The Paradox of Thrift - 60 Second Adventures in Economics (2/6)

The Paradox of Thrift suggests that while it may be wise for an individual to save money when income is low and job prospects are precarious, it could be collectively disastrous if everyone is thrifty together.

(Part 2 of 6)

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[NAA]

Hayek and Friedman didn't say anything about saving being better than spending. The interest rate tells you whether it's a good idea to spend or save and you should decide for yourself.

[BruceAttah]

The paradox of thrift wasn't discovered by John Maynard Keynes, but by Bernard Mandeville in 1714. Credit where credit is due. And it doesn't just pertain to government spending, but personal spending, too.

Also, there's a flipside to this which works against Keynes: the "broken window paradox" described by Bastiat.

[Mareleven]

Got it thanks man. You chained it up really nicely. I also watched bbc's masters of money with Keynes as well and it too illustrated it nicely.

[CanonNikonMan]

that's a whole new debate. but even then, the Keynesian multiplier theory suggests that even a small amount of autonomous government spending could induce a multiplier effect and generate income... this is because an injection of extra income leads to more spending, which creates more income, and so on.

[coredump]

Spending more today automatically means spending less in the future. This is true whether done by individuals or government. The tragedy is that while governments set out to spend today and repay tomorrow, they rarely do in practice, so end up printing more money to cover up the shortfall, which leads to inflation. This is the worst tax of all as it hits the poorest the hardest.

[Strega]

Although the Keynesian model has many flaws, if I had to identify any one 'Achilles Heel' it would be the way the system treats savings. Keynes' work seems to treat savings as simply 'not consumption;' the system seems to view peoples' savings in the light of its opportunity cost, or the demand generated from the demand for goods and services it could have generated. However, I wholly disagree with this notion. People's savings don't simply disappear; as the video briefly mentions in the beginning, it is loaned to entrepreneurs to commence new projects that employ labor and capital. What's more, although we are all certainly dead in the long run, our children will go on living after us. Ensuring a better life for our descendants is a powerful incentive to produce goods and service that people truly demand, and to forego consumption in the short term in exchange for greater purchasing power later on.

[isawaturtle]

The govt only has to tax if inflation rises too high.
The govt doesn’t tax for revenue like a household needs revenue for spending.

[CanonNikonMan]

if a government spends by say building a new bridge, who is going to build it? workers. exactly. there will be engineers, carpenters, builders, etc, etc, all being able to work just because their government is spending. more employment means more income, which means more demand.

[Wutwutn]

I can challenge the astronomy and thought adventures but I can't understand cash for the life of me

[Mareleven]

How does government spending create jobs???! Surely will still be the same amount of demand in the economy, I don't see the connection. Someone please help!

[TheStrangeBloke]

because a 60 second summary shouldn't be allowed to use generalizations at all. And because economists aren't allowed to have favorite schools of thought. If you want hardcore analysis, read a textbook, or better yet, read the economists in their own words. If you want general idea of the paradox, watch a 60sec youtube video.

[CanonNikonMan]

your first claim was that govt spending increases prices. how can that happen? when the govt intervenes, it offers a LOWER price because there is no incentive for making profits. the govt will make its provisions affordable to everyone, in fact, they could even be free.
your second claim is that the spending comes from somewhere. well, that's a given. the govt will collect taxes regardless of whether it has spending projects. the only consequence of spending is a tighter budget.

[Liusila]

I'm watching this because procrastination

[JuanMartinez-icsg]

Hayek destroyed the so called 'Paradox of Thrift' in his essay 'The "Paradox" of Savings.

[netsildnaputuhs]

least it's the educational part of youtube.

[TehTezMan]

I'll just wait for the bros revival

[TheEntropianist]

and a 0% tax rate brings in the most revenue.

[DavidByrne]

Most often economics is nothing but political advocacy.

[DavidByrne]

It's really terrible isn't it?

[DubyaEmDeez]

Haha, this is blatantly not true. Economists aren't allowed to have favorite schools of thought? If that were true, we wouldn't have economists toeing the line of Hayek and his ilk, because his ideas have been proven to be wrong every time they've been tried. Look at Greece and Spain getting screwed hardcore with austerity, and look at how well Iceland has done by following Keynes's ideas. Sorry to burst your bubble, but economics is philosophy, not science, and they do pick schools of thought.