The Paradox of Thrift

The Paradox of Thrift

The paradox of thrift was an economic situation defined by John Maynard Keynes during the Great Depression. Keynes noted that the United States population was experiencing a financial crisis because of excessive individual savings, which were depriving other people of income. This situation is known as a paradox because economists believe that saving is a good habit as the funds held can be used for future consumption (Twiggs, 2012). For instance, some people are denied employment opportunities because the employers that would have hired them save their would-be salaries, thereby making saving a bad habit in the long run.

The reverse of the paradox of thrift would be for consumers who save to re-invest their funds as capital, thereby not affecting anyone’s income. If people hold so that they can use the funds saved to acquire new businesses or to expand their organizational operations, they do not deny potential employees job opportunities (Fox, 2009). In this way, saving becomes a good habit as long as it promotes capital investment behaviour, which creates employment in the future. Therefore, to evade an economic crisis, it would be best if households used their saved funds to start entrepreneurial projects so that they strengthen the purchasing power of the people that they employ.

I have learned that saving can be detrimental if it inhibits consumer spending by denying people purchasing power. Savings that could be used as salaries to empower people to spend will help the country avoid being in a financial crisis, which can result in the decline of asset prices. In the future, I will save my funds and then use them to start a business so I can create income for an unemployed individual. In this way, I will reverse the paradox of thrift as my savings will be helpful.

References

Fox, J. (2009, February 23). The Paradox of Thrift. TIME Magazine, 173(7), 16-16.

Twiggs, C. (2012). Was Keynes wrong about saving?

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Read the articles:

Wait, Is Saving Good or Bad? The Paradox of Thrift by E. Katarina Vermann

The Paradox of Thrift by Justin Fox

The Paradox of Thrift by Kenneth Davidson

Was Keynes Wrong About Saving? by Colin Twiggs

PDF files with the article are also posted in Content – Week 3 – Articles for Discussion Week 3.

In your initial response to the topic, you have to answer all questions.

What is the paradox of thrift? Is it real? Is Saving Good or Bad?
Give an example of the paradox of thrift.
What is the reverse paradox of thrift?
Reflection – the students also should include a paragraph in the initial response in their own words, using macroeconomic terminology, reflecting on specifically what they learned from the assignment and how they think they could apply what they learned in the workplace or everyday life