The Paradox of Thrift in a Simple Stock-Flow Consistent Model

Classical economists thought that a thrift campaign would enrich households. John Maynard Keynes argued that a rise in thrift would, paradoxically, impoverish households because of a fall in aggregate demand. This Demonstration shows the effect of a one-time, permanent change in households' propensity to save out of income for Godley and Lavoie's (2007) simplest stock-flow consistent model ("MODEL SIM", for simplest). We see that a rise in the savings propensity decreases consumption and disposable income temporarily, but as wealth accumulates, consumption and income return to their steady-state values. For this model, therefore, there is a "paradox of thrift" in the short run, but not the long run.