Paradox Thrift, Essay Example

I understand the “Paradox of Thrift” and why it occurs, but I do not exactly believe that it impairs the health of the economy.

If everybody saved their money during times of recession, then demand for products and services would decline. If the demand for products and services declined, then economic growth would stall. This would result in all kinds of additional economic problems such as jobs cuts, rises in unemployment, business failing to achieve sales revenue goals, and many other macroeconomic factors.

This actually makes sense on the surface. If everybody stopped spending their money right now, then the entire economy would eventually collapse. There are two major factors that prevent this from occurring.

Firstly, when the demand falls, the prices fall with them.
As prices fall, consumers are more likely to spend their money. That is why sales always result in revenue growth for businesses – and is why businesses regularly have promotional sales. If the demand for products and services fall across the macroeconomic board, then businesses will tend to lower their prices to generate more customers.

The second factor that contradicts the “paradox of thrift” is that people putting money into their savings accounts still does not remove it from the economy. As people put money into their savings accounts, it then becomes money that the banks can then lend to businesses. So, when more people save, the banks have more resources to lend out to businesses, and when the businesses have access to more resources, they can employ more people, sell new products, and drive up their revenue.

In conclusion, saving money actually carries out economic duties. Saving money can be just as stimulating for the economy as generating sales growth.  A strong economy requires plenty of both savings and sales to sustain.

Works Cited

Landes, Luke. The Paradox of The Paradox of Thrift. 20 December 2011. 5 May 2015 <http://www.consumerismcommentary.com/the-paradox-of-the-paradox-of-thrift/>.