflation? Could one not logically flip this paradox around and ask "If you know you could sell something for more later, you will wait to sell it?"

The paradox of thrift just contradicts itself in the end when you flip it around. It seems to be an excuse for purposeful inflation more than a real paradox when you think about it logically.

Chistiandoublezero (talk) 17:01, 19 November 2014 (UTC)Chris

Misapplication of Keynes by current policy makers: Scamjob?

I can understand the paradox of thrift in the case where I spend an extra $50 per month, and in return for that extra expenditure I get more goods and services (let's say more salmon meals instead of chicken wings). That is an example of increasing economic activity (I am getting better food, and that allows me to be more productive). But it seems to me that current economic policy just wants to focus on rising prices. In other words, if I am forced to spend the extra money just to keep the same level of goods and services as before, then there is not really increased economic activity (I am not buying anything extra for that money). All it means is that I am being impoverished, and Keynes is being used as a smokescreen by those who benefit from such an arrangement. — Preceding unsigned comment added by 24.79.80.75 (talk) 23:27, 21 May 2016 (UTC)

Koo, balance sheet recession

In Section "Related Concepts" should be mentioned Richard Koo balance sheet recession which is similar to debt deflation by another name.

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