The Paradox of Thrift: Savings and Investment

Key Points

• 1The paradox of thrift suggests that a rise in individuals’ savings can cause a fall in overall savings and investment.
• 2The concept was popularized by John Maynard Keynes in his 1936 book, The General Theory of Employment, Interest, and Money.
• 3Keynesian economists believe higher savings is bad for the wider economy.
• 4Critics argue that a fall in consumer spending leads to a rise in savings and investment.
• 5Critics argue that capitalists in a free economy will effectively reallocate higher savings in accordance with the greater preference that consumers show for goods in the distant future than in the near future.