Re: Samuelson, 14th edition, Paradox of Thrift

["Gunnar Tomasson" <tomasson@xxxxxxxx>]

In 'Treatise on Money', Keynes gave the single most lucid account that I
have come across of what, in the 10th edition of 'Economics', Paul A.
Samuelson called "the age-old question of thrift versus consumption."

In a sub-section entitled 'Paradox resolved', Samuelson began his
'resolution' thereof as follows:

"Let us for the moment leave our cherished beliefs aside and try to
disentangle the paradox in a dispassionate, scientific manner.  Two
considerations will help to clarify the whole matter.

"The first is this.  In economics, remember, we must always be on guard
against the logical fallacy of composition.  That is to say, what is good
for each person separately need not always be good for all; under some
circumstances, private prudence may be social folly...

"The second clue to the paradox of thrift lies in the question of whether or
not national income is at a depressed level..."

As it happens, neither of these "two considerations" have any bearing on the
circumstances addressed by Keynes in the 'Treatise' nor were the
circumstances themselves "paradoxical".

Briefly, as I recall it, Keynes envisaged a one-commodity (banana) economy
in which entrepreneurs mobilize and employ factors of production at a total
cost of X.  Keynes then went on to describe the disastrous effects of a
"savings campaign" whereby factor income recipients would save some part of
X rather than use the whole amount to buy bananas from entrepreneurs - so
long as the "savings campaign" remained in effect, the economy's total
employment and output would spiral downward, attaining "equilibrium" at
zero.

The appearance of "paradox" enters the picture ONLY when - American
mainstream "keynesian-style" - the economic theorists omit to anchor their
reasoning in foundations (axiomatic premises) that are consistent rather
than inconsistent.

In other words, when they reason AS IF "savings" from factor incomes are a
NECESSARY means of financing entrepreneurial investment in factor inputs for
the production process - in and of themselves, as indicated by Keynes'
'Treatise' account, such "savings" are always and necessarily deflationary.

In the 'General Theory', Keynes muddled the analytical waters by making
believe that "savings" out of factor incomes had to be offset by the
equivalent of an entrepreneurial boot-strap operation whereby the economy's
entrepreneurs BORROW and spend on NEW productive investment an amount equal
to the "savings" which they failed to EARN in the form of final sales
proceeds.

As it happens, I raised related issues in a question to Don Patinkin when
gave a lecture at the IMF in the early 1980s on what he saw as the key
analytical novelty in the General Theory (that Y would vary to equate S =
I).  Curiously, Patinkin claimed not to recall the 'Treatise' account - and,
therefore, could not address the issue.

Gunnar






----- Original Message -----
From: "Greg Nowell" <gnowell@xxxxxxxxxx>
To: "pkt" <pkt@xxxxxxxxxxxxxxxx>
Sent: Monday, April 16, 2001 8:32 PM
Subject: Samuelson, 14th edition, Paradox of Thrift


> http://www.cato.org/pubs/journal/cj16n1-7.html
>
> Following a tip from Rakesh Bandhari, I did a search
> and discoverd a number of reactionary web sites
> vaunting Prof. Samuelson's alleged renunciation of the
> paradox of thrift.  One is reproduced above.  Can
> anyone confirm that the p of t is in fact missing from
> the 14th edition, if you have  a copy handy?  I'll have
> to buy it otherwise.
>
> Thanks,
>
> Greg Nowell
>
> --
> Gregory P. Nowell
> Associate Professor
> Department of Political Science, Milne 100
> State University of New York
> 135 Western Ave.
> Albany, New York 12222
>
> Fax 518-442-5298
>
>
>
>