Paradox of thrift

The Paradox of thrift, or Paradox of savings, refers to the supposed ill effects that saving has on an economy in recession. While not an original observation, as references to such a concept have been known as early as the 16th Century with Bernard Mandeville’s The Fable of the Bees, John Maynard Keynes popularized the concept in his General Theory. According to the standard Keynesian explanation of the business cycle, a reduction in aggregate demand, that is consumption spending, will drive an economy into recession. When individuals and businesses increase their savings, this only compounds the problem of a reduction in private consumption spending, leading to further decreases in economic activity, which result in still lower rates of saving on net.

Austrian Position
Austrians disagree that increased saving leads to deeper recessions because they do not accept that demand is the driving force of an economy. Rather, they argue, it is the production of goods which allows demand to take place in the first place which propels an economy. Robert Murphy describes this concept by saying that “actual production must occur before people can consume anything. […] you can't ‘demand’ a TV set unless the store has an actual unit on the shelf. […] the manager of Best Buy can't stockpile his shelves with TVs unless the manufacturer has previously assembled them .” In fact, not only is increased savings not a bad thing, it is savings which allows for greater production by increasing the capital stock. Without delaying consumption there is no way in which to invest in the tools, machinery or labor necessary to achieve a higher output.

Links

 * The Campaign Against Cost Cutting by Frank Shostak, September 2002
 * Hayek on the Paradox of Saving by Robert Blumen, January 2008
 * Is the Economy a Perpetual Motion Machine? by William L. Anderson, March 2009
 * The Paradox of Thrift: RIP by Clifford F. Thies, 1996