A Paradox of Thrift or Keynes's Misrepresentation of Saving in the Classical Theory of Growth?

Abstract

Every year thousands of introductory economics students are made to accept as valid one of Keynes's lasting inversions of classical economics, namely the proposition that saving may be a private virtue, but is a public vice. According to Keynes, a community that seeks to increase its rate of saving would end up impoverishing itself and actually saving less, but the community that increases its consumption at the expense of saving would end up being richer and saving more. This proposition, frequently stated in macroeconomics textbooks as the paradox of thrift, arises mainly from Keynes's definition of saving to include the hoarding of cash, contrary to the classical definition and language of the marketplace, but has received little recognition or criticism as such.' Rather than emphasizing Keynes's misrepresentation of the classical theory of income determination and growth in which hoarding constitutes a reduction in saving, most critics have pointed out only that saving may take other forms besides hoarding.2 Thus, several reviewers of the General Theory [22], in which Keynes fully develops the argument, criticized it mainly for having assigned too much importance to the hoarding of cash, e.g., Pigou [37], Robertson [40], Viner [51], and Hawtrey [11]. Some modern textbook writers employ the loanable-funds view of savings to show the lim