Paradox Of Thrift
Categories: Econ
Another brainchild of John Maynard Keynes, the paradox of thrift is a paradox for individuals. When times are tough and the economy is in a recession, what do you do: save or spend?
Your knee-jerk reaction is probably to save, right? What if you lose your job and can’t pay your bills? You’d feel like a dumba$$ for spending like it was a Saturday at the mall in a bull market.
Keynes urges you to make the other choice: spend. When economic times are tough, spending will get the cogs of the economy turning again.
This is the paradox of thrift, or paradox of savings: people save in recessions to make things better, but that decreases GDP, leading to lower spending and savings in the aggregate.
How can you save more money if you’re not making any money?
The paradox of thrift is a great reminder of why there’s both microeconomics and macroeconomics. The microeconomists, and personal financiers, will tell you to save in a recession. The macroeconomists will tell you to spend, for your country.
Good luck, economic soldier.
