Paradox of Thrift
The Keynesian observation that when all individuals simultaneously increase saving, total savings falls because lower spending reduces national income.
What is Paradox of Thrift?
The paradox of thrift is a Keynesian economic concept describing how individually rational saving behavior can lead to collectively harmful outcomes. When all households simultaneously attempt to save more — especially during a recession — the resulting reduction in consumer spending lowers aggregate demand. This leads to lower business revenue, job losses, and income reductions, which ultimately reduce the total amount of saving the economy can support. What is prudent for an individual (spending less and saving more) becomes self-defeating when everyone does it at once, deepening the very downturn that prompted the desire to save. The concept is central to the Keynesian argument for government stimulus during recessions.
Example
During the 2008 financial crisis, US personal saving rates spiked as households cut spending to rebuild finances. While individually rational, the simultaneous spending pullback sharply reduced GDP and corporate earnings, causing layoffs that reduced income — making it harder for many households to save as much as intended.
Source: John Maynard Keynes — The General Theory of Employment, Interest, and Money (1936)