Paradox of thrift

Updated: Aug 20, 2021

The argument that a rise in the ex ante propensity to save, that is, the share of incomes that people want to save, may not increase the ex post level of savings and investment in the economy, which may even decrease. The basis of the argument is that in a depressed economy attempts to save more from present incomes reduce consumption and thus output income levels. The fall in incomes then discourages investment, so that ex post savings and investment actually fall: this is the paradox of thrift. The opposing argument says that in a prosperous economy, at any given income level, having more savings available makes it either easier or cheaper to borrow to finance investment; the fall in consumption thus ‘crowds in’ investment, so that ex post incomes are unchanged and savings and investment rise. The arguments for and against the paradox of thrift each appear to be capable of being correct in some circumstances; which actually applies in any particular situation is a matter of fact.

Reference: Oxford Press Dictonary of Economics, 5th edt.

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James Knight
Editor of Education
James is the Editor of Education for Invezz, where he covers topics from across the financial world, from the stock market, to cryptocurrency, to macroeconomic markets.... read more.