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Paradox of Thrift

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  • The paradox of thrift, popularized by economist John Maynard Keynes, suggests that an increase in individual savings rates may lead to a decrease in overall savings within an economy.
  • Contrary to conventional wisdom, which assumes that higher individual savings contribute to higher overall savings, the paradox of thrift argues that excessive saving at the individual level can have negative effects on the broader economy.
  • The paradox arises from the fact that when individuals save more and spend less, it can lead to a decrease in aggregate demand, resulting in reduced business investment, production, and employment opportunities.
  • As consumer spending declines due to increased saving, businesses experience lower revenues, leading to cutbacks in production and layoffs, which further dampen economic activity.

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