The paradox of thrift

A paradox, the definition of which we are familiar with, means a statement that is devoid of logical meaning and diverges from generally accepted notions. This category also includes the statement that the growth of personal income savings may cause a drop in the actual volume of investments and capital in the economic sphere.

The classical economic theory was based on a different definition. She expressed the opinion that savings, representing capital, which, if necessary, can become a source of investment, serves as a stimulus for the growth of national income. That is, it is a reserve investment fund.

In contrast, the British economist George M. Keynes defined that the desire to create inventories exceeds the desire to invest in countries with a highly developed market structure. The paradox of thrift is as follows:

- with the growth of capital, its effectiveness is reduced, this is due to the reduction in the number of high-yield opportunities for its investment;

- an increase in the standard of living of the population leads to an increase in the volume of its savings.

However, unused capital leads to a reduction in spending on consumer needs. This causes a reduction in GDP and aggregate demand. As a result of these processes, the overall level of income is reduced by an amount that exceeds the amount of unused capital.

Consequently, the paradox of frugality is a reduction in the prosperity of the population with a simultaneous increase in its savings. Investments of an autonomous type contribute to the growth of national income, as well as derivative investments. This is due to the effect of the multiplier effect.

The growth of any element of autonomous costs contributes to an increase in social income. At the same time, the value that improves the national welfare exceeds the amount of the initial level of expenditure. In contrast, a decrease in income hinders the growth of investment, which entails stagnant phenomena in the economic sphere.

If there is a problem of part-time employment in the country , the paradox of frugality leads to a decrease in the consumer level. This process affects the size of aggregate demand. Producers of goods can not realize their product and make a profit. Their enterprises lose their attractiveness as an investment object. This leads to a decline in production, an even greater increase in unemployment and a fall in the level of aggregate income.

The nation is getting much poorer. This principle was confirmed at the time when the Great Economic Depression of 1929-1933 was observed. The paradox of frugality in the presence of a situation with full employment contributes to the prevention of the financial sphere from "overheating". This is due to a decrease in the price level due to a decrease in aggregate demand, which serves as one of the main indicators of the economy.

It is consumption that distracts more than sixty percent of all expenditures of the population. Even very small changes in demand can have a significant impact on the balance of national income and employment levels. The creation of an accurate consumption model would help to ensure a steady increase in GDP. With its help, it would be enough simply to predict the changes in demand with the growth or decrease in the number of investments and government orders.

At present, many consumption patterns have been created. Scientists try to calculate a certain average algorithm, which will most fully describe the aggregate demand. The creation of an accurate model will allow the most effective management of economic processes in society.