The Paradox of Thrift: Lose weight by eating more

Keynes’ influence weakened temporarily in the 1980s, increased quietly again for a while thereafter, and had a roaring comeback with the financial crisis. Today, most practical men (and women)—and the odd madman—are the slaves of Keynes.

Policy makers are especially drawn to Keynes’ “paradox of thrift”. According to this paradox, it may well be appropriate for individuals to save with a view to raising their incomes in the future. However, if all actors in an economy engage in a competition of saving, aggregate demand drops and everybody is worse off. There is no reason for the defenders of the virtue of saving to despair. Recent developments do not support the case of their adversaries. But even when it is disputed by facts, Keynes’ paradox of thrift is politically very powerful: It promises a diet, with which you lose weight by eating more. How can this possibly be topped?

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