Microeconomic measures can produce counterintuitive
'emergent' effects at the macro or systemic level. The commendable act of
saving money by individuals during uncertain economic times has the perverse macroeconomic
effect of making a recession worse: in aggregate there will be less money available
for spending, suppressing demand for goods and services. Economists call this effect 'the paradox of thrift'. Similarly, logical efforts
by companies in such conditions to reduce their wage bill or their postponement
of investment decisions will reduce spending in the economy and deepen the economic downturn.
What can be done to counteract this harmful dynamic?
The missing spending can be replaced by government spending: governments have it
within their power to effectively counter economic downturns!
