This was, off course, before the Great Depression and before Maynard Keynes. Lord Keynes published his iconoclast book “The General Theory of Employment, Interest and Money” in 1936 that popularized the “paradox of thrift.” He led the public to another fable, “The Fable of the Bees,” written by Bernard Mandeville and published in 1714. The paradox states that if everyone saves more, particularly during times of recession, then aggregate demand will fall and, in turn, lower total savings in the population. So, what is good for an individual may not always be good for the economy.
Having said that, the paradox of thrift should not be taken as a universal law. If it were, then China, which has increased its savings from around 30 percent to around 50 percent in recent years, would not be the world champion of economic growth but a country in deep recession. Some caveats have to be noted at this point. The paradox is certainly valid for a closed economy, particularly if it suffers from insufficient demand, but it may not always be valid in an open economy. Chinese growth has accelerated despite the country's increasing savings rate because China has been able to export some of its excess product. One should add that this ability is possible because Chinese industry is competitive in the global market. So, China's impressive savings rate does not cause recession but an impressive trade surplus.
As there is but one world, if some countries have large savings/trade surpluses, such as China and Germany, then others should have the opposite. Indeed, this is the case for the US and countries in the southern EU. In the early 2000s, these countries experienced decreasing savings rates and increasing trade deficits. Now, however, the machine is out of order. To fix it, some should save less and consume more while others start to celebrate World Savings Day more enthusiastically.
I am sure you would like to ask me what I mean by “some.” Here is my second caveat. In the La Fontaine and Mandeville fables, the insects only represent individuals. In the modern economy, there are firms and states in addition to individuals or households. All of these agents are able to increase or decrease their savings, and the final impact this has on the economy will depend on their debt-to-income ratio and the situation of the economy at the time. Who must save more and who must save less? Certainly Chinese households should save less while consuming more foreign goods, but this is not a wise recommendation for Chinese firms and the state. If this does not happen, Chinese growth could slow to the point it would be unable to sustain China's rulers.
The problem is how to convince the Chinese to be less thrifty. Believe me, economic theory does not have a straight forward answer to this question. The situation is as complicated as in the US, which is threatened by a second recession. American households, having become highly indebted while behaving like the La Fontaine's grasshoppers in the past, do not want to consume more. On the other hand US Federal State increased its expenditures but public debt has consequently become so high that it risks to be unsustainable.
The situation is even worse in Europe. Greece, Portugal and Spain each have so much public debt, such low savings and growing trade deficits that Greek, Portuguese and Spanish households as well as each state are all increasing necessarily their savings while their gross domestic products (GDP) are declining, in turn decreasing income and savings. In other words, the paradox of thrift is hard at work in these countries. One way to get out of this deadlock would be for the Germans consume more goods out of southern Europe, but how? German wages would have to increase. Indeed, they have already started to increase. But there are limits. Too great an increase could cause inflation. Everyone knows that the Germans are afraid of inflation since the savings of their grandparents evaporated due to hyperinflation in the 1920s. Moreover, higher wages and inflation could damage German competitiveness in the world market and push Germany into recession.
Obviously, I could continue to discuss the savings issue and the pitiful state of the world economy for pages without any providing any “rational” and “acceptable” solutions. I could not have enough space to discuss the Turkish case. For this purpose, you can look at my March 18 column “The worrying savings gap.” I wish a happy World Savings Day to all of humanity!