Should We Applaud a Falling Trade Deficit?

by Don Boudreaux on July 30, 2009

in Balance of Payments, Trade

Here’s my latest column in the Pittsburgh Tribune-Review.

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John Dewey July 30, 2009 at 2:17 pm

Professor Boudreaux,

I agree that a falling trade deficit is not good news, for exactly the points you have made. The U.S. is less desirable for investment, and the reduced economic activity results in fewer imports used here for production. Of course, the reduction in U.S. incomes also means less money available for consumer goods imports such as computers, phones, and microwave ovens. With less dollars flowing to China, Mexico, Korea, and elsewhere, far fewer dollars are available in those nations for investment in the U.S.

Anonymous July 30, 2009 at 2:53 pm

So you noted a correlation between “trade deficits” and “american prosperity” and you turn it into a causal link, namely that deficits lead to prosperity and you “prove” that link with a scary story of the trade of the 1930′s.

That causal link is utter nonsense.

maybe you haven’t noticed their existence, but there are some other prospering countries in the world that actually run big trade surplusses with the rest of the world. If the chinese & oil exporters stop propping up your currency today, the USA might soon be one of them.

I agree that these balances don’t matter so much, but don’t use them to “cause” prosperity.

Anonymous July 30, 2009 at 3:07 pm

He didn’t make a strong causal statement at all, geckonomist – he simply pointed out that trade deficits haven’t been doomsday and trade surpluses haven’t been sugar and spice and everything nice.

But while we’re talking about causality – I do think it’s worth thinking through whether the trade surplus drove the depression or vice versa. That’s not a clear question to me at all. But I don’t think Don was making a hard causal statement either way.

“Trade deficit” in a lot of ways is meaningless – because there is a BALANCE of payments. I don’t think the question is whether a deficit is good or bad. It’s neither -and it depends on market adjustments to factor prices. The only interesting question for me on this front is “how painless or painful are those market adjustments”.

Anonymous July 31, 2009 at 10:01 am

What Don omits in his trade analysis is that in a free world, the US dollar would probably have to depreciate considerably, as a country having large current account and trade deficits.

However, since the chinese and arab oil producers all refuse to float their currency, there is no free world and the USA continues to enjoy more pleasant deficits than one would expect.

Anonymous July 31, 2009 at 10:21 am

Right – I think that’s the key. But that’s still no reason to be opposed to trade deficits. That’s just a reason to be aware of the prospect of sharp corrections.

And I guess one thing to point out would be that China would experience that painful correction too – they’re going to have a much harder time exporting if the yuan appreciates and it’s going to put a lot of people out of work in the cities, which is going to contribute to a great deal of social unrest as well – and THEY’RE running a surplus. So clearly deficits aren’t any unique evil, and surpluses are no safe haven. The problem isn’t deficits, and it’s not even “imbalances” – as Don points out, we’re always running some sort of imbalance. The problem is imbalances that balance out very quickly!

Methinks July 30, 2009 at 2:58 pm

This is off topic, but the look of this blog has changed suddenly. has it been hijacked or have the hosts just changed something?

Anonymous July 30, 2009 at 3:13 pm

Methinks,
It looks like the blog is now hosted by Wordpress while earlier it was hosted by Typepad. Scroll to the end of the page to see what I am talking about. I like the new look.

Methinks July 30, 2009 at 3:30 pm

Thank you, rsanjiv. I’ve had a couple of problems with hijacked sites, so I’m wary.

I love the nesting feature.

sandre July 30, 2009 at 3:09 pm

I sort of agree with geckonomist. Trade deficit is a meaningless statistic. Trade deficits are not a requirement for prosperity. But it might be a symptom – of over consumption and under production. If this theory that trade deficit is an indication of investment in production, shouldn’t the trade deficit just dissappear over the longterm? Especially, given that these new investments will result in more local production, and hence a reduction in deficits?

Surfisto July 30, 2009 at 6:54 pm

sandrews,
I don’t think the trade feficit is meaningless, they are not a requirement for prosperity, but show it. How is the wealth of a nation mearsured? By how much we consume (GDP per capita). So we are so rich as a society we could not produce everything we want and have the money for, or maybe we could but why not have someone else make it cheaper so we can buy more. So showing we import so much is one indicator of how rich we are.

Anonymous July 31, 2009 at 10:05 am

OK,
let’s take a country like Norway. Probably the richest society in the world, where’s that symptomatic deficit ?

Surfisto July 31, 2009 at 1:52 pm

From Oil & Gas, if you take oil out of the equation they run a deficit. There must be an article out there somewhere about this, anybody have a link?

Surfisto July 31, 2009 at 1:57 pm

Does a country with a current account surplus run a capital account deficit?

Greg_Ransom July 30, 2009 at 4:32 pm

Read Hayek’s _Monetary Nationalism & International Stability_ and your answer will certainly depend on the context. A trade deficit can provide the slack of an unsustainable artificial boom — a case where a country is consuming capital goods rather than producing wealth.

In the context of America, 2009 I think the unarguable answer to your question is YES.

John Dewey July 30, 2009 at 7:16 pm

Greg Ransom, are you answering Don’s question? Are you claiming that we should applaud a falling trade deficit, and asserting that your claim is unarguable? If so, please explain why.

As I see it, the trade deficit of the past 30 years simply represents investment by foreigners in the U.S. – investments such as the Honda assembly plants in Ohio and Indiana, the BMW assembly plant in South Carolina, the ThyssenKrupp steel mill in Alabama, etc. It also represents the attractiveness of U.S. equities and debt, so much so that investment has poured into our nation for decades. I don’t see anything wrong with such foreign investment in our economy. Do you?

Greg_Ransom July 30, 2009 at 7:52 pm

Well, they also invested in houses which were bulldozed in LA County, and houses and retail buildings which are now empty, they invested in governmebt health care at $15,000 per capita for a population in a part of Texas that makes less than $13,000 per capita.

The whole story is complex. I can’t hold your hand and take you through all of the details.

John Dewey July 30, 2009 at 11:21 pm

Yes, it is true that not every investment made by foreigners turns out as they would like. So what?

It is now apparent that some of the investments made by foreigners over the past 30 years were not good investments. Now that foreigners have realized this, they are not investing as much in the U.S. as before.

So why do you applaud the falling trade deficit? Do you think it a good thing that foreign investors have not realized the returns they expected on some of their U.S. investments?

Greg_Ransom July 30, 2009 at 7:55 pm

Foreign “investment” in America is in some large measure simply grabbing a stake in the massive tax increases on the American population which will take place over the next decades.

John Dewey July 30, 2009 at 11:34 pm

It appears you are confining your analysis to the purchase of U.S. government debt by foreigners. At the end of 2008, foreigners also owned $16 trillion in U.S. assets which were not U.S. government debt. Those assets include:

- direct investment, such as the factories I listed above;
- U.S. corporate stocks;
- U.S. corporate bonds;
- financial derivatives; and
- deposits in U.S. banks.

That $16 trillion foreign investment has nothing to do with “grabbing a stake in the massive tax increases on the American population”.

Greg_Ransom July 31, 2009 at 2:10 am

Of course, one cure for systematic distortions is economic crisis …

What are these assets worth today? What will the be worth in 5 years?

A second way to look at this is in terms of alternative worlds — consider a world where American’s saved / invested, rather than foreigners. That future income stream would be going to Americans, making them richer, but in the actual world, American’s won’t be getting rich, foreigners will.

I’m happy the foreigner’s will be getting richer because of their savings/investing. I’m not happy that Americans will be less well off than if they were the one’s saving/investing.

You’re only looking at part of the picture “johndewey”. So it is very tedious arguing with you. I repeatedly have to say — you aren’t looking here, and you aren’t liking there, and you aren’t looking over here, etc. etc.

Greg_Ransom July 31, 2009 at 5:12 am

Steve Hanke, July 2006:

Excessively low interest rates and excess credit have generated other distortions and imbalances. Those schooled in the business cycle models developed by Friedrich Hayek in the 1930s know that excessively low interest rates result in a widening gap between savings and investment. People are unwilling to postpone consumption if the return to savings is meager, and users of capital are too prone to finance borderline projects when the cost of money is low. Sure enough, gross savings was 16.7% of gross national product in 2000.

By 2005 it had fallen to 13.8% of GNP. Gross investment (that’s investment before a deduction for capital consumption) as a percent of GNP held its own during this period, starting at 20.7% and ending at 20%. Consequently, the savings-investment gap ballooned from -4.0% of GNP to -6.25%.

At the national level, that savings minus investment in the U.S. is equal to U.S. net foreign investment. And this is equal to the balance on the U.S. current account, which is broadly the difference between U.S. exports and imports. If domestic investment exceeds total savings by Americans, as it now does, imports will be greater than exports, and we will acquire foreign capital to finance the difference. In simpler terms, our increasing trade deficit is a function of the negative differential between our saving and investment rates.

dg lesvic July 30, 2009 at 6:11 pm

Congratulations.

One of the greatest pieces of economic writing I have ever seen.

Magnificent!

Anonymous July 30, 2009 at 7:00 pm

.

Surfisto July 30, 2009 at 7:09 pm

I am trying to understand how a Keynesian and Austrian would look at this, I need some help!

Professor Boudreaux writes,

“If you save and invest wisely, though, not only are you made better off, but workers and consumers are also made better off. Saving is necessary for investment; market-driven investment increases worker productivity; and higher worker productivity means higher wages over time and a larger economic pie”

Since we are saving as a nation more than ever before that is taking away from the incomes of others slowing demand leading to less investment internationally. So we this would mean that saving yes you are better off for the future, but workers are now worse off taking from their savings meaning there is not “more” money for investment (ie someone taking a loan). I guess this is the Keynesian approach.
Am I reading the paragraph wrong? What am I missing on the Keynes side? What is the Austrian view with this paragraph and article?
Thank you.

Anonymous July 31, 2009 at 1:26 am

You’re talking about the so-called “paradox of thrift”, or “paradox of savings”. In short, when I save $100, it is said that those who would’ve received that money (like a restaurant I attended prior to my new saving behavior) must make up for that income loss by a combination of drawing from savings and decreased consumption. Their decreased consumption creates a similar situation, e.g. for their suppliers. This recursive behavior plays out to result in $100 being taken out of savings that perfectly cancels the $100 I put into savings. (It is said that it is an equivalent situation for your restaurant to draw $100 from savings, and for the recursion to take place with an ultimate combined $100 drawn from savings.) Therefore, it is said, savings decreases aggregate income and has no effect on aggregate savings.

This is more accurately called the “fallacy of the paradox of thrift”. The reason is that drawing from savings is not likely to be one of the first things your restaurant does, because it is not a sustainable business practice. The actual choices would be more in an order like:

1. Find new customers (recursively passes on these choices)
2. Decrease consumption (recursively passes on these choices).
3. Increase productivity (a sustainable end game).
4. Take out a loan/draw from savings (a temporary end game).

If the restaurant does (3), wealth has been created.

If the restaurant does (1) or (2), the choice is recursively passed on to other parties to deal with. Keynesians see this passing the buck as an economic irrelevancy. But what it actually is are THE economic signals. That is, when economists talk about signals, this is precisely what they are talking about. The more parties this signal gets passed on to (by choosing 1 or 2), the more chance there is that someone will find a way to increase productivity.

Therefore, the most likely responses to income loss will either immediately stimulate wealth creation, or if not achievable by the first receiver of the signal, the signals will percolate throughout the economy giving many others the information that they should try to increase productivity.

Then there is also the delay between your putting into savings, and the time it would take for all the recursive income losses to be drawn from savings. During that time, there would be net aggregate savings, even if the paradox of thrift were not a fallacy.

That restructures the economy, as Hayek described, to respond productively to changes.

In other words, the paradox of thrift only makes sense if you expect vast numbers of people to act against their own best interests. And, if you don’t think choices and actions consume time.

Surfisto July 31, 2009 at 3:04 am

Vikingvista Thank you for the answer,
I studied marketing so (1) makes sense, I see new promotions everyday with the best prices I have ever seen. However people are saving in mass of likes we have never seen, hurting restaurants.
I agree increasing productivity will generate wealth, however how much more productive can they become? The incentive to cut costs is already there for business to cut costs. I understand that productivity will come from what we can not imagine today, but there must be a relevant range.
With (2) would you say that decreasing consumption in the case of restaurants mean firing wait staff, turn down lights, etc? If so would firing wait staff fit the “paradox of thrift”?
I think I understand the signals bit and the time delay. Is that more the austrian view? Is austrian and Chicago school the same view?

I am reading Friedman now and have Hayek and Keynes on my shelve to read next.

Also if you have time I posted a comment above about to sandrews, can you tell me how my logic is going?
Thank you.

Anonymous July 31, 2009 at 5:20 am

Laying off workers is not a special case. Workers are a labor supplier. When the restaurant cuts their consumption of labor, the labor suppliers are faced with similar decisions–find new work, reduce consumption, live more efficiently, draw from savings, etc. Again, drawing from savings is unlikely to be a first choice.

“how much more productive can they become?”

That’s where cutting consumption comes in. Consumption cutting is recursive, spreading the signal to increase productivity among more and more people. The key is for the people in a position to make productive changes to get the message. Propagating the signals makes that more likely.

And don’t forget what a signal is. It tells a person when something he is doing is NOT productive. The signals are essential for a productive economy. They provide the lowest level target-specific information that in aggregate is immensely more complicated than any central planner could ever possibly achieve.

So IF economic recovery is possible, which method is most likely to achieve it–the one that fits like a million-fingered glove where ONLY productive activities are encouraged, or the one that falls like a sledge hammer with all of its antiproductive collateral (or even intended) damage?

The paradox of thrift is a real paradox TO THE EXTENT that people respond to income loss by drawing down savings, AND TO THE DEGREE of immediacy in which that occurs. But because reality is so far removed from that extent and that degree, the application of the paradox to reality can only be described as a fallacy. And since savings is finite, the paradox can only be temporary anyway.

Then we could ask about the paradox of the paradox of savings. You said it. Savings IS at an all time high. How is that possible? Paradox, huh?

Surfisto July 31, 2009 at 6:49 am

This lesson is hard to grasp. I see the idea behind signals. Are you saying that Keynesians do not understand these signals or ignore them when looking at the paradox of thrift? Or are these signals the cause of the paradox of thrift?
If I am a waiter, I see I am making less tips, that signals me to cut my consumption of certain goods. Now was that signal not caused by someone saving?
If savings is finite then so is income right?
Again thank you for your time if you continue to respond (please do), economics has been vary humbling

John Dewey July 31, 2009 at 2:09 pm

vikingvista: “Savings IS at an all time high. How is that possible?”

I don’t think U.S. net savers are saving more. It’s just that the U.S. net consumers are consuming less. Household debt at the end of 2008 was down for the first time in 60 years. I don’t think it’s increased much since then.

My guess is that some of the unemployed are drawing down savings. But the employed are still contributing heavily to IRA’s and 401K’s.

dg lesvic July 30, 2009 at 7:43 pm

Daniel,

Referring to my description of Prof Boudreaux’ essay as “magnificent,” you wrote,

“You seem to offer up that superlative awfully regularly ;-)

I never say anything that isn’t from my heart.

And we know the smallness of yours.

dg lesvic July 30, 2009 at 7:55 pm

Daniel,

The fact that you couldn’t recognize the magnificence of that piece or begrudged the author the recognition for it that he deserved shows either the smallnes of your mind or your heart. And you don’t have a small mind.

I’m sorry for you.

Anonymous July 30, 2009 at 8:56 pm

dg, I liked and agreed with Don’s post – read my comment above, dude.

I’m laughing at you – not Don. You say “this is the best piece of economic writing I’ve seen” or something like it an awful lot. I’m just messing with you – chill out. :)

dg lesvic July 30, 2009 at 8:16 pm

Daniel,

I”d like you and Don to drop by my house next Thursday, have a beer with me, an Amerian beer, and see if we can’t hash this out.

dg lesvic July 30, 2009 at 9:57 pm

Daniel,

When you come, we have strategically placed machine gun nests in all the windows, so I can assure you a warm welcome. And please wear a red rose in your button hole, to avoid any tragic mistakes.

dg lesvic July 30, 2009 at 10:08 pm

Daniel,

Speaking out of both sides of your mouth doesn’t fool anyone. Your real meaning was perfectly clear. And until you’ve said something worthwhile in economics yourself, I would n’tbe so quick to belittle those who have.

dg lesvic July 30, 2009 at 11:11 pm

That goddam Daniel Kuehn still has me exercised.

I think I know quite a bit about foreign trade, but I learned a lot fabout it, I repeat, a lot, from Prof Bourdreaux’ piece. To me it was a marvel of exposition and composition, and for anyone to imply that is was anything less makes me angry.

Anonymous July 31, 2009 at 10:28 am

dg calm down!

Why don’t you just scroll up and read my actual responses to Don. I agree with him!!!! I’m just joking around with you. I didn’t realize you were so sensitive about it!

dg lesvic July 30, 2009 at 11:18 pm

Especially that pompous ass.

Anonymous July 31, 2009 at 7:01 am

Whether we should applaud or bemoan a rising or falling trade deficit depends on what is causing the change.

For example, the U.S. could have a rising trade deficit, because foreign central banks have, for political reaons, made U.S. Dollars artificially more valuable to hold. Therefore, falling trade deficit might indicate the withdrawal of such distortions in the international currency markets, and, in the long run, be a good thing for all. Another example is that a great deal of overseas investment in the U.S. economy might be in Federal Government debt, and therefore contributing the growth of government and costing future generations, (since the money is unlikely to be used on worthwhile projects to help Americans vetter pay off the debt).

Anonymous July 31, 2009 at 10:11 am

That’s the way I see it. On the second point i however, I agree with Don that it doesn’t really matter who holds the US debt from a US point of view, a lady from florida or one from HongKong – as long as the debt is denominated in US Dollars.

John Dewey July 31, 2009 at 10:36 am

Are you saying that savings by foreigners enables U.S. government spending? Do you believe that U.S. government deficits would have been lower if Treasury had been forced to offer higher returns for that debt?

As I see it, the government was going to spend whatever it desired. That foreigners rather than Americans purchased that debt really doesn’t matter, does it? Well, maybe. If foreign demand for U.S. debt had been lower, U.S. government borrowing might have crowded out borrowing by the private sector. That foreigners were willing to buy U.S. government debt probably freed up funds for growing corporations and entrepreneurs.

dg lesvic July 31, 2009 at 9:32 am

Daniel,

I don’t see any joke. I just see resentment. You must can’t stand a tribute to anyone other than yourself. OK, how’s this? Daniel, you’re magnificent, too. So, it is alright now to describe anyone else’s work that way, too?

By the way, this new system is really screwed up. Better retool it.

John Dewey July 31, 2009 at 2:53 am

It may be tedious, but you still have not explained your claim that we should applaud a falling trade deficit, and that this claim is unarguable.

Now you seem to be arguing about an “alternative world”. That’s very convenient, for you can imagine any scenario you wish. But back to this world we live in: as the trade deficit is reduced, are Americans saving more and investing more? I don’t think so. As the trade deficit is reduced, is the U.S. government borrowing less? Certainly not. So it appears that the ills you seem to be citing – low American saving and government deficits – were going to happen regardless of the trade deficit.

So why do you applaud the reduction in the trade deficit?

Greg_Ransom July 31, 2009 at 5:13 am

All the facts I’ve seen says American’s are saving dramatically more.

Where do you get your facts?

“as the trade deficit is reduced, are Americans saving more and investing more?”

Anonymous July 31, 2009 at 10:34 am

surfisto – It’s worth reading the original treatment of the paradox of thrift. What is important for differentiating an actual paradox of thrift from simply an increase in the savings rate is (1.) there is less investment demand than there is total savings, and (2.) that response of investment demand to the lower price of savings is slow because of (a.) business uncertainty – not unwarranted if nobody is buying anything because they’re afraid of losing their job, or (b.) excess capacity.

If you leave 1, 2a, and 2b out, the paradox of thrift looks silly. People who make the paradox of thrift argument aren’t saying that saving is bad or even that this sort of thing happens that often. I suggest if you want to learn about paradox of thrift, read people who buy into it. And then if you want to learn the counter-argument, read the people who don’t. You wouldn’t ask Paul Krugman about Austrian business cycle theory, for example – but you might ask him about critiques of ABCT.

vikingvista is quite correct, though, that the paradox of thrift is true to the extent that people respond to market signals. It’s the response of those who demand savings to the price of savings that is key. Normally those signal responses work smoothly – occassionally they may not.

Anonymous August 1, 2009 at 12:28 am

“Are you saying that Keynesians do not understand these signals or ignore them”

They ignore them. The signals are central to the Hayekian explanation, but play no part in the Keynesian interpretation.

“I see I am making less tips, that signals me to cut my consumption of certain goods. Now was that signal not caused by someone saving?”

Yes, it very well may have been. But it isn’t specifically signaling you to cut consumption. It is merely telling you that your current activity is not as productive anymore. You might cut consumption. You might even temporarily draw down from savings. But likely you will first and foremost look for ways to keep your income up–like looking for a new job. By changing your job, you are part of the intricate productive restructuring of the economy.

“If savings is finite then so is income right?”

By “savings is finite”, I am merely saying that drawing from it can only be a temporary activity. Once you replace income with drawing down savings, the clock is running, because once savings runs out, that is no longer one of your options. Just be introspective on this with your own savings. Do you look to it as an alternative to income? No. You might look at it as a (necessarily temporary) fall back position if none of your other plans–like e.g. getting a new job or changing your business model or clipping coupons, does the trick.

John Dewey July 31, 2009 at 10:46 am

Please show me some facts that say that total savings by Americans has increased the past year. It is probably true that borrowing has declined. But I was referring to the gross amount of savings – not the net of savings less borrowing. And that was what you were implying as well when you wrote:

“a world where American’s saved / invested, rather than foreigners. That future income stream would be going to Americans, making them richer”

IOW, the number of true savers and the amount they save has likely stayed the same the past year, if not gone down. The number of borrowers and the amount they are borrowing has likely gone down. So the net of savings less borrowing may appear to increase, but the actual savings – a function of personal income – has probably not changed.

John Dewey July 31, 2009 at 10:48 am

“In simpler terms, our increasing trade deficit is a function of the negative differential between our saving and investment rates.”

So what? How is that a bad thing? Is it a bad thing that foreigners as well as Americans realized the gains from our economic engine?

Greg_Ransom July 31, 2009 at 6:32 pm

It was an artificial & unsustainable boom John, unless you didn’t notice — it was MALINVESTEMENT. Read some Hayek or Garrison.

The “American” engine was a very sick dog.

Furthermore, American consumption without America investment is unsustainable.

Tell me yes or no whether you’ve read Hayek and Garrison, then we can move forward.

John Dewey July 31, 2009 at 6:59 pm

greg ransom: “It was an artificial & unsustainable boom John, unless you didn’t notice … The “American” engine was a very sick dog.”

If it was an unsustainable boom, why did it last 30 years? We’ve had current account deficits for 30 years. The American economy outpaced the rest of the developed world for nearly all of that time. If the current account deficit was bad – and you claim you applaud its decline – then why did the economy boom for 30 years?

Yes, the Fed’s easy money policies inflated the real estate bubble. Yes, the bailout of Long Term Capital Management led the financial sector to take more risks than it should have. Yes, Congress encouraging Fannie Mae and Freddie Mac to acquire risky loans set the stage for this current crisis.

But what does all that have to do with the current account deficit? Again, the current account deficit has persisted for over 30 years.

Anonymous August 1, 2009 at 12:18 am

“vikingvista is quite correct, though, that the paradox of thrift is true to the extent that people respond to market signals. ”

Jesus, DK. That’s closer the the opposite of what I said. I’ll quote myself:

“The paradox of thrift is a real paradox TO THE EXTENT that people respond to income loss by drawing down savings, AND TO THE DEGREE of immediacy in which that occurs.”

That is why the paradox of thrift is a myth.

I don’t care if you oddly believe that “the signals” = “drawing down savings”. But don’t attribute such inanity to me.

Anonymous August 1, 2009 at 11:01 am

Huh? I was refering to “the immediacy in which that occurs”, vikingvista. Don’t attribute your confusion to me.

Ask yourself why people “draw down savings” – isn’t it a response to price signals?

My point is simply that IF you buy the paradox of thrift, than it’s a question of the immediacy with which both individuals and businesses respond to those price signals.

Anonymous August 1, 2009 at 11:05 am

surfisto -
RE vikingvistas: “They ignore them. The signals are central to the Hayekian explanation, but play no part in the Keynesian interpretation.”

Statements like this demonstrate why you can’t learn about Keynesianism or Keynesian concepts like the paradox of thrift from someone that has a visceral negative response to it. I don’t know exactly what vikingvista is thinking of, but these signals play a central role in Keynesianism – indeed in every school of economic thought that I can think of.

surfisto, the assertion is ridiculous on it’s face. Just consider the famous “Keynesian cross” model. When you see a downward sloping curve or an upward sloping curve in economics it’s a tell tale sign that the entire model is driven by individuals’ response to price signals.

Go to someone else for an explanation of Keynesianism – come back to vikingvista for a rebuttal, if you must.

Greg_Ransom August 1, 2009 at 5:13 pm

Where talking about more or less here, not exists doesn’t exist.

Another bad argument on your part.

Anonymous August 1, 2009 at 6:09 pm

“vikingvista is quite correct, though, that the paradox of thrift is true to the extent that people respond to market signals.”

Let me make this so clear that maybe even you can understand:

vikingvista is quite correct, though, that the paradox of thrift is ***FALSE*** to the extent that people respond to market signals, as people respond in reality to market signals.

People and businesses don’t instantaneously rise to the call of falling income by eagerly looking to draw down savings. The reason economies change–the reason a capitalist economy is so versatile and rich, is that people’s incentives are to change their productive ways.

And if you’ve ever bothered to listen to a Keynesian explain the paradox of thrift, you will marvel (actually, YOU wouldn’t even notice) at the irrelevancy placed upon the act of decreasing consumption as a response to decreasing income. To them it just comes out of savings further down the chain, so no difference.

Stop trying to explain me to others.

Anonymous August 1, 2009 at 6:30 pm

“I don’t know exactly what vikingvista is thinking of, but these signals play a central role in Keynesianism – indeed in every school of economic thought that I can think of.”

This signals is as common to economics as supply and demand. IN THE PARADOX OF THRIFT, Keynesians IGNORE the importance of the signals, which is why their explanation of the paradox is absurd.

surfisto–

The reason economics is as confusing as it is, is that there is no shortage, as you can see, of confused people trying to muddy the waters.

As you read, beware in particular of the satisfaction of search within yourself. An economist will say something (like the paradox of thrift) that on its face seems piercing and explanatory. You feel a satisfying spark of enlightenment (the satisfaction of search), and then you move on.

It is important that you don’t move on, but keep asking questions, like you do on this forum. All questions eventually lead to simple mundane inescapable foundations. When you get there, from the perspective of those foundations, economics isn’t nearly as confusing or contradictory.

Good luck, my friend.

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