Is the Paradox of Thrift true?

The paradox states that if everyone tries to save more money during times of economic recession, then aggregate demand will fall and will in turn lower total savings in the population because of the decrease in consumption and economic growth. The paradox is, narrowly speaking, that total savings may fall even when individual savings attempt to rise, and, broadly speaking, that increase in savings may be harmful to an economy.

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For although the amount of his own saving is unlikely to have any significant influence on his own income, the reactions of the amount of his consumption on the incomes of others makes it impossible for all individuals simultaneously to save any given sums. Every such attempt to save more by reducing consumption will so affect incomes that the attempt necessarily defeats itself. It is, of course, just as impossible for the community as a whole to save less than the amount of current investment, since the attempt to do so will necessarily raise incomes to a level at which the sums which individuals choose to save add up to a figure exactly equal to the amount of investment.

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Anagram said:

The paradox thrift is defined by wikipedia as:



It was popularized by John Maynard Keynes who stated it as:



Its important to remember that in this case savings is that which is deposited in the bank and not simply cash that is hidden under a mattress or something like that. The idea that people increasing savings leads to falling overall savings or economic harm has been well criticized in the past.

Do you think the paradox of thrift holds up or not?

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joG said:

It will depend on the circumstances and the period one looks at. There is no answer that fits all situatiinas.

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