Paradox of thrift

From Wikipedia, the free encyclopedia
Jump to: navigation, search

The paradox of thrift is the idea that during a recession, people will want to save more money. But if everyone saves money, then the economy can slow down even more, reducing peoples' income as a result. It is often linked with John Maynard Keynes. It is a main theory of Keynesian economics.

It is a kind of prisoner's dilemma: saving benefits each individual but damages the general population. This is a paradox because it is contrary to intuition. Someone might think that what seems to be good for an individual in the economy will be good for the entire population. However, exercising thrift may be good for an individual by enabling that individual to save for a "rainy day", and yet not be good for the economy as a whole.

There is little agreement as to how important this is in a modern economy. Modern economies are huge, and much affected by other national economies.