Paradox of thrift

According to Robert, classically trained economists believe that the government should get out of the way and let the economy repair itself. Keynesian economics, on the other hand, argues that the government must borrow money to complement the contributions of the private sector in narrowing the production deficit. The basic concept of a paradox of thrift is that what is beneficial to one person does not be beneficial to the other participants (Murphy).

If everybody wants to save at the same time, it would lead to hardship and less overall saving. Using the example of a family that decides to cut off expenditure thus saving the cut cost, it is evident that whatever they keep out of their move is income lost by the affected businessman. It translates to the amount of savings at a local bank. The revenues of the whole community remain the same even after original homesteads decide to cut costs. However looking at the broader picture, the affected businesses may determine on reducing their expenditure to curb their drop in income. It will, therefore, balance back their spending and revenues. For the whole community as a whole, there isn’t any significant changes in the total income and total savings as per such actions.

On the other hand, the business owners might decide to also cut on both their expenditure n their savings by little amounts. It will mean that the total savings in the whole community increases.

In another instance, according to Fazzari if the government borrows money, this could have a negative impact on a small unit family that has intentions of saving. However, the truth is the additional income developed by the government ends up as other members of the business community income. They end up spending the money and hence a rise in the economy. These two scenarios show no Keynesian effect. On the other hand, if the immediate recipients of the governments borrowed income doesn’t increase their expenditure hence saving, they increase the saving of the community.

Fazzari demonstrates the importance of unit saving and the importance of governments borrowing. This is by analyzing the two case scenarios. However, from the case scenarios, it is evident that the paradox of shift idea uses lots of unrealistic assumptions. The paradox of shift relies on circular economy and is not used for sudden changes in saving decisions (Murphy).

Bibliography

Murphy, Robert P. Nothing Paradoxical About Thrift. 2 March 2009. .