Chronic underconsumption is an idea most often associated with Keynes. But while the infamous English economist published his General Theory in 1936, Hayek’s 1929 article “The ‘Paradox’ of Savings” analyzes a similar theory advanced by two Americans a decade before. While the two authors have nearly vanished from history, the insights contained in Hayek’s nearly forgotten article are more necessary today than ever.
The two protagonists were college president William Trufant Foster and businessman Waddill Catchings. They aimed to show how the production of goods could increase, with no corresponding increase in the purchasing power of consumers. Under these conditions, not all consumer goods could be sold at prices above producers’ costs. Markets would fail to clear, or producers would take a loss on each sale; the economy would spiral downwards into depression. FULL ARTICLE
Source link: http://archive.mises.org/7627/hayek-on-the-paradox-of-saving/
Hayek on the Paradox of Saving
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Where can one find an online version of Hayek’s article? Thanks in advance.
From a consumer point of view, saving is not an investment. Rather, it is a decision as to whether there is anything worth buying. If the consumer does not find a product of interest, then the money is retained. The unspent money then is available to entrepreneur to produce something that the consumer (or owner) of the money wants to buy. If no one can produce anything deemed valuable enough to buy, the capital sits idle until needed.
As the article points out, it would be unwise to invest in production that produces zero (or negative) profit. Therefore, a good entrepreneur will use capital to create something with a positive return. Of course, bad entrepreneurs make poor decisions and go broke. Given that many new ventures do fail (most, in fact), it is apparent that good entrepreneurs must create extremely productive investments to have overall economic growth.
But economic growth does not depend on macro economic laws or unfathomable principles. Economic growth is rooted in a very, very, very simple fact: the economy grows because individuals produce more than they need to survive.
If we produced less than needed to survive, we would die. If we produced exactly what we needed to survive, there would be no growth. But because we produce more than needed to survive, the economy grows because our excess effort can be harnessed for ever-increasing output potential.
An unfettered economy will always grow. The only way the economy will contract is if individuals are somehow prevented from being productive. This could be through government intervention and regulation, severe natural disasters (famine, pestilence, flood, etc.), or man-made disasters (war). Otherwise, the good times will always be rolling.
As far as I know it is not available on-line anywhere. Unfortunately.
David Spellman: I think that there is a difference in terminology here. In ordinary English we use saving to mean “not spending”. But in economics saving means save-and-investing, which is a form of spending. Simply not spending is called “increasing your cash balance”. Increasing cash balances do nothing to promote economic growth, nor to inhibit it.
I watched ÿouve got mail¨ the other day and thought of this same hayekian argument when the employees in Meg Ryans shop are laid off and later work for Tom Hanks. How pop culture unintendidly relfects economic wisdom.
I hope that the Hayek “Prices and Production” is on the list for the Mises Institute to republish.
There appear to be only a few used copies available online, at unaffordable prices.
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