Hayek on the Paradox of Saving
Chronic underconsumption is an idea most often associated with Keynes. But while the infamous English economist published his General Theory in 1936, Hayek's 1929 article "The 'Paradox' of Savings" analyzes a similar theory advanced by two Americans a decade before. While the two authors have nearly vanished from history, the insights contained in Hayek's nearly forgotten article are more necessary today than ever.
The two protagonists were college president William Trufant Foster and businessman Waddill Catchings. They aimed to show how the production of goods could increase, with no corresponding increase in the purchasing power of consumers. Under these conditions, not all consumer goods could be sold at prices above producers' costs. Markets would fail to clear, or producers would take a loss on each sale; the economy would spiral downwards into depression. FULL ARTICLE