Economic Paradoxes

This page is dedicated to actual and my own take on certain Economic Paradoxes.

The Paradoxes with PINK Titles are actual paradoxes and the ones with Turquoise Titles, are the ones I have innovated and created.  They are mere observations and logic checks and I invite any person to comment and discredit them, if my logic is wrong.

A short definition of a paradox is: “A paradox is a proposition in (alleged) contrast with common sense.”

Paradox of Thrift

In brief the paradox of thrift was postulated by John Maynard Keynes.  During the Credit Quake of 2008 – 2009 we have returned to this ‘supply side’ economist’s wisdom with many governments implementing slivers of his  economic philosophy in order to ‘keep the economic beast’ ticking over.

In short the paradox of thrift occurs when during a recession of period of economic contraction, households and consumers stop spending money and save to pay off debt or to reduce uncertainty.  This leads to a counter cyclical wave of more contraction as what the economy needs during a recession is the counter intuitive concept of increased spending.

The lesson of the paradox of thrift is this:  ‘Make hay whilst the sun shines’.  Yes, during a period of growth and economic stability, we should save more, as growth is then both hopefully sustainably contained (asset bubbles and the like) and a buffer created to help stimulate spending once the cycle reverses into a contraction.  So we should by rights be spending more during this recession, if only we had the capacity and not have been tied down by so much personal debt racked up during the go-go years of the early part of the first decade of the 21st century.

The Winner’s Curse

This is quite a tricky concept to get one’s head around initially.  The winner’s curse occurs in a value auction situation.  Bidders will all roughly speaking value an item at the same price (or value).  However, one of the bidders will have to raise the bidding price in order to win the auction.  This price or value will be above what all other bidders valued the item at.  No real value has been destroyed, but the winner will feel ‘cursed’ as he / she had to pay more than they probably bargained for in order to obtain the item.  Value would only truly be destroyed once the winner has to sell the item and on a ‘time value of money’ adjusted basis receive less for the item than was initially paid for it.  (Think here Royal Bank of Scotland’s doomed purchase of ABN Amro).

The following paradoxes will be fleshed out later and added as we develop our knowledge base:

The Mandeville paradox

The Prisoners’ Dilemma

The paradox of embeddedness

Creative Destruction

Spontaneous Order

The paradox of Participation

The paradox of Scale

16 thoughts on “Economic Paradoxes

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