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 is the difference between consumer surplus and economic surplus?

    The consumer surplus is the difference between the highest price a consumer is willing to pay and the actual market price ... Read Full Answer >>
  2. What is the variance/covariance matrix or parametric method in Value at Risk (VaR)?

    The parametric method, also known as the variance-covariance method, is a risk management technique for calculating the value ... Read Full Answer >>
  3. What does it signify about a given product if the consumer surplus figure for that ...

    High consumer surplus for a particular product signifies a high level of utility for consumers and may carry some implications ... Read Full Answer >>
  4. What is backtesting in Value at Risk (VaR)?

    The value at risk is a statistical risk management technique that monitors and quantifies the risk level associated with ... Read Full Answer >>
  5. How do I discount Free Cash Flow to the Firm (FCFF)?

    Discounted free cash flow for the firm (FCFF) should be equal to all of the cash inflows and outflows, adjusted to present ... Read Full Answer >>
  6. What is RiskMetrics in Value at Risk (VaR)?

    RiskMetrics is a methodology that contains techniques and data sets used to calculate the value at risk (VaR) of a portfolio ... 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

    What is a Capital Account?

    Capital account is an economic term that refers to the net change in investment and asset ownership for a nation.
  5. Economics

    Understanding the Fisher Effect

    The Fisher effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate.
  6. Fundamental Analysis

    Explaining the Geometric Mean

    The average of a set of products, the calculation of which is commonly used to determine the performance results of an investment or portfolio.
  7. Investing

    The Labor Market Recovery’s Missing Ingredient

    Job creation is running at the fastest pace since the 90s, and there is some evidence that wage growth is finally starting to accelerate, albeit modestly.
  8. Economics

    Gambling on Macau: Too Risky?

    Macau was once heralded as the new Las Vegas for casino investors. Is it too late?
  9. Economics

    When To Expect Fed Liftoff Now

    “When will the Fed raise interest rates?” That has been the question of many investors since the Fed indicated it was prepared to end its zero rate policy.
  10. Budgeting

    An Analysis Of The US Trade Deficit

    The United States' trade deficit is historically large, the biggest in the world. With luck, it'll get even larger.

You May Also Like

Hot Definitions
  1. Venture-Capital-Backed IPO

    The selling to the public of shares in a company that has previously been funded primarily by private investors. The alternative ...
  2. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  3. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
  4. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through ...
  5. Security Market Line - SML

    A line that graphs the systematic, or market, risk versus return of the whole market at a certain time and shows all risky ...
  6. Tangible Net Worth

    A measure of the physical worth of a company, which does not include any value derived from intangible assets such as copyrights, ...
Trading Center