Talk:Paradox of thrift

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[edit] 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)

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 your 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.