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What is the paradox of thrift?

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Quick Answer

The paradox of thrift is an economic theory that asserts that individuals choosing to save rather than spend their money can make a recession worse, and that individual saving can collectively be harmful. The paradox of thrift, like many economic theories, is not universally accepted as true.

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What is the paradox of thrift?
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Full Answer

Proponents of the theory posit that decreased spending by individuals harms businesses, causing the owners to lay off employees, who are then themselves unable to spend. This creates a snowball effect, as each round of layoffs impacts additional businesses, as well as heightening existing perceptions of weakness in the economy, which discourages further investment.

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