I really enjoy taking up topics to which I am not professionally trained at. If you viewed my education history, you’d find that I majored in Computer Science with minors in Mathematics and English Literature. What little I know of economics comes from very few books and blogs, so it may largely be unreliable. But nevertheless, I try to use what knowledge I have and apply my own sense of things to the topic. And, as always, I am perfectly OK with admitting I am wrong about something.
Recently, I’ve read that more and more people are saving their money and this is hurting the economic recovery. In essence, it is the paradox of thrift given life. The idea behind it was popularized by John Maynard Keynes, the founder of Keynesian economics. Now, I’m not completely schooled in the different disciplines of economics (I know there are at four basic ones: Keynesian, Austrian, Socialist, and Chicago or Monetarist), but I have trouble with the precise distinctions.
Keynesian economics, as I see it, is really nothing more than an economic discipline that justifies more and more government intervention in the market for the benefit of the market. It essentially calls for government spending to go up in down times in order to bring the market back to its feet. This was the economic policy utilized by Franklin Deleanor Roosevelt’s New Deal policies. In theory it was probably fairly sound as many economists and other policymakers recommended it. However, if anyone reads a detailed history of the Great Depression (or just simply reads up some Austrian economists’ analysis of it), you’ll see that Keynesian economics was a dismal failure in practice.
In any newly developed theory, you really have to analyze the life of the man. Murry N. Rothbard gives a very good analysis of him here. Basically, Keynes lived the life of a hedonist. He blew most of the money he made. As such, it should come as no surprise that his school of economics reflects that very lifestyle. Also, it should come as no surprise that he endorsed the paradox of thrift.
Basically, the paradox of thrift states that in a recession, people save more money and spend less of it. However, consumer spending is needed to boost the economy back into growth mode. This basically means that people’s own sense of self-preservation is their downfall.
Unfortunately, this idea is flawed at best and only pertains to people who think for the moment. When people save money, they generally do so with a goal in mind for one. In the case of a recession, this is usually because they are trying to save money to hedge against possible unemployment or some other emergency. Also, many outstanding debts are paid down as much as possible as well. It’s no fun to have no short term savings, be deeply in debt, and be unemployed as well. When the outlook is grim, many people do what they can and hope that they don’t have to face unemployment.
Another aspect of saving in mass is that people will place their savings in the banks and the banks are what need the deposits the most in order to be able to loan money out. You see, consumer spending is only part of it, because most economists agree that banks need to be able to loan in order to get the economy rolling again. Personally, I don’t buy this fallacy, but the people who buy into the paradox do.
Personally, I believe that you should do what you want to do, regardless of the economic times. It doesn’t matter if the economy is doing good or bad. You should save, spend, and give your money as you see fit. I will not spend just because the economy isn’t doing well. Nor will I save just because the economy isn’t doing well. I will do right by my finances and I don’t mind if you do the same.
That is the ultimate fallacy of the paradox of thrift: the denial of the individual in favor of the collective.