the corner office

a blog, by Colin Pretorius

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The paradox of thrift

Bank of England deputy governer Charlie Bean caused a bit of a stir by saying that because of the recession, people should be out there spending, and not saving. Well, that's BOE policy, that's the whole point of low interest rates: easy to borrow (and spend), less point in saving.

Depressingly unsurprising to see the comment thread on this poll at the Guardian. Market failure! Government must step in! Capitalism sucks!

The irony. Bean is referring to the paradox of thrift, a tenet of Keynesian economics. Keynesianism with its mantra of spend! spend! spend! has dominated the thinking of centrist and leftist (and rightist) governments throughout the recession: Gordon Brown, Vince Cable, Barack Obama, even in his own way George Osborne and just about everyone else who supports or profits from state intervention and 'stimulus' has invoked Keynes in their demands for more government and private debt, more artificially low interest rates, more spending, more of what created the bubble in the first place.

I don't think that many of those Guardian commenters would know (or appreciate) that the most vocal opponents of the 'spend your savings' philosophy were the free-market Austrian economists. The same arguments were played out 80 years ago, and as economist FA Hayek and others said back then:

But we should regard it as little short of a disaster if the public should infer from what has been said that the purchase of existing securities and the placing of deposits in building societies, etc., were at the present time contrary to public interest or that the sale of securities or the withdrawal of such deposits would assist the coming recovery. It is perilous in the extreme to say anything which may still further weaken the habit of private saving.

Sad or tragic that the Hayek vs Keynes battle is still being fought 80 years later. You can imagine the debate will be raging in another 80 years' time. I'm biased, and I'm not an economist, but I'll say that the spend don't save argument sounds to me like high priests trying to say up is down. Regardless of the economy, when storm clouds are approaching, stocking up the larder is the only sensible thing to do.

{2010.09.28 - 18:09}


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