Chapter 11
Paradox of savings/long run growth question:
The “paradox of savings” is the name for a conclusion we reach in our short run income-
expenditure equilibrium analysis of the savings rate: If the savings rate increases, this
causes consumption to fall, which leads to lower equilibrium output and lower
employment. Since total income is lower, even though the savings rate is higher, the total
volume of savings will not be. This is the paradox: the attempt to save more does not
actually result in more savings.
The long run analysis, meanwhile, starts from the assumption that changing the savings
rate does not affect the level of employment, N. All short term fluctuations in N that might
result from changes in the savings rate are assumed to even out over the long term
so that even if the savings rate switches to a permanently higher rate, N will not settle at a
permanently lower level.
The long run, however, is just a series of short runs back to back. Blanchard is a little
vague about how this adjustment might take place. I asked you to think about the
distinction and make a judgment about how persuasive you find the two contrasting
assumptions and how you think the short run becomes the long run. Opinions and analyses
differed (and that’s fine!).
My own take is that the short run paradox of savings is a pretty good approximation of
reality. As Keynes says, when people save more they are foregoing current consumption
with no particular plan to consume at a specific future date. So producers see reduced
