Episode Eight: The Paradox of Thrift

photo credit: <a href='http://www.flickr.com/photos/picaas/3177673630/'>Geert Reitzema</a>

photo credit: Geert Reitzema


When financial times are tough, individuals and families tend to tighten their belts, and try to use their money more frugally. You'll sometimes hear politicians saying governments should do the same - pledging austerity budgets, and restrained spending.
But there is a concept in economics called The Paradox of Thrift.


It's the idea that when everyone in an economy saves money, all at the same time, it can actually result in a loss of savings. If no one's spending, then no one's earning either.
That's why economists who follow the theories of John Maynard Keynes advocate for governments to get more involved in times of economic downturn. Keynesians favour job-creation and stimulus spending over austerity.
This week, we'll learn why Yale economist Robert Shiller says the Paradox of Thrift, a troubled baby-sitting co-op, and an 18th-century poem, could provide good models for today's discussions of global economics.