What is the paradox of thrift?

The paradox of thrift refers to the phenomenon where, during times of economic downturn, increased saving by individuals can lead to a decrease in overall economic demand. When people decide to save more money, they typically cut back on spending. This reduction in consumer spending can cause businesses to experience lower sales and revenue, leading them to decrease production and potentially lay off workers. As a result, the overall economic activity declines, and this can ironically result in reduced savings at the macroeconomic level.

Although saving is generally seen as a positive behavior for individuals, when many people simultaneously choose to save more, it can lead to negative outcomes for the economy as a whole. Thus, the correct interpretation of the paradox lies in recognizing that increased saving does not automatically lead to a stronger economy, but rather, it can result in lower aggregate demand and economic stagnation in the short run.