GLEN TENNEY At the Margin Advertisement

On occasion it is necessary to debunk certain erroneous concepts -- especially when they are quite popularly held as true.

One that needs repeated debunking is the popular idea that saving (as opposed to spending for consumption) is bad for the economy.

According to the anti-saving crowd, the decision to save means less revenue to business firms, which translates to less demand for labor, which in turn means fewer jobs, lower incomes, less consumption, and even less saving.

Please notice both the front and back ends of the previous sentence, repeated here for emphasis: The decision to save means less saving. This apparent contradiction was in fact an important aspect of the theories of John Maynard Keynes, an influential economist writing in the 1930s, and the contradiction has come to be known as the "paradox of thrift."

But the notion is wrong, and it seems to require almost continuous refutation.

Refuting the paradox of thrift and its corollaries is especially important in today's economy because much of the rhetoric coming from Washington these days is based on this false notion. The folks in Washington, more often than not, are telling us the recession we are currently experiencing is the result of a capricious choice by consumers to save too much of their incomes.

This "waning of animal spirits," as Keynes called it, is the great evil in the eyes of so many of the politicians. And the solution, we are told, is to somehow get consumers spending again. The numerous parts of the so-called "stimulus" package, and even the word "stimulus" itself, tend to suggest a desire on the part of the politicians to encourage consumption at the expense of saving. "Spend for the good of the economy," we are told.

But don't you believe it.

Our current economy is in bad shape because it has lost its capital, not because people are not consuming enough. Capital is the accumulated wealth of business firms and individuals used to generate profit or interest. Capital is built on a foundation of saving, which is the act of abstaining from consuming.

Saving is the precondition of retailers and wholesalers maintaining inventories, of manufacturers producing goods, and of all businesses paying wages. Without saving, none of these activities can occur.

The key to understanding why the paradox of thrift is fallacious involves understanding two aspects of the workings of a market economy Keynes either ignored or explicitly rejected in his writing: the market for loanable funds, and the disaggregated labor market.

It is an understanding of the ordinary adjustments in these two markets that thoroughly dispenses of the notion that saving is the original sin.

Keynes, for example, did not see the importance of the role of changes in interest rates in coordinating inter-temporal choice made by consumers, savers, and investors. The idea that saving decisions and investment decisions can be -- and routinely are -- coordinated by adjustments in the loanable funds market was pooh-poohed by Keynes.

And second, Keynes overlooked the fact that production processes take place over time and in stages, and a decrease in the demand for labor in the latter stages will be replaced by a higher demand for labor in the earlier stages of production as a result of savers' decisions to save more of their incomes.

With these two things in mind, it is clear an increase in saving in an economy is not the reason for decreased incomes overall.

Keynesians tend to see both interest rates and wages rates as "sticky" rather than responding readily to changes in the inter-temporal preferences of savers.

They have a point here. Things don't always adjust as quickly as some would like. And yet, the Keynesians are also notorious for supporting monetary and fiscal policies that serve to mask the changes in both interest rates and wage rates so they cannot adjust -- thus bringing about the very rigidity that they acknowledge.

It is true, of course, that a market economy cannot work properly if it is not allowed to work.

Recessions and depressions like we are currently experiencing are caused by the attempt to create capital on a foundation of credit expansion rather than saving. The creation of money out of thin air is loaned into existence by the central bank, and so it looks an awful lot like saving.

But this kind of credit expansion is not capital. In fact, by lowering interest rates such credit expansion actually discourages real saving. That is the real problem with which we are currently faced.

So, next time you hear someone say consumers should be spending more for the sake of the broader economy, perhaps you should be glad they are not. A strong market economy is built on capital, not consumption.

And saving, not money creation, is the foundation on which real capital is built.

(Glen Tenney teaches economics and finance at Great Basin College in Pahrump. He can be reached at glent@gwmail.gbcnv.edu.)