Jonathan Kay and the Foolishness of the Paradox of Thrift

There is no question that the Keynesian paradigm is beginning to lose influence.  Years after the financial crisis and the implementation of massive bouts of government-financed stimulus, the world economy has yet to recover.  The Keynesian prescription to our ills has been an abysmal failure by any measure.  Not to mention the fact that most, if not all, of the devout followers of Keynes somehow missed the American housing bubble that was plain as day to Austrian minded observers.

Regardless of these inadequacies, the muddle thinking of Paul Krugman’s idol still manages to haunt the pages of major periodicals.  Today, Jonathan Kay digs up another relic of befuddlement as he demonizes, of all people, a senior citizen for the most evil of acts: preserving and taking care of an automobile for decades.  From the National Post:

 “Rachel Veitch, you monster. Oh, the 93-year-old Orlando, Fla. woman may sound cute and perky. But don’t be fooled. She’s what’s wrong with America.Veitch’s reign of economic terror began in 1964, when her husband bought her a car. Forty-eight years, and 567,000 miles later that car is still on the road. It outlasted Veitch’s marriage – and her next two, as well. It also outlasted her eyesight: In March, when Veitch found she could no longer read the daily newspaper, she decided her driving days were over. But she refuses to hand the car over to her relatives, out of fear they’ll break the thing. The 93-year-old lady epitomizes what John Maynard Keynes called the “paradox of thrift: Acting penny-wise is great for the Veitches of the world, but terrible for every-one else, since stingy behaviour reduces the high levels of aggregate demand on which a mass-retail capitalist economy depends. Not to mention the jobs of people who work for car, TV and sofa companies.”

Mr. Kay’s thinking perfectly reflects the Keynesian, closed view of the world.  The economy, according to Keynes, operates as a type of circular flow where consumption, investment, and saving all occur at a certain rate.  Consumption, based on demand, drives all saving and investment.  Any drop in spending and consumption slows calms the animal spirits and results in economic recession.  Hence the need for politicians to stuff more pilfered funds into the pockets of their buddies.

As Henry Hazlitt showed, fallacies plague The General Theory.  One of the biggest is the outright assumption that when times are good and conditions of “full employment” exist, this state of affairs must be resurrected.  It’s irrelevant if the previous structures of the economy are sustainable i.e. driven by an inflationary bubble, spending must be ratcheted up!  Those who opt for prudence are doing mankind a disservice with their cruel and miserly behavior!

If this generalization appears illogical on the surface, that’s because it is.  After all, weren’t you always told while growing up that saving for a rainy day is a wise thing?  How can getting your money’s worth out of everything you purchase and utilize have such disastrous implications?

The answer is that increasing one’s savings, that is preferring future consumption over the present, does not in itself lead to an economic crisis.  Yes, dynamic changes in consumer preferences may cause short term fluctuations in employment in certain industries.  But dynamic consumer preferences are a reality of the ever-changing human condition.  If consumer demands were always a certainty, then anyone and everyone would be an entrepreneur.  But it is exactly because the nature of man’s preferences is never static that makes, as Austrian economist Izrael Krizner emphasized, entrepreneurship and profiting off what the market demands not a teachable science.

Decisions to save more and spend more are made on a continual basis.  Those entrepreneurs looking to make a profit must adjust their investment practices to meet this demand.  Basically, the market is capable of adjusting to new realities when the barriers and distortions of intrusive government are out of the way.  More Rachel Veitch’s in the world doesn’t spell inescapable disaster.

As a special treat to the readers, below is a picture of my 1989 Toyota Corolla station wagon.  It has approximately 215,000 miles to its odometer and still runs strong (though certainly not as strong as it used to!).  I received the car from my grandmother when I was 17 and have been driving it for the past seven years.  It has gotten me through high school, community college, and undergraduate university.  I plan on driving it till it no long functions.

According to Mr. Kay I am a monster.  My reluctance to purchase a new automobile has deprived employees at car manufactures, dealerships, and auto part producers of income.

But of course this assertion is not only hyperbolic but shortsighted.  While it’s true that my putting off of purchasing a new car has resulted in less money going to workers associated with automobile production, that doesn’t mean my money has up and disappeared.  The income I have saved with driving the same car for seven years has been used on such goods and services as education, cellular phone service, apparel, food, and various other activities associated with being a young adult.  By the same accord, the money I have saved has been placed into a bank and likely lent out as capital to aspiring entrepreneurs.

The focus on aggregate demand as a fixed variable drives much of the concern over boosting it via government expenditures.  But just as capital is not a homogenous lump, human beings are not bound to an arbitrary amount of “demand.”  As radical individualist Frank Chodorov puts it, man has an “unceasing drive toward a richer and fuller life.”  Less fully satisfied with his present lot, man is in a forever state of action to quell any uneasiness.  And as long as the threat of starvation, physical injury, and disease remain, there will never be enough resources to go around.  If man remains man and inclined to continually improve his own living condition, then demand itself will never be in short supply.

Mr. Kay misses this truth along with perhaps the most important truth which exists in economics: that is scarcity.  The crowd of intellectuals forever chanting for “more government spending, more credit expansion” wouldn’t comprehend the issue of scarcity if it was painted on a 30 foot bill board with neon print and placed directly in front of their face.  They take the existing stock of production in society for granted.  Inventory capital such as machines, tools, plants, and industrialized equipment doesn’t fall from the sky.  The resources needed for such time-sensitive investments must be available; that is not at first purchased and used as consumer goods.  By abstaining from consumption, interest rates are driven down to facilitate long term borrowing and scarce resources are more widely available to entrepreneurs looking to engage in more complex channels of production.  Such investments increase the productive base of the economy which in turn leads to lower prices in goods produced.

Like Bastiat’s broken window, Kay’s lack of imagination has him focusing on immediate effects rather than the big economic picture.  If Kay’s view were more prevalent in practice, consumption would be at an all time high which would in turn leave fewer resources around for investment.

Keynes never disproved Say’s Law; one can’t consume what hasn’t at first been produced.

Spending doesn’t create prosperity; it is only a function of previous efforts to produce.  Mr. Kay’s painting of Veitch as a nemesis of society neglects both time and scarcity as driving forces of production.  While it comes off as tongue-and-cheek, the policies advocated by Kay and his like-minded peers have damaging and wide ranging implications for the worldwide economy.

At the end of the piece, Kay offers to purchase coffee for everyone; no doubt reemphasizing the virtue in his high spending habits.  Well my answer is, yes, I will gladly allow Mr. Kay to purchase my cup of coffee.  The money I saved can then be used to employ the pastry baker.

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One Response to “Jonathan Kay and the Foolishness of the Paradox of Thrift”

  1. Damn the buyer of a new car to hell for he has failed to boost the demand on such goods and services as education, cellular phone service, apparel, food, entertainment, housing, etc.

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