Paradox of thrift

28.03.2015 |

Episode #4 of the course “Brain-twisting paradoxes”

The paradox of thrift is an economic problem which tackles the question “Is it better to spend or save?” The arguments of the two camps go like this:

Free marketers like Friedrich Hayek and Milton Friedman say that when money is tight, it’s best to be thrifty and save all you can. The banks that hold your savings can then use that money to invest in social advances that will create more jobs. This simple concept has clear long-term benefits.

On the other side of the argument are economists like John Maynard Keynes, who say long-term economic strategies like those proposed by Hayek and Friedman are too long for the lifespan of an individual person. People don’t live long enough to see the benefits of their self-imposed thriftiness, he says. Instead, the government should spend money to create jobs now for the constituents they are serving. According to Keynes, if the government refuses to spend while people and businesses also save, no one has money and unemployment gets worse. Keynes argues that by the government creating jobs in the present, they will easily be able to recuperate that money later on with taxes, because people will be happy to pay them since the government got them back to work.

Thus, according to the paradox of thrift, while saving and protecting your money may seem like the logical thing to do in a recession, spending may actually be the best solution. Consumer spending contributes to the collective good, because one person’s spending is another person’s income.


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