Wednesday, December 23, 2009

The "Paradox of Thrift" in Reverse

It occurs to me that the "Paradox of Thrift" that Keynesians are so enamored of actually works in reverse. In fact, a lot fo Keynesian theory is simply the "Paradox of Thrift" in reverse, which is ultimately the source of the broken window fallacy.

Basically, the "Paradox of Thrift in Reverse", or the PoTiR, is the belief that since, for any business, more consumption of that business's products means more prosperity, then spending more in general creates more prosperity.

What the PoTiR ignores, of course, is that spending is limited by resources available, and that in the near term, we are dealing with a zero-sum game. Spending on kitchenware makes the spoon-makers prosperous, but it decreases what can be spent on glassware. Consumption in and of itself can only direct to which products resources go. Investment is needed for prosperity in the economy as a whole.

That is all.

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