Wednesday, March 24, 2010

paradox of thrift

the amount left over after the consumption by an individual or society is known as the saving. people do not spend all of their incomes on consumption. since people are always worried about their future, they save some part of their incomes. this will free them from their future economic worries. individual saving will determine the national saving. though national saving is composed of individual saving, the effects of these savings in the economy are of different types.
the classical economists were of the view that the saving was good for the economy because according to them the investment was determined create national saving and this national saving would convert into national investment. therefore, the economists were of the concept that the saving and investment were inseparable from each other. but another economists criticized the concept of saving that was given by the classical economists. they were of the concept that saving would decrease the consumption in the economy. they explained that this would lead to the situation of under consumption. thus, decrease in consumption will result in the decrease in effective demand and as a result there will be over-production, unemployment and economic crisis in the economy.
another economists had a different view in regard to saving. he criticism the concept of saving given by the classical economists and said that saving being good or bad depends upon its use. if saving is invested then there won't be any decrease in effective demand. in such a situation, Savina won't have any kind of harm in the society. but if saving is kept hoarding instead of investing then this will have negative effect in the economy. from individual point of view saving is a virtue but form the social point of view saving is a social evil. if any individual cuts down the consumption and saves some part of the income, then it is good for that individual. but this won't help the society in any way. the reason for this is that the expenditure of one personify the income of the other. in a given period the saving of one individual is equal to the decrease in the income of the other individual. this will result in the decrease in the saving of the second individual or party. so, the more the single individual saves the less will be the social saving. explained the concept of saving under the macro-economics in accordance to social saving rather than individual saving, thus saving is vice but not virtue.
so , saving decrease effective demand in the economy resulting a decrease in the price and profit.as a result, investors will be discouraged to invest. this will further decrease the employment, production and income which in turn decrease the saving. this will convert the saving into social evil. so in the beginning saving is a virtue to the individual but to the society and the nation it will become harmful. this in the end and also harms the individual. therefore, saving turns in to misfortune. this is known as the paradox of thrift.

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