The Paradox of Thrift
Indeed the paradox of thrift affects total demand in an economy. In times of recession, many people attempt to save more and eventually reduce the circulation of money. The fall of aggregate demand will bring about a decrease in both economic growth and overall consumption of services and goods. The paradox states narrowly that total savings can fall even if individual savings seems to be rising. Broadly speaking, the paradox of thrift can be totally harmful to the whole economy. Both narrow and broad claims are paradoxical in nature.
Narrowly speaking, individual thrift may be good and fruitful for the economy. On the other hand, collective thrift is considered by many economists to be bad for any economy since many people will cut back their consumptions by greater margins. These two claims and extremes put policy makers on a prisoners’ dilemma as to which path to guide the economy to because at the end of the day savings are necessary to guard future needs.
Many people feel secure in their future only if they hold goods with title. However, such goods may not be healthy and productive to the current economy. Economic needs are ever dynamic and many economists have proven that not many people are able to contribute positively to the world economy in their savings. At times some people feel motivated when they have both wealth and savings. This is paradoxical to the consumers because their objectives are not always in line with any nation’s plans.
Finally, the paradox of thrift can freeze the loan-able funds when people save money in forms other than cash savings (Fazzari, 2007). Savings in an economy will freeze all the expenditure; this means there will be no incomes at all. Without incomes savings will never be possible in an economy. Economists call for planners to bring in favorable economic policies that will ensure that correct and balanced transactions are made within an economy.
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