The Paradox of Thrift

Here’s an interesting fact for you: in some circumstances, spending is economically better than saving. Now, you may be bewildered as to why this is true, I am going to use the power of logic to explain. 

At an individual level, saving is a smart financially decision as it helps build wealth and prepare for emergencies. However, when you are in a society, you saving money is cutting someone’s income and you spending money is giving someone income. If everyone decided to have on toothbrush for life and save all the money spent on toothbrushes, the toothpaste brush industry would be in shambles and would vanish in a matter of weeks, if not days. Apart from the business aspect, it can damage individuals as well. This is the paradox of thrift, found by economist John Maynard Keynes.

To take an extreme example, if you were working in a company that makes lipstick, and you save most of your money, just spending on food and an apartment. The car dealer you were supposed to buy a car off, the Netflix head from who you were supposed to buy a subscription off, and so many others have just lost their income. Let’s pretend everybody in your company follows that principle. Netflix, the car dealer, and nother companies go out of business, and a huge unemployment crisis occurs. Now, those who lost their job are not going to spend on lipstick, so you go out of business. By you not spending, an entire society has an economic crisis now. Of course, this is very extreme but this example has shades of truth to it.

Common examples include The Great Depression, 2008 financial crisis, and Japan’s lost decade. This is already a long post, so I won’t go into details of the example, but they’re pretty famous, so search it up. Bye for now.