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There is only one goal. That is to be whole again.

There is only one goal. That is to be whole again. How human beings live and work determines whether they remain whole or are split. ...

8/6/14

The paradox of thrift has been misunderstood for a long time. The idea is simple: if we all cut back upon our consumption in an attempt to raise our individual levels of saving, the overall saving rate for the economy will drop rather than rise. The paradox consists of the idea that individual actions in a logical fashion undertaken in a way that makes perfect sense for the individual may take society as a whole in exactly the opposite direction of that which is individually intended. It is my contention that such a paradox only exists in the present structure of the economy, a structure that splits the individual and that when we adopt a holistic structure that split will be healed and the paradox of thrift come to an end.

Let us examine the paradox of thrift a bit closer.

What we produce creates an income equal to it. If I produce a $100 pair of shoes I thereby create an additional $100 in income. This is true because we define profit in economics as a residual. Once I have paid my workers and overhead and whatever else, what I have left, the entire residual, is profit. Profit is part of income so,

Output = Income.

Output can be consumed (C) or invested (I). We include in investment all the residual output that is not sold, calling it inventory investment. So,

Output = C + I.

Income can be consumed (C) or saved (S). So,

Income = C + S.

Hence,

Output = Income

C + I = C + S

I = S.

Investment equals saving.

The paradox of thrift is used to support two very different points of view. It will be my contention and concomitant responsibility to show that both views are structurally limited though entirely correct. It is this structural limitation that allows two opposing points of view to use the paradox of thrift to make their case.

The first view points out that in a modern economy saving decisions are made by one set of people and investment decisions by an entirely different set of people. Since these actions are not coordinated, an increased rate of individual saving creates an imbalance between investment and saving causing overproduction or underconsumption depending on how you look at it. This results in periodic gluts in the market followed by recessions.

The opposing point of view starts off exactly at the same point as the first view: in a modern economy saving and investment decisions are made by different sets of people and hence subject to imbalances. However, this view points out that in a well functioning market this imbalance is temporary. Excess saving will cause a drop in the price of savings or in other words the interest rate. As the interest rate drops investment rises. The interest rate, in fact, keeps dropping until investment rises to meet the level of saving. Now this does not always happen in a modern economy because of barriers to the free operation of the market such as government policies, regulations, the lack of well-defined property rights and so on. This in turn results, just as is asserted by the first point of view, in periodic gluts in the market followed by recessions.

The policy response of the first point of view is to raise investment to meet the higher level of saving through public investment financed by budget deficits and the bond market. The policy response of the second point of view is to reduce the size of the government at all levels, lower taxes and reduce regulations.

I find both points of view to be stuck in a mechanistic, industrial view of the world. We have seen both points of view cause much havoc and destruction in the world.

The problem with both points of view is that they take the structure of the economy as given. Neither view questions why saving and investment have been split and what terrible consequence this split has had on the individual and society. If we can imagine a way of living and working where we are connected to our work, connected to our planet and all that is part of it, living and non-living, we will have an entirely different approach to the paradox of thrift. In fact the paradox of thrift can not operate at all if saving decisions are made by the same people who are making the investment decisions.

If I save, not out of fear, not for a rainy day, but with a vision to expand my work, my creation, to embrace more sustainably, to create fresh webs of relationships, networks of people and land and animals and plants and minerals and nature herself, then my investment will be a natural consequence of and holistically equal to my saving. Society will then never depart from the

Saving = Investment

equality and the very nature of saving, the very act of saving will be an act of love and in that act of love spontaneously create an investment equal to it.

At that point the paradox of thrift will cease to exist the so-called points of view of economics will wither and return to their native nothingness, monuments to man's profound idiocy in the museums of tomorrow.

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