paradox of thrift


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Fig. 138 Paradox of thrift. The savings schedule rises from S to S 1, but this serves to reduce the equilibrium level of national income from Y to Y1, and the actual amount saved from Sy to Sy1.

paradox of thrift

the proposition that there is an inconsistency between the apparently virtuous nature of household SAVING and the potentially undesirable consequences of such saving. If most households decide to save a larger proportion of their incomes, then they will consume less, and this reduced expenditure will lower AGGREGATE DEMAND, so leading to lower levels of output and employment. Thus, an increase in savings will reduce the level of national income.

Thriftiness or saving is beneficial to the economy as it releases resources from the production of consumer goods to be used for producing investment goods. However, if households attempt to save more than businesses plan to invest at a given level of income (i.e. ‘withdrawals’ exceed ‘injections’ in the CIRCULAR FLOW OF NATIONAL INCOME), this will cause the EQUILIBRIUM LEVEL OF NATIONAL INCOME to decline, reducing also the actual amounts saved and invested.