Just about every so-called business periodical touts an increase in consumer spending as “good for the economy.” But is this really so? Can we really spend our way out of a recession? Lord John Maynard Keynes thought so, and his teachings have become the standard narrative just about everywhere in the world.
Probably the most influential economic treatise of all time is Keynes’ “General Theory of Employment, Interest and Money,” published in 1936 at the height of the Great Depression. Keynes theorized that the Great Depression was caused by insufficient aggregate demand, otherwise known as spending. A complementary concept is the paradox of savings, which theorized that savings is harmful because it causes aggregate demand to fall. Keynes (and others) preached that, although increased savings by an individual may be beneficial, a general increase in savings by most market participants would cause the economy to fall into a deflationary spiral.
The fallacy of the paradox of savings has had many excellent rebuttals. The fundamental problem is that it treats “the economy” as something separate from what each individual experiences for himself. An “economy” is a mental construct; it doesn’t exist apart from its billions of individual components. For an excellent debunking of Keynes and his new economics, I suggest the book “Where Keynes Went Wrong” by Hunter Lewis. […]
— Read More: mises.org
