Analysis of the Paradox of Thrift During Two Great Recessions
The argument begins from the observation that in the condition of equilibrium, total income must be equal to
total output. Income has a direct effect on saving. Other things being equal, an increase in the autonomous component of
saving, will move the equilibrium point at which income equals output to a lower value, thereby inducing a decline in saving
that may more than offset the original increase. Keynes rejected the classical economy theories that 1. Output and prices will
eventually return to a state of equilibrium. He was not as optimistic about the natural equilibrium of the market. He believed
the government was in a better position than market forces when it came to creating a robust economy. 2. Cutting of wages
can restore full employment, by arguing that employers will not add employees to produce goods that cannot be sold because
demand is weak. In this form it represents a prisoner's dilemma as saving is beneficial to each individual but deleterious to
the general population. This is a "paradox" because it runs contrary to intuition. 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.
Keynesians Said that consumption, or spending, drives economic growth. Thus, even though it makes sense for individuals
and households to cut back consumption during tough times, this is the wrong prescription for the larger economy. A
pullback in aggregate consumer spending might force businesses to produce even less, deepening the recession. This
disconnect between individual and group rationality is the basis of the savings paradox.
Keywords - Paradox, Thrift, Depression, Investment, Employment