There Is NO Such Thing as a “Paradox of Thrift” and Keynes Misrepresented the Classical Concept of Saving

In this article, I restate the classical savings theory of growth to provide a basis for demonstrating that Keynes misrepresented the classical concept of saving to include the hoarding of cash, a mistake which led to his erroneous conclusions about the classical theory of growth. I use Keynes's arguments mainly in the General Theory to restate the paradox of thrift proposition, and I rely on direct quotations from the classics and Marshall to establish Keynes's misrepresentation of their argument. I conclude that there is no such thing as a paradox of thrift other than Keynes's incorrect substitution of “hoarding” for “saving” in the classical theory of income determination. This recognition may help end the annual ritual of teaching students a fundamental confusion from which they later struggle to escape in courses such as development economics or finance. The discussion also shows that there is much of significance yet to be gained by paying careful attention to what the classics said, especially in assessing Keynes's claims against them. Even among the classics, as Samuelson has observed, “their quarrels lasted because often they were quarrels over misunderstandings and definitions.”

The classical theory of growth against which Keynes proposed his paradox of thrift argument simply states that economic growth is determined by the rate of saving or capital accumulation. The greater the amount saved out of income, the more capital goods, land, and labour services can be bought or hired for production.

—James C. W. Ahiakpor, “A Paradox of Thrift or Keynes's Misrepresentation of Saving in the Classical Theory of Growth?” Southern Economic Journal 62, no. 1 (July 1995): 17-18.