Paradox of thrift

Statement

Statement of the paradox

The paradox of thrift (also called the paradox of saving) says the following: if everybody (individuals/households) increase their saving, then this results in a decline in their spending, leading to a decline in aggregate demand, and a shrinking of the economy. This may, in the somewhat longer run, lead to a decline in the savings rate of the economy.

The paradox was introduced by John Maynard Keynes.

Partial resolution of the paradox

If the money saved by individuals and households can be borrowed by others (possibly other individuals, or businesses) then increased saving need not lead to a decline in the economy. This is because an increase in the total saving by individuals and households increases the supply of money, pushing down interest rates and making it more attractive for businesses to borrow money, possibly to expand their capital stock or enhance production.