Sunday, April 5, 2009

The Paradox of Thrift and the way out of this mess - if you can handle it [JOHANN HARI]

clipped from

It's a strange debate to have now, because the opponents of any stimulus seem to be mired in a row that was resolved back in the 1930s. John Maynard Keynes transformed the way that we think about recessions. Before him, everybody believed the Merkel-Cameron-McCain line that recessions are like bad weather: you just need to wrap up and sit it out, even though it hurts. But Keynes transformed all that.
He showed that recessions are actually caused by a failure of consumer demand. When people sense that they might lose their job, they - perfectly sensibly - cut back on their spending. They buy fewer DVDs or restaurant meals or holidays. But this causes a fall in demand for services - and more people lose their jobs, causing demand to fall further in turn, and on and on, in a spiral. He called it "the paradox of thrift": what is rational for an individual consumer is irrational for the society as a whole.
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