Paradox of Thrift
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A Paradox of Thrift is a Paradox that if everyone tries to save more money during times of economic recession, then aggregate demand will fall and will in turn lower total savings in the population because of the decrease in consumption and economic growth.
- AKA: Paradox of Saving.
- See: The General Theory of Employment, Interest And Money, Aggregate Demand, Economic Growth, Fallacy of Composition.
References
2014
- (Wikipedia, 2014) ⇒ http://en.wikipedia.org/wiki/Paradox_of_thrift Retrieved:2014-9-28.
- The paradox of thrift (or paradox of saving) is a paradox of economics, popularized by John Maynard Keynes, though it had been stated as early as 1714 in The Fable of the Bees,[1] and similar sentiments date to antiquity. [2] The paradox states that if everyone tries to save more money during times of economic recession, then aggregate demand will fall and will in turn lower total savings in the population because of the decrease in consumption and economic growth. The paradox is, narrowly speaking, that total savings may fall even when individual savings attempt to rise, and, broadly speaking, that increase in savings may be harmful to an economy. [3] 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.
The paradox of thrift is a central component of Keynesian economics, and has formed part of mainstream economics since the late 1940s, though it is criticized on a number of grounds.
- The paradox of thrift (or paradox of saving) is a paradox of economics, popularized by John Maynard Keynes, though it had been stated as early as 1714 in The Fable of the Bees,[1] and similar sentiments date to antiquity. [2] The paradox states that if everyone tries to save more money during times of economic recession, then aggregate demand will fall and will in turn lower total savings in the population because of the decrease in consumption and economic growth. The paradox is, narrowly speaking, that total savings may fall even when individual savings attempt to rise, and, broadly speaking, that increase in savings may be harmful to an economy. [3] 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.
- ↑ Keynes, The General Theory of Employment, Interest and Money, Chapter 23. Notes on Merchantilism, the Usury Laws, Stamped Money and Theories of Under-consumption
- ↑ See history section for further discussion.
- ↑ These two formulations are given in Campbell R. McConnell (1960: 261–62), emphasis added: "By attempting to increase its rate of saving, society may create conditions under which the amount it can actually save is reduced. This phenomenon is called the paradox of thrift....[T]hrift, which has always been held in high esteem in our economy, now becomes something of a social vice."
1724
- (de Mandeville, 1724) ⇒ Bernard de Mandeville. (1724). “The Fable of the Bees: or, Private Vices, Public Benefits."