Tuesday, November 8, 2011

The Paradox of Thrift

I'm a huge fan of NPR's Planet Money and today I was learning about John Maynard Keynes (who, according to Nicholas Wapshott, the author of Keynes Hayek: The Clash that Defined Modern Economics, was the most colorful Brit of the 20th Century besides Winston Churchill).  Keynes had a theory that was called The Paradox of Thrift: (according to wikipedia) "The paradox states that if everyone tries to save more money during times of recession, then aggregate demand will fall and will in turn lower total savings in the population because of the decrease in consumption and economic growth. The paradox is, narrowly speaking, that total savings may fall even when individual savings attempt to rise, and, broadly speaking, that increases in savings may be harmful to an economy"

In other words, if we all save our money, we all get poorer.  Fascinating.  I wonder what economic theory would have everyone being wise with their money and having good character?

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