In the Keynesian model, when people try to save more, national saving decreases while income decreases.
This is called the paradox of thrift. Reduced saving also decreases future standard of living according to the theory of economic growth.
In the Keynesian economic framework, the concept of national saving being equal to national income forms a fundamental premise.
However, the paradox of thrift emerges when individuals collectively attempt to save more.
When people increase their savings, the immediate impact is a reduction in current consumption, which in turn leads to a decrease in overall national income.
This paradox arises because while saving is crucial for future investment and growth, an abrupt increase in savings without corresponding investment or consumption can lead to a drop in aggregate demand. This decrease in demand can further suppress income and economic activity, potentially leading to a cycle of reduced spending, income, and overall economic growth—a scenario detrimental to the economy.
Keynes highlighted that shifts in household preferences, favoring consumption over saving, can positively influence aggregate demand. When individuals choose to spend more rather than save, it stimulates current economic activity, bolstering aggregate demand and potentially driving economic growth in the short term.
However, a sustained reduction in saving can have adverse effects on future standards of living and long-term economic growth.
Reduced saving limits the pool of resources available for investment in productive ventures, infrastructure, and innovation, ultimately impacting a nation's capacity to improve productivity and enhance living standards over time.
Achieving a balance between saving, investment, and consumption is crucial for sustainable economic growth and long-term prosperity.