The paradox of savings

from Wikipedia, the free encyclopedia
The saving paradox results from mutual reductions in expenditure and in this respect a reduction in other income, which in turn strives to keep itself liquid or, as a precaution, begin to increase liquidity reserves. Exemplary were the global economic and German banking crisis in the 1930s.

The paradox of thrift (Engl. Paradox of thrift ) states that it is not possible on economic operators as a whole, because of increased austerity measures to obtain the usual amount of their income. The saving paradox is a variant of the competitive paradox .

Historical origins

Probably the oldest variant of the saving paradox can be found in the Bible under Proverbs 11:24: "One distributes and always has more; another is meager because he is not supposed to, and yet becomes poorer." Author Bernard Mandeville supported the austerity paradox in his famous bee fable , in which he claimed that virtue and frugality lead to general decline.

At the beginning of the 20th century, the saving paradox was popularized in the USA by the authors William Trufant Foster and Waddill Catchings . They attributed recessions to a lack of consumption or overproduction; their proposals to stimulate demand for goods through debt-financed government spending were taken up in the Great Depression.

The paradox of savings at Keynes

According to John Maynard Keynes , too , cutting down on consumption, i.e. saving households, means a decline in demand for companies. They reduce production (and reduce further investments) and trigger a negative multiplier process . Macroeconomic income is falling, more than the original drop in consumption.

While a single person can reduce their spending on consumption at any time and thus increase their savings, this is not possible for all people in an economy. Because everyone who cuts his expenses, lowers the income of the other people. As soon as everyone consumes less, production and income in the economy decline. In addition, investments are also declining, so that saving together in consumption not only does not increase savings in the economy, but even decreases it.

The saving paradox according to the balance mechanics

Example: US Sectors 1929–33
Example: Sectoral balances (net)
USA 1929–35

The saving paradox can best be described formally in the terms of the balance mechanics developed by Wolfgang Stützel as a circulatory paradox . It is about saving by cutting expenses, which always leads to an income surplus for the individual, i.e. a saving of money. But as soon as the whole (in the sense of each individual) saves on expenditure, only the income in the economy decreases:

Partial clause
For individual economic operators or a partial group of economic operators, the following applies: the lower the expenditure, the greater the revenue surplus.
Size mechanics
The decline in expenditure of a partial group of economic operators can only lead to a revenue surplus if the complementary group either carries out or accepts an expenditure surplus.
Global rate
A general decrease in expenditure always leads to a decrease in revenue for the whole and never to a revenue surplus.

criticism

The neoclassical theory and the Austrian school consider the saving paradox to be wrong. The neoclassical economist James Ahiakpor argues that the paradox is based on a confusion between hoarding and saving. While hoarding deprives the economic cycle of financial resources, saving (for example in the form of buying securities) merely means a transfer of purchasing power from one actor to another, which leaves overall demand unchanged. This is the core message of Say's law .

With similar arguments, albeit much more differentiated, Friedrich August von Hayek criticized the teachings of Foster and Catchings in 1932. According to Hayek, the claim that saving leads to a decrease in the demand for goods is more popular in semi-academic and propaganda literature than any other economic theory. In his view, supporters of the savings paradox lack any understanding of the function of capital and interest.

Individual evidence

  1. ↑ Wilhelm Lautenbach (Ed. Wolfgang Stützel): Interest, credit and production (PDF; 1.2 MB), Tübingen 1952, p. 62: “If the saved amounts are held as deposits with the banks, ceteris paribus, the liquidity deteriorates [of the overall banking system]. The credit volume grows with the same fund, so that the ratio of total deposits to fund deteriorates. For if the savers had not saved but spent their income, the amounts of money would inevitably have come to the banks in the same way after they had flowed through the retail trade; the banks' cash holdings would have been the same, but the credit volume would have been lower, because the amounts spent for consumption would have been collected by entrepreneurs, with the result that their credit needs would have been correspondingly lower, but their sales would have been higher. That is a paradoxical result in every direction. Earnings, liquidity and, as a result, the propensity to invest are greater when wage earners save less. Saving is only just generating the need for credit with reduced sales, and conversely, when savers consume earlier savings, the liquidity of both banks and companies is increased and at the same time the entrepreneur's income. "
  2. ↑ Wilhelm Lautenbach (Ed. Wolfgang Stützel): Zins, Kredit und Produktion , Tübingen 1952, p. 91: “Only if, on balance, non-entrepreneurs used up their savings during the Depression, the liquidity of companies could improve; only to the extent that this happened would it be possible that stocks in the economy could also be successfully liquidated. Since it is now exactly the opposite, as has been observed and experience has shown, since the savings of non-entrepreneurs are still growing overall, only a further illiquidization of the economy can be expected from this side. Yes, in addition, the growth in the savings of non-entrepreneurs in the Depression is the reason and expression of capital losses in companies. "
  3. ↑ Stephan Schulmeister, October 2013: Euro settlement: The final step into the economic war. (PDF; 624 kB) p. 2:
    “As was the case back then, austerity policy is proving to be the most important crisis intensifier. The harder it was saved, the more the national debt rose, in the ranking Greece, Spain, Portugal, Great Britain. The knowledge of this 'saving paradox' was actually a result of learning from the global economic crisis, but after 30 years of dominance of the neoliberal worldview, this knowledge has been forgotten. "
  4. ↑ Peter Bofinger: Fundamentals of Economics. An Introduction to the Science of Markets. Munich 2007, ( online on Google.Books ) p. 606: "[...] in which the efforts of each individual do not succeed as a whole, because reduced expenses of one actor reduce the income of another."
  5. ↑ Bible Proverbs 11
  6. ^ Foster, WT and W. Catchings (1927) Business Without a Buyer. Boston and New York: Houghton Mifflin Company, p. 42: "Assume that somebody decides to save one dollar instead of buying a watch. Then, clearly, that watch or its equivalent must remain for the present unsold. Next, suppose that the thrifty individual invests the dollar in such a way that it is used to produce another watch, and in the process is paid out as wages. Consumers now have enough money to buy either the watch which remained unsold, or the watch which has just been made by the use of savings; but they cannot buy both watches. To that extent there is 'overproduction'. "
  7. ↑ Wolfgang Stützel: Economic balance mechanics. Mohr Siebeck, (2nd edition) Tübingen 2011. P. 74.
  8. ↑ Ahiakpor, JCW (1995) A Paradox of Thrift or Keynes's Misrepresentation of Saving in the Classical Theory of Growth? Southern Economic Journal Vol. 62, pp. 16-33. That. (2004) Classical Macroeconomics: Some Modern Variations and Distortions. London: Routledge.
  9. ↑ Machovec, FM (2014) Our Classical Macro Heritage. Quarterly Journal of Austrian Economics 17, pp. 273-312. Esp. P. 283: "Keynes ... mischaracterized all boosts in saving as highly apt to be hoarded, a supposition that enabled his paradox of thrift".
  10. ^ Hayek, FA (1932) The 'Paradox' of Saving. Economica 32, pp. 125-169.
  11. ↑ Blumen, R. (2008) Hayek on the Paradox of Saving. Mises Institute.
  12. ↑ Hayek, op. Cit., P. 125: "But while in this way the idea has found a greater popularity in quasi-scientific and propagandist literature than perhaps any other economic doctrine hitherto ..."
  13. ↑ Hayek, op. Cit. P. 162: "What they entirely lack is any understanding of the function of capital and interest.