Why I am still not a Keynesian

One of the Keynesian concepts I find least plausible is the paradox of thrift. Firstly, as even Keynesians concede, it obviously doesn’t work in a barter economy. Going back to Robinson Crusoe on his island, suppose he’s farming apples. If he foregoes consumption for investment, he plants some of the apples instead of eating them, he’ll have more apples in the future. Saving works, no paradox of thrift.

OK, next up, suppose it’s a family in a modern economy. They used to hire a labourer to mow their lawn and make it all pretty. They decide to forego consumption (of their pretty garden) for investment, and instead they pay the labourer to build a guest-house which can in future be rented out. Again, saving works, no paradox of thrift.

Now suppose suppose instead of hiring the labourer directly, the family give the money to the bank, which lends it out to someone else to invest, who employs the labourer to build the guest-house. Nothing changes.

The only objection is if the money isn’t lent out, that the bank just sits on the money. Well, OK, that can be a problem. But that isn’t a problem of savings, that’s a problem for investment. Now, arguably, you can say that if there is a sudden and massive increase in savings, the banks will be unable to lend it out within a reasonable time. True, but a sudden and massive anything is going to be disruptive. In the real world, people can ramp up their savings rates, but it will take them a long time to substantially increase their savings, and real-world large-scale increases in savings rates are responses to damaged balance sheets.

In short, there is nothing paradoxical about thrift.


One response to this post.

  1. Posted by Max on October 11, 2011 at 7:12 pm

    missed the argument..


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