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Paradox Of Thrift

Definition

The paradox of thrift is a paradox of economics. The paradox states that an increase in autonomous saving leads to a decrease in aggregate demand and thus a decrease in gross output which will in turn lower total saving. The paradox is, narrowly speaking, that total saving may fall because of individuals' attempts to increase their saving, and, broadly speaking, that increase in saving may be harmful to an economy. Both the narrow and broad claims are paradoxical within the assumption underlying the fallacy of composition, namely that what is true of the parts must be true of the whole. The narrow claim transparently contradicts this assumption, and the broad one does so by implication, because while individual thrift is generally averred to be good for the economy, the paradox of thrift holds that collective thrift may be bad for the economy.

What is the 'Paradox Of Thrift '

The Paradox of Thrift, or paradox of savings, is an economic theory which posits that personal savings are a net drag on the economy during a recession. This theory relies on the assumption that prices do not clear or that producers fail to adjust to changing conditions, contrary to the expectations of classical microeconomics. The Paradox of Thrift was popularized by British economist John Maynard Keynes.

Explaining 'Paradox Of Thrift '

According to Keynesian theory, the proper response to an economic recession is more spending, more risk-taking and less savings. Keynesians believe a recessed economy does not produce at full capacity because some of its factors of production — land, labor and capital — are unemployed.

Circular Flow

Keynes helped revive the so-called “circular flow” model of the economy. This theory says an increase in current spending drives future spending. Current spending, after all, results in more income for current producers. Those producers rationally deploy their new income, sometimes expanding business and hiring new workers, each of whom earns a new income which, in turn, may be spent.

Problems

The circular flow model ignores the lesson of Say’s Law, which states goods must be produced before they can be exchanged. Capital machines, which drive higher levels of production, require additional savings and investment. The circular flow model only works in a framework without capital goods.


Further Reading


Global imbalances and the paradox of thrift
academic.oup.com [PDF]
… W. Max Corden. *. * Department of Economics, University of Melbourne. , e-mail: [email protected] Search for other works by this author on … Thus the initial effect was not for aggregate demand to decline—the Keynesian paradox of thrift—but for a financial sector …

A paradox of thrift or Keynes's misrepresentation of saving in the classical theory of growth?A paradox of thrift or Keynes's misrepresentation of saving in the classical theory of growth?
www.jstor.org [PDF]
… W. Max Corden. *. * Department of Economics, University of Melbourne. , e-mail: [email protected] Search for other works by this author on … Thus the initial effect was not for aggregate demand to decline—the Keynesian paradox of thrift—but for a financial sector …

Paradox of thrift recessionsParadox of thrift recessions
www.nber.org [PDF]
… W. Max Corden. *. * Department of Economics, University of Melbourne. , e-mail: [email protected] Search for other works by this author on … Thus the initial effect was not for aggregate demand to decline—the Keynesian paradox of thrift—but for a financial sector …

The paradox of thrift: RIPThe paradox of thrift: RIP
heinonline.org [PDF]
… W. Max Corden. *. * Department of Economics, University of Melbourne. , e-mail: [email protected] Search for other works by this author on … Thus the initial effect was not for aggregate demand to decline—the Keynesian paradox of thrift—but for a financial sector …

The New Paradox of Thrift:. Financialisation, retirement protection, and income polarisation in Hong KongThe New Paradox of Thrift:. Financialisation, retirement protection, and income polarisation in Hong Kong
journals.openedition.org [PDF]
… W. Max Corden. *. * Department of Economics, University of Melbourne. , e-mail: [email protected] Search for other works by this author on … Thus the initial effect was not for aggregate demand to decline—the Keynesian paradox of thrift—but for a financial sector …

A supermultiplier Stock-Flow Consistent model: the “return” of the paradoxes of thrift and costs in the long run?A supermultiplier Stock-Flow Consistent model: the “return” of the paradoxes of thrift and costs in the long run?
academic.oup.com [PDF]
… W. Max Corden. *. * Department of Economics, University of Melbourne. , e-mail: [email protected] Search for other works by this author on … Thus the initial effect was not for aggregate demand to decline—the Keynesian paradox of thrift—but for a financial sector …

The independence of finance from saving: a flow-of-funds interpretationThe independence of finance from saving: a flow-of-funds interpretation
www.tandfonline.com [PDF]
… W. Max Corden. *. * Department of Economics, University of Melbourne. , e-mail: [email protected] Search for other works by this author on … Thus the initial effect was not for aggregate demand to decline—the Keynesian paradox of thrift—but for a financial sector …

Should Clinton Cut the Deficit or is There a Global Paradox of Thrift?Should Clinton Cut the Deficit or is There a Global Paradox of Thrift?
onlinelibrary.wiley.com [PDF]
… W. Max Corden. *. * Department of Economics, University of Melbourne. , e-mail: [email protected] Search for other works by this author on … Thus the initial effect was not for aggregate demand to decline—the Keynesian paradox of thrift—but for a financial sector …

Piketty's paradox: a comparison to the Keynesian paradox of thriftPiketty's paradox: a comparison to the Keynesian paradox of thrift
www.tandfonline.com [PDF]
… W. Max Corden. *. * Department of Economics, University of Melbourne. , e-mail: [email protected] Search for other works by this author on … Thus the initial effect was not for aggregate demand to decline—the Keynesian paradox of thrift—but for a financial sector …

Paradox of thrift and budget in a simple Keynesian growth modelParadox of thrift and budget in a simple Keynesian growth model
books.google.com [PDF]
… W. Max Corden. *. * Department of Economics, University of Melbourne. , e-mail: [email protected] Search for other works by this author on … Thus the initial effect was not for aggregate demand to decline—the Keynesian paradox of thrift—but for a financial sector …



Q&A About Paradox Of Thrift


How does this model work?

This model works by saying an increase in current spending drives future spending. Current spending results in more income for current producers who then rationally deploy their new income and expand business and hire new workers each earning a new income which may be spent again.

What is the Paradox of Thrift?

The Paradox of Thrift, or paradox of savings, is an economic theory which posits that personal savings are a net drag on the economy during a recession. This theory relies on the assumption that prices do not clear or that producers fail to adjust to changing conditions, contrary to the expectations of classical microeconomics.

What does saving do to an economy?

Saving slows down economic growth and reduces peoples' income as a result.

Who helped revive this circular flow model?

John Maynard Keynes helped revive this circular flow model.

What does this theory rely on?

This theory relies on the assumption that prices do not clear or that producers fail to adjust to changing conditions, contrary to the expectations of classical microeconomics.

Why would saving be good for an individual but bad for the entire population?

Saving benefits each individual but damages the general population because it slows down economic growth and reduces peoples' income as a result. This is a paradox because it goes against intuition; one might think that what seems to be good for an individual in the economy will be good for the entire population. However, exercising thrift may be good for an individual by enabling that individual to save for a "rainy day", and yet not be good for the economy as a whole.

Who first came up with this theory?

John Maynard Keynes first came up with this theory.

How much agreement is there about how important this theory is in modern economies?

There isn't much agreement on how important this theory is in modern economies because they are huge and affected by other national economies so much so that they cannot really affect each other's performance very much at all anymore since globalization has taken place over time.

What is the paradox of thrift?

The paradox of thrift is the idea that during a recession, people will want to save more money. But if everyone saves money, then the economy can slow down even more, reducing peoples' income as a result. It is often linked with Keynesian economics.

What does it ignore?

It ignores capital goods which require additional savings and investment before they can drive higher levels of production. The circular flow model only works in a framework without capital goods."

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