Eugen von Böhm-Bawerk v. Keynes on Savings: An Economically Advanced Nation Does NOT Engage in Hoarding

But then why teach the paradox of thrift at all? Not only is it historically unproved, but it is fundamentally flawed. The problem is that Keynesians treat savings as if it disappears from the economy, that it is simply hoarded or left languishing in bank vaults, uninvested. In reality, saving is simply another form of spending, not on current  consumption, but on future consumption. The Keynesians stress only the negative side of saving, the sacrifice of current consumption, while ignoring the positive side, the investment in productive enterprise. The Austrian economist Eugen Böhm-Bawerk stressed the positive side of saving: “For an economically advanced nation does not engage in hoarding, but invests its savings. It buys securities, it deposits its money at interest in savings banks or commercial banks, puts it out on loan, etc.” (1959 [1884], 113).

—Mark Skousen, The Big Three in Economics: Adam Smith, Karl Marx and John Maynard Keynes (Armonk, NY: M. E. Sharpe, 2007), 179-180.

The Pigou “Wealth” or “Real Balance” Effect Did Much to Undermine the Keynesian Doctrine of “Liquidity Trap”

But over time critics have chipped away at the Keynesian structure. The first objection was the “liquidity trap” doctrine, Keynes’s fear that the economy could be trapped indefinitely in a deep depression where interest rates are so low and “liquidity preference” so high that reducing interest rates further would have no effect (Keynes 1973a [1936], 207). The man who first countered the liquidity-trap doctrine was Arthur C. Pigou, ironically the straw man Keynes vilified in The General Theory. In a series of articles in the 1940s, Pigou said that Keynes overlooked a beneficial side effect of a deflation in prices and wages: deflation increases the real value of cash, Treasury securities, cash-value insurance policies, and other liquid assets of individuals and business firms. The increased value of these liquid assets raises aggregate demand and provides the funds to generate new buying power and hire new workers when the economy bottoms out (Pigou 1943, 1947). This positive real wealth effect, or what Israeli economist Don Patinkin later named the “real balance effect” in his influential Money, Interest and Prices (1956), did much to undermine the Keynesian doctrine of a liquidity trap and unemployed equilibrium.

—Mark Skousen, The Big Three in Economics: Adam Smith, Karl Marx and John Maynard Keynes (Armonk, NY: M. E. Sharpe, 2007), 177-178.