Paradox of thrift,
Definition of Paradox of thrift:
The paradox of thrift, or paradox of savings, is an economic theory which posits that personal savings are a net drag on the economy during a recession. This theory relies on the assumption that prices do not clear or that producers fail to adjust to changing conditions, contrary to the expectations of classical microeconomics. The paradox of thrift was popularized by British economist John Maynard Keynes.
According to Keynesian theory, the proper response to an economic recession is more spending, more risk-taking, and fewer savings. Keynesians believe a recessed economy does not produce at full capacity because some of its factors of production (land, labor, and capital) are unemployed.
Economic concept that if everyone tries to save an increasingly larger portion of his or her income, they would become poorer instead of richer. This is because the economy will slow down from reduction in demand and the very same people would lose their jobs. This theory, however, applies mainly to Keynesian economics where increased savings represent a diminishing circular flow of income.
How to use Paradox of thrift in a sentence?
- The paradox of thrift is an economic theory which argues that personal savings can be detrimental to overall economic growth. It is based on a circular flow of the economy in which current spending drives future spending.
- Critics of the theory state that it ignores Say's law, which calls for investment in capital goods before any level of spending can be achieved, and does not take into account inflation or deflation in prices.
- You may find yourself in a state of paradox of thrift and will need to decide if you want to get out of it or not.
- The paradox of thrift was not something I wanted to pay attention to because I really liked to save my money.
- The paradox of thrift was experienced in 2008 when many people stopped spending as well, theoretically this is a fun concept to play with.
- It calls for a lowering of interest rates to boost spending levels during an economic recession.
Meaning of Paradox of thrift & Paradox of thrift Definition