ABSTRACT
In a demand-constrained economy, public spending can be wise or foolish, appropriate or
inappropriate, effective or ineffective, but-the paradox first pointed out by Keynes-it cannot be more costly to the economy as a whole than doing nothing. In a demand-
constrained system, individual households and businesses are forced by economic
pressures to economize, but the system as a whole normally operates with a substantial
reserve of both labor and productive capacity. In a resource-constrained economy just the
reverse is true: individual units have incentives to overspend, to squander resources and
overrun costs, while the system as a whole suffers from shortages in the face of excessive
demands. And, as we saw, in each case the system works so as to preserve its own nature:
in the demand-constrained case, cost-cutting constricts effective demand, whereas, in the
resource-constrained case, cost overruns further expand it.
