Date Posted: 7/5/2012 12:03:28 PM
Posted By: moff J Membership Level: Silver Total Points: 485
The paradox of thrift is a paradox in economics that is popularized by the Keynesian economics. It states that if everyone tries to save more money during times of recession, then aggregate demand will fall and will in turn lower total savings in the population because of the decrease in consumption and economic growth. It is paradoxical through the fact that individuals compose the population; therefore, an increase in an individual's savings should also increase the total population's savings. However, according to the Keynesian economics, the opposite is true.The reasoning behind this paradox is that many economies are demand-based and therefore an increase in consumption, as opposed to saving, will lead to an increase in the total income and thereby higher economic growth. By putting the paradox into perspective, it can be shown that when the total population saves more, the incomes of the firms reduce because of decreased consumption. This means that firms are selling less of their products. This in turn leads to lower salaries and downsizing thereby reducing the income of the population. This results to a lower income available for saving and therefore the total population savings decrease and this in turn slows down economic growth.This paradox could be what is happening in Kenya. Individual people are trying to save their incomes with the hope that the cost of living will go down. They therefore end up spending less and therefore reduce the aggregate demand in the economy which in turn means decreasing incomes for the companies. This means lower taxes and slower salary increments, if any, together with downsizing and retrenchments in other industries. The outcome of it all, economic growth slow down and tougher living conditions for the population.Many people in the country are complaining that the cost of living has gone up. This is absolutely true. They are therefore holding on to their money, spending on only what they deem to be important, and saving the rest of the money. To make matters worse, they are not saving with the banks as they have reservations about the banks due to the volatility of the financial markets and low interest rates being paid by the banks. What they do not know is that by failing to spend, they are hurting the economy even more. Therefore, in as much as government expenditure has been increasing tremendously, households consumption, which is the biggest component of the GDP also needs to increase in order to bolster economic growth.In conclusion, it can be said that spend more to get more in the long run and for the larger population.
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