paradox of thrift
paradox of thriftThe 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. Advocates of this view argue that in a depressed economy attempts to save more from present incomes reduce consumption and thus income levels. If this were the whole story, ex post savings and investment would not change. They go on, however, to argue that the fall in incomes 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...
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