A counterpoint to the "paradox of thrift"

In Keynesian economic theory, demand is king. To the extent people making personal decisions want to buy enough, that's good. However, if people do not want to buy their own industrial output, that's bad, and the government should step in to give people money to buy stuff. Thus, from a Keynesian perspective, the housing bubble was a very good thing, because it generated enormous demand for people to buy goods, and the only acceptable government response to the end of the borrowing binge is to step in and borrow considerable amounts of money itself.

The genius of Adam Smith, however, was that he found a model for ordering an economy in which everyone acting in their own best interest lead to prosperity. It is never in one's best interest to borrow money on a depreciating asset unless you expect to generate revenue from it, such as corporate jets purchased by Netjets or cars used for taxis. Otherwise, you're acting against your own best interest, and a society that encourages such behavior is essentially imposing a highly regressive credit tax on its citizens. A government that borrows heavily to support consumption moves this tax to its younger workers.

So, this is arguably the central problem of industrialization: when each individual can produce far more than he can consume, how many people can you practically employ? In a profligate society, waste drives employment, because people choose to consume more than they need. In a thrifty society, any economic activity must have greater value for the buyer than the opportunity cost of spending money. Thus, anything manufactured has to have some kind of value beyond simple entertainment. This is why notoriously thrifty societies like Japan and Korea are leaders in service robots, self-cleaning toilets, and small cars. Also, they push the market for electronic entertainment because if you want their cash, your game had better be very good.

Thus, the paradox of thrift should not be seen as saying that we must avoid becoming thrifty at all costs. It means accepting the difference between economic growth and quality of life. PMCIN is here to help with that.