Paradox of Thrift, the Deficit Debate and Virtue Ethics

An economist friend of mine pointed out to me that my post on the intersection of ethical dynamics and economics omitted to mention the “paradox of thrift” brought to the attention of 20th Century economists and theoretically elaborated by John Maynard Keynes.  In fact, my friend felt that the post was mostly about the paradox of thrift yet I had neglected to mention it or credit Keynes.  While it may have been a significant oversight on my part, I disagreed with his premise that that post or my position was largely about that paradox.  I explained to him and will explain here the differences between a simple observation of the paradox of thrift as it operates in contemporary economics and my approach.

The Paradox of Thrift Summarized

The paradox of thrift is a phenomenon whereby if everybody in an economy attempts to increase savings (thrift) and these savings are not in investments but in liquid assets, overall savings and economic growth goes down;  individual virtue collides with overall social well-being.  There are many good explanations of the paradox of thrift which, as Wikipedia includes in its entry on the subject, goes back to biblical injunctions against a propensity to save rather than spend.  Various pre-Keynesian economists including Bernard Mandeville commented on the paradox.  During the Depression, Keynes elaborated the paradox by introducing the notion that governments should stimulate demand by government deficit spending on projects that put money back into the economy.  The stimulation of aggregate demand would counteract the tendency of individual economic actors to save out of fear during an economic downturn.  Richard Koo’s “balance sheet recession” is an example of the paradox of thrift.

The Paradox is based on Keynes’s observation that people have a propensity to prefer liquid assets over commitment to investments that “tie up their money”.  The liquidity preference is a fundamental problem for economics, where overall wealth is based on longer-term investments in productive goods and in the demand by consumers for the products produced by capital goods.  Under conditions of uncertainty and fear including in economic downturns, this liquidity preference is enhanced.  We appear now again in a “paradox of thrift world” according to Paul Krugman and others.

Anti-Keynesians, Deficit Hawks View the Acknowledgement of the Paradox as Itself a Vice

While Keynesians accept the paradox of thrift as a fact or periodic objective condition of the economy, especially in an economic downturn, the struggle between economic schools inside economics has meant that this observation is not accepted universally as a fact of life.  From a Keynesian or Keynes-influenced perspective, the deficit hawks, who of necessity must overlook or downgrade the Paradox, are simply out to lunch, ignoring a fact of life (if everybody tries to increase savings under conditions of weak demand, total savings and wealth goes down).

However there are those anti-Keynesians of various stripes, including followers of the Austrian school, who believe that Keynesianism and its acknowledgement of the paradox are essentially incitement to violate the economic virtue of saving.  They see this, whether in honesty or as a political pose, as a moral war between two conceptions of virtue or rather to them, a war between a virtue and a vice.  Mandeville in the 18th Century and Keynes in the 20th century were faced with scandalized reactions to this observation, though in the case of Mandeville, a fairly consistent anti-moralism and commitment to self-interest helped inflame the reaction to what might have been sound economic advice.

Thrift is Not the Only Economic Virtue

While thrift is considered, in a post-Calvinist world, to be a primary economic virtue, and was praised by Adam Smith the founder of modern economics, and Ben Franklin, it is not the only virtue.  As implied above, anti-Keynesians think of Keynesians as promoting spending as a virtue, though as I will argue below this is only ambiguously the case.  Giving to charity is considered by many to be an economic virtue, and corporations and individuals often display their charitable giving to gain benefit from the perception of this virtue.  Nowadays, “going green” or efforts to work towards ecological sustainability are considered to be virtues, which many show off to others, as a means, in part, of gaining social status, as well as an educational tool.

Anything that can be said to be a stable or inherent characteristic of a person or a corporation can be taken by some economic actors to be a virtue or vice and either compel attraction or repulsion.  Thus a structure of a virtue ethics involves the evaluation of these presumed stable or inherent characteristics as either positive (promoting attraction or approbation) or negative (promoting repulsion or condemnation).  Unfortunately, and this may seem a stretch to some, the use of racial preferences and prejudices works very similarly to virtue ethics in this regard:  people do business with people from one or two ethnic groups as a preference over others or avoid doing business with one or two or more other members of other ethnic groups.  Virtues, of course, are subjectively evaluated, so for some, a preferred ethnic group may be a shunned one, but nevertheless the same structure of attaching value in both positive and negative form to an inherent, though not necessarily lifelong, characteristic of an individual or organization is occurring.

Virtue Ethics Is a Way of Seeing the World

The foregoing is an effort to show that virtue ethics is a meta-ethical way of seeing the world that in turn shapes more specifically economic paradigms and is highly influential within professional economics.  A paradigm, as defined by Thomas Kuhn the historian and theorist of science, is a way to look at the world that frames that world so as to be meaningful to scientists or other observers.  For Kuhn observations of the world entail or imply some form of a framework.  Some facts or features of the world will appear to be unimportant or even invisible from within one or another paradigm.

Those economists who see their jobs as the inculcation of virtuous habits in people and groups of people, will tend to look for and praise characteristics of people, governments or organizations that to them exemplify these virtues while criticize or even excoriate the same actors who do not exhibit these virtues or display their opposites.  They may view their task as objective observers and interpreters of the world, but where there is uncertainty, ambiguity, and the need to evaluate or project into the future they are likely to view the economy as something like a morality play between good and less good or even bad actors.

Thus in the struggle over deficit spending and the paradox of thrift, defining the economy as largely enacted by people with varying levels of virtue, especially as regards the virtue of thrift, emphasizes inherent or supposedly inherent characteristics over what might be systemic and situational issues.   The various deficit commissions and other organizations that are creating or trying to create an atmosphere in which statements of personal virtue or the economic virtue of entities (using the value of thrift and the responsible borrower as primary virtues) are signs of “responsibility”, are almost exclusively wedded to a virtue ethical way to parse the world.  Critics of their perspective usually point to a system or specific history which they are misinterpreting or missing altogether.

What Isn’t a Virtue Ethics in Economic Meta-Ethics?

As I noted in the previous post , economists have the choice of at least three meta-ethical frameworks to organize and evaluate the social data which they collect and organize into a perhaps part-scientific, discourse that applies valuations to its findings:  these valuations implicitly use some admixture of utilitarian, deontological, and virtue ethical frameworks.

Keynesianism, which is itself a broad and unsystematized climate of opinion, does not build itself up as a virtue ethics, and, in fact with Keynes’s observations of the effects of virtue ethics in the paradox, shuns the ascription of stable inherent characteristics in economic actors, to which values are attached.  The meta-ethics of Keynesianism might be construed as a “systemic, behaviorially-based utilitarianism with a varying deontological commitment to full employment”.  Keynesians attempt to weigh and measure various human attributes that effect economic behavior and attempt to figure out how economic policy can be designed to achieve full employment at any given juncture.

While the broadness of Keynesianism (if we include post-Keynesianisms, neo-Keynesians, new Keynesians, etc. in this category) is a scientific and political problem across the board, those Keynesians that remain most “technocratic” run particular political risks in avoiding the emotive cores of virtue ethics and deontological commitment to universal or popular rights.  A systemic utilitarianism based on numerical representations of utility is a particularly “dry” affair for most non-economists; in the case of the deficit debate standing up for continued deficit spending in the interests of maintaining “aggregate demand” is not particularly inspiring rhetoric.  On the other hand, a “left” Keynesianism, which is mostly absent from the center of the public debate, draws on deontological commitments to “decent jobs” or environmental integrity as a means of inspiring at least some political support for its agenda.

In the current political climate, which is dominated by neo-liberal values that tend to place responsibility on the individual rather than society, it is easier to evoke and maintain a political consensus around an individualized virtue ethics.   Concerted efforts would need to be made by Keynesians to defend themselves politically, most probably evoking some form of a deontological commitment to overall social welfare and to good work with adequate wages.  Though there are exceptions, the declaration of commitment to this type of values with manifest emotive basis has not, for the most part, been forthcoming from either the economic profession nor political elites.

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About Michael Hoexter
I'm a clean energy marketing and policy strategist and consultant based in the San Francisco Bay Area.

3 Responses to Paradox of Thrift, the Deficit Debate and Virtue Ethics

  1. Jim Stodder says:

    As the economist mentioned in the piece, I agree that Keynesian and most ‘progressive’ economists do not usually explicitly state, much less justify, their ethical grounding. And that economic discussion would be better if these assumptions were clearer.

    Utilitarian ethics blend easily into the individualist ethos of US culture. But I agree with Michael that there are philosophical, practical, and political problems with a utilitarian perspective, especially for a ‘progressive’ politics. I’ll comment briefly on philosophical problems with utilitarianism — all of which have practical and political consequences:

    1) As recognized by economic philosophers starting with Kenneth Arrow, there is a severe consistency problem in building up from this individualist basis of choice into a “Social Welfare Function” that could evaluate social states as better or worse. This is reflected in political difficulties of performing the same ‘aggregation’ of values.

    2) Amartya Sen has long worked in this field, and also advocates deontological commitment — as an alternative to utilitarianism — to “Basic Needs.” This approach has gained wide acceptance in the field of development economics, but has been controversial in our domestic US politics as to food, medical care, oreducation.

    3) And finally there is the “discount rate problem” of long-term accounting for economic or social welfare. Contemporary ecological economists like Geoffrey Heal and Nicholas Stern have advocated that the discount rate on social welfare be adjusted as a practical matter to be very low, even close to zero, so as to take serious account of the well-being of generations far into the future. This is reflected in debates between Nordhaus arguing for higher discounting and Stern for lower — with clear political consequences.

  2. Jim,
    Thanks for your comment and thoughts.

    The choice between utilitarian vs. deontological ethical tools, whether conscious or as unreflective assumptions seems to be important especially as regards the concerns of those people who see economics as part of the tradition of the Enlightenment and as a tool to address social needs. The latter have been associated, rightly or wrongly, with the concerns of the political Left on a global scale. That Sen’s insights have made it into the currently dominant consensus about the functioning of the economies of the developed world, is a testament in part to utilitarian assumptions within the mainstream of economics.

    As the piece suggests, economists have an additional choice which they can apply to evaluating or embedding as an assumption what is or how one can arrive at the “Good”, virtue ethics. Virtue ethics, especially the virtue ethics of what might be called simple transactional morality, is particularly strong, along with utilitarianism on the “right-ward” side of the economics profession.

    It’s interesting that you point out the aggregation problem associated with the “Social Welfare Function” as regards a utilitarian calculus. Virtue ethical approaches, I believe, have as serious or a more serious problem in dealing with aggregate or broadly social characteristics that cannot be ascribed to an individual. Virtue ethics, by necessity, is looking for the Good (or the Bad) inside people or organizations and it is difficult to create “sums” or other mathematical composites of virtues across people or other semi-personified entities.

  3. Pingback: President Obama has Let the Barbarians In…Now We (or He) are Going to Have to Drive Them Out « Politics 2100: Blogging as if the Future Mattered

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