Prudence versus Prosperity (2009 Feb)

by Barry A. Liebling

There is no question that prudence is a virtue – particularly when it comes to buying things. The characteristics of a prudent purchaser are so familiar they are banal. Do not buy anything that you cannot afford. If you are short of funds wait until you have the money. When something catches your eye in the store consider alternatives – like saving your money or getting something else. Above all, be rational – take responsibility for what you do, think before you act, try to make your purchases count.

Prudence seems to be at odds with a common platitude about buying things. The more you spend and the quicker you spend, the more you help the economy. When you go shopping every purchase is a boost to the system. If you make a hasty acquisition or if you go into debt – even if you regret your actions – you have infused life into the economy.

Recently, Kelly Evans of The Wall Street Journal (January 6, 2009) wrote an article that discussed this apparent conflict. She reports that many Americans are “saving more and spending less – just as the economy needs their dollars the most.” Some economists assert that “increased saving – or its flip side, decreased spending – can exacerbate the economy’s woes.” Evans gives examples of people who are “socking away money they once would have spent, contributing in part to failing stores, shuttered restaurants and rising unemployment.”

The implications of Evan’s “paradox of thrift” are grim. The essential claim is that individuals who act prudently in their self-interest will have a damaging effect on “the economy.” If it were true it would be a victory for interventionists who look upon free markets with unsympathetic eyes and yearn to bring about a command economy. Interventionists have always asserted that ordinary people are inherently stupid and need to be directed by “government experts” for their own good. This narrative suggests that even when people act prudently they are destructive to the common weal and ought to be reigned in.

But the “paradox of thrift” argument is a fallacy. The best thing for “the economy” is to encourage everyone to be rational and prudent – even though many will fail to take this advice. Managing your finances thoughtfully is better than giving in to impulsiveness – both for you and for others.

It is true that in difficult economic times stores fail, restaurants close, and unemployment may rise. But to blame undesirable outcomes on people who are using foresight and discretion in their purchasing decisions is wrong-headed. Prudence is the path to prosperity, and its lack leads to trouble.

The flawed notion that those who are careful with their money “are aggravating the nation’s economic woes” presumes that if these people acted differently – imprudently – “the economy” would be better off. But this is not plausible. Consider what the alternatives are for those who are “socking away money they once would have spent.” Suppose they based their purchasing decisions on caprice instead of consciously planning?

A consumer decides to refrain from buying an expensive flat panel television because he does not know what his income will be. Would “the economy” – that is everyone else – be better off if he bought it anyway. The electronics store would make the sale, but the credit card company would take a loss if he failed to pay. If, against his better judgement, he purchased the television he would have less money to spend on more important things – like repairing his car. Is it better for “society as a whole” if the electronic retailer gets revenues instead of the local garage?

A mother calculates that it is too expensive to take her children to restaurants, and this hurts the sales of eating establishments. Would the economy be better off if she splurged on fine dining but spent less money on her children’s clothes? Do restaurants in her neighborhood deserve the mother’s money more than clothing stores?

A husband and wife resolve to save a substantial portion of their salaries and deliberately spend less. If they have a bank account their financial institution has the use of their funds for its business. At a later time when they decide to make purchases they will be able to offer their vendors zero-risk terms – paying in full. On balance will this hurt the economy or make it stronger?

When someone claims that individual prudence is “paradoxically” at odds with human welfare be suspicious. Look closely behind the claim and you will see there is no paradox.

*** See other entries at in “Monthly Columns.” ***

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