Paradox Of Thrift

AAA

DEFINITION of '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 collective good, because one person's spending is another person's income. Thus, when individuals save rather than spend, they cause collective harm because businesses don't earn as much and have to lay off employees who are then unable to save. Therefore, an increase in individual savings rates is believed to create a flattening or diminishing of the total savings rate.

INVESTOPEDIA EXPLAINS 'Paradox Of Thrift '

It is important to note that the paradox of thrift is a theory, not a fact, and is widely disputed by non-Keynesian economists. One of the main arguments against the paradox of thrift is that when people increase savings in a bank, the bank has more money to lend, which will generally decrease the interest rate and spur lending and spending.

RELATED TERMS
  1. Keynesian Economics

    An economic theory of total spending in the economy and its effects ...
  2. Capital Saturation

    An economic state in which real income is high and is expected ...
  3. National Savings Rate

    An estimate from the U.S. Commerce Department's Bureau of Economic ...
  4. Dismal Science

    A term coined by Scottish writer, essayist and historian Thomas ...
  5. Classical Economics

    Classical economics refers to work done by a group of economists ...
  6. Neoclassical Economics

    An approach to economics that relates supply and demand to an ...
RELATED FAQS
  1. What are the main risks to the economy of a country that has implemented a policy ...

    The main risk to the economy of a country that has implemented a policy of austerity is the potential for a self-reinforcing, ... Read Full Answer >>
  2. In what manner will a recession likely affect the marginal-propensity-to-save rate ...

    The marginal propensity to save, or MPS, rises in most, though not all, recessions. This makes perfect sense on an individual ... Read Full Answer >>
  3. Why would a country's gross domestic product (GDP) and gross national income (GNI) ...

    A country’s gross domestic product, or GDP, and gross national income, or GNI, are likely to differ considerably because ... Read Full Answer >>
  4. While closely related, how do gross domestic product (GDP) and gross national income ...

    Gross domestic product, or GDP, and gross national income, or GNI, are the two most important economic indicators that measure ... Read Full Answer >>
  5. How does the neoclassical growth theory predict real GDP?

    Neoclassical growth theory predicts real gross domestic product (GDP) through measures of total factor productivity, capital, ... Read Full Answer >>
  6. What do banks do to control the bank reserve?

    While all banks are required to maintain a specific amount of bank reserves, the banks themselves do not control the minimum ... Read Full Answer >>
Related Articles
  1. Economics

    Why Can't Economists Agree?

    There are many reasons why economists can be given the same data and come up with entirely different conclusions.
  2. Bonds & Fixed Income

    Can Keynesian Economics Reduce Boom-Bust Cycles?

    Learn about a British economist's proposed solution to a common economic problem.
  3. Active Trading

    Giants Of Finance: John Maynard Keynes

    This rock star of economics advocated government intervention at a time of free-market thinking.
  4. Economics

    Is Texas The Future Of America?

    The top three fastest-growing cities are located in Texas and 20% of jobs created between 2009 and 2014 were in the Lone Star State.
  5. Economics

    Understanding Limited Liability

    Limited liability is a legal concept that protects equity owners from personal losses due to their ownership interest in the company.
  6. Fundamental Analysis

    Explaining the Empirical Rule

    The empirical rule provides a quick estimate of the spread of data in a normal statistical distribution.
  7. Economics

    Explaining Demographics

    Demographics is the study and categorization of people based on factors such as income level, education, gender, race, age, and employment.
  8. Fundamental Analysis

    Calculating Degree of Financial Leverage

    Degree of financial leverage (DFL) is a metric that measures the sensitivity of a company’s operating income due to changes in its capital structure.
  9. Economics

    What Does Capital Intensive Mean?

    Capital intensive refers to a business or industry that requires a substantial amount of money or financial resources to engage in its specific business.
  10. Economics

    The Most Likely Outcome For Greece

    After more than five years of a Greek drama, most of us have become fatigued with hearing about Greece’s debt problems, the one issue that won’t go away.

You May Also Like

Hot Definitions
  1. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
  2. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  3. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
  4. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
  5. Current Account Deficit

    A measurement of a country’s trade in which the value of goods and services it imports exceeds the value of goods and services ...
  6. International Monetary Fund - IMF

    An international organization created for the purpose of: 1. Promoting global monetary and exchange stability. 2. Facilitating ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!