Saturday, February 16, 2013
Paradox of Thrift
I just don't buy the paradox of thrift argument. In a nutshell, the argument asserts that when everyone saves the economy shrinks. I believe the underlying assumption is that everyone in the economy is pessimistic about the future so they save for the bad times ahead. As less is spent, investment shrinks and there is less GDP being produced.
In the notes to the left, I show that the Aggregate Expenditures drop which leads to less being saved.
What I think will happen is that my savings will be used by a forward thinking entrepreneur who will seize the opportunity to capture the market when others are reluctant. In other words, this thinking will maintain GDP. For a recession to occur, something else has to happen.
For an outstanding discussion of this topic, click here.