Paradox of Thrift
Organization Behavior and Human Resource Management

Paradox of Thrift

 

The term “Paradox of Thrift” refers to the situation where increase in savings ultimately reduces to productive capacity, employment and saving itself. J.M. Keynes introduced the concept of paradox of thrift while discussing the great depression of the 1930s.

Thriftiness means the tendency of saving more. The classical economists regarded the saving as a great social virtue. According to them, investment is determined by the saving. They thought that individual savings would create national saving and this saving would be converted into national investment. Therefore, saving is virtue or good for the economy.

J.M. Keynes does not accept the concept of savings described by the classical economists. Keynes said that saving, which is good or bed depends upon its use. Savings in the forms of hoarding would decrease the consumption of the society. From individual point of view, saving may be virtue but from economy point of view, saving is social vice or evil.

Keynes said that savings reduce the expenditure. But in society, the expenditure of one person is the income of other person. So, saving in the form of hoardings decreases the consumption. This would lead to the situation of decrease in effective demand. As a result of this, there will be over-production, unemployment and economic crisis in the economy. It reduces the profit and the investors will be discouraged for investment ie. The investment will also decrease. Ultimately, it reduces the national income and saving.

Therefore, low investment reduces the income. When income is low, the amount of saving will also low. Thus, the process of reduction in savings due to an increase in savings in the beginning is called Paradox of Thrift.

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