Lee Kelly has started a new blog called Philosophy and Economics, and the first post is on the paradox of thrift. One of the things I've always appreciated Lee Kelly for is a very clear exposition of monetary disequilibrium arguments. He's also, of course, excellent on questions of certainty and knowledge.
The paradox of thrift post is great - often it is explained as "if people are saving then they aren't spending", which I suppose is true on a micro level but clearly doesn't have to be true at a macro level. Saving rates can increase without disastrous consequences if investment rates also increase, for example. Too many people spin the paradox of thrift off into crude Keynesianism by failing to explain that problems emerge when savings are not matched with an increase in demand for loanable funds. That's when these various accounting identities like S=I and Y=C+I+G come into play, with a new equilibrium at a lower output level.
The comment section gets into more liquidity trap issues, but I don't think Lee Kelly was necessarily talking about a liquidity trap - you can have paradoxes of thrift without them, after all (I think at least - I'm not sure why you would need a liquidity trap to have a pardox of thrift, but perhaps I'm wrong).
The next post will be a refutation of the paradox of thrift.
Monday, October 4, 2010
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Sorry for not following up on that first post yet (I know you're eagerly awaiting the next installment!), but I have had other stuff on my mind -- as you can see if you check out my blog.
ReplyDeleteOh, and I don't really mean to "refute" the paradox of thrift. One could just as sensibly say that I want to refine the concept of the paradox of thrift. Though I will recommend dropping the name because I think it is misleading.