Paradox of thrift
The paradox of thrift (or Paradox of Saving) is a
paradoxof economicspropounded by John Maynard Keynes. The paradox states that if everyone saves more money during times of recession, then aggregate demandwill fall and will in turn lower total savings in the population. One can argue that if everyone saves, then there is a decrease in consumption which leads to a fall in aggregate demand and thus leads to a fall in economic growth.
The simplified form of the argument is that, in equilibrium, total income (and thus demand) must equal total output, and that total investment must equal total saving. Assuming that saving rises faster as a function of income than the relationship between investment and output, an increase in the
marginal propensity to save, all other things being equal, will move the equilibrium point at which income equals output and investment equals savings to lower values.
In this form it is a
prisoner's dilemmaas saving is beneficial to each individual but on a whole it can be harmful. This is a "paradox" because it runs contrary to common intuition. One who does not know about the paradox of thrift would fall into the fallacy of composition. This fallacy arises when one infers that something is true of an economy from the fact that it is true of an individual. Although exercising thrift might be good for an individual, by enabling that individual to save for a "rainy day", it might not be good for the economy as a whole.
This paradox can be explained by analyzing increased savings in an economy. If a population saves more money (that is the
marginal propensity to saveincreases across all income levels), then total revenues for companies will decline. This decrease in economic growth means fewer raises and perhaps downsizing. Eventually the population's total savings have remained the same or even declined because of lower incomes and a weaker economy. This paradox is based on the proposition, put forth in Keynesian economics, that many economic downturns are demand based.
Non-Keynesian economists criticize this theory on two grounds. First, if demand slackens and prices fall, the resulting lower price will stimulate demand, which tends to limit the decline in demand. Second, and perhaps more important, "savings" represent
loanable funds; an increase in the supply of loanable funds tends to lower interest rates and stimulate borrowing, so a decline in consumable goods with a short time horizon is offset by an increase in production in sectors with longer time horizons. For example, the demand for personal electronics might decline, but the demand for such things as real estate would be stimulated by favorable borrowing conditions.
List of paradoxes
* [http://ingrimayne.saintjoe.edu/econ/Keynes/Paradox.html The paradox of thrift explained]
Wikimedia Foundation. 2010.
Look at other dictionaries:
Paradox Of Thrift — The notion that individual savings rather than spending can worsen a recession, or that individual saving is collectively harmful. This idea is generally attributed to John Maynard Keynes, who said that consumer spending contributes to the… … Investment dictionary
Thrift — can refer to: * A generic term for a savings and loan association in the United States * Thrift (plant) a plant in the genus Armeria that have pink or white flowers; the term is especially used to refer to Armeria maritima * Thrift (protocol), a… … Wikipedia
thrift is a great revenue — Cf. CICERO Paradox 49 non intellegunt homines quam magnum vectigal sit parsimonia, men do not realize how great a revenue thrift is. 1659 J. HOWELL Proverbs (French) 15 Parsimony is the best revenue. 1855 H. G. BOHN Hand Book of Proverbs 530… … Proverbs new dictionary
ПАРАДОКС СБЕРЕЖЕНИЙ — PARADOX OF THRIFTУвеличение сбережений не всегда благотворно действует на экономику. В этом и заключается парадокс, т. к., согласно экон. теории, увеличение сбережений ведет к увеличению инвестиций, что в свою очередь ведет к экон. росту. Тем не… … Энциклопедия банковского дела и финансов
Парадокс бережливости — PARADOX OF THRIFT Утверждение о том, что увеличение ожидаемой склонности к сбережению не всегда способствует росту фактического уровня сбережений и инвестиций в экономике, которые даже могут снизиться. Согласно классической экономической теории… … Словарь-справочник по экономике
Keynesian economics — Economics … Wikipedia
List of paradoxes — This is a list of paradoxes, grouped thematically. Note that many of the listed paradoxes have a clear resolution see Quine s Classification of Paradoxes.Logical, non mathematical* Paradox of entailment: Inconsistent premises always make an… … Wikipedia
Deficit spending — Part of a series on Government Public finance … Wikipedia
Fallacy of composition — The fallacy of composition arises when one infers that something is true of the whole from the fact that it is true of some part of the whole (or even of every proper part). For example: This fragment of metal cannot be broken with a hammer,… … Wikipedia
John M. Robertson — Pour les articles homonymes, voir Robertson. John Mackinnon Robertson … Wikipédia en Français