Keynes' Paradox of Thrift?

Question

if i, as a consumer, save money, i benefit from the extra money which, at the very least, earns interest and makes me more liquid financially.
if all the consumers save money, it is detrimental to the society as there is a drop in spending and investments.

could Keyne's Paradox of Thrift be explained in any other ways, other than ?

again, i have to say, if you don't get what im saying, please at least check out the facts before you give answers like "yes." or "no.", lets not waste our time.

Answer 1

I have explained it to my classes using the analogy of immunizations. If nobody else is getting immunized, it is beneficial to me to do so because I protect myself that way. But if everyone is getting immunized, it's more advantageous for me not to because I am already protected by other people's actions and can best serve my own interests by avoiding the small risk from the shot. Essentially it is the contradiction beteen individual and group benefit, and there are many examples.

Of course, in the world of economics things are much more complex than the paradox indicates. Even Keynes knew that, and many economists snce have elaborated on the issue. As one small example, if everyone saves, the availability of capital drives interest rates down, spurring investment, lowering prices and increasing prosperity for all. I like to use the analogy of nature's feedback mechanisms even more than Keyne's Paradox.

Answer 2

If you ask me, the 'Paradox of Thrift' is based on enough other fallacious ideas to make it of little consideration.

For example, it makes what is a nominally accurate assumption that if people suddenly spend less, businesses will suddenly not make as much money, and that they will suddenly react by restricting wages. But let's poke holes in this a bit.

Obviously someone who saves money doesn't want to save an infinite amount of money. NO amount of money is helpful unless you spend it. And that is exactly the point of savings - to be able to spend it later. So although there may be a very short-term drop in spending and revenues, I fail to see how this can possibly result in a long-term drop unless people are not SAVING their money, but are instead DESTROYING it. The Paradox only works if money is removed and NEVER put back. Which is a nonsensical model.

Likewise, it assumes businesses slavishly and exactingly correlate payrolls with income. But this is not always the case either. Many businesses when faced with lower profits compensate by trying to EXPAND instead of shrinking. Many businesses are willing to take a short-term loss in order to retain a good employee base for the long term (replacing employees when the economy changes is not a no-cost process either, and even firing them is not no-cost). And some diversified businesses can have sectors which operate at a loss for YEARS (Microsoft's games division has NEVER turned a profit, for example).

And let's not forget that there are some businesses whose revenues are pretty close to constant REGARDLESS of the wealth of the consumers. Tripling the cost of gasoline in America hasn't changed consumption of it significantly at all. There are some things people are going to buy no matter how much money they have. So there will always be businesses that survive and even thrive in even evironments of extreme thrift.

Thus, the explanation I like to use for Keyne's Paradox of Thrift can be summed up in three words: Almost entirely false.

Answer 3

Keynesian economy is based on the flow of capital Every dollar spent within a community in fact becomes something like eight dollars. Thrift is false because it fails to realise the essence of capital shown in the exchange of goods and services. It's the story of the Talents from the Gospels. Interest is a pittance compared to working capital and a healthy economy.