The paradox of thrift – what if everyone became more frugal?

Having recently watched the Playing with FIRE documentary and contemplating the increased media attention around the Financial Independence movement, I started asking myself – What if this idea really took off? What if a lot of people embraced a more frugal lifestyle? What if everyone started saving more and Financial Independence became mainstream? What if a large percentage of the working age population didn’t need to work?

This is probably nothing more than a fun thought experiment, given the unfortunately high level of financial illiteracy, societal pressure to keep up with Joneses and the rampant consumerism now embedded deeply in our social conscious.

But what if…..

In the short term, society embracing a more frugal lifestyle will undoubtedly impact the economy. The economist John Maynard Keynes, coined the phrase, the paradox of thrift, which suggests that while saving benefits the individual, it may not benefit the economy as a whole. If all households simultaneously try to increase their saving by reducing their spending, then revenue for companies will also decline. The decrease in demand results in less income for both employers and employees. Eventually this results in a net loss, with total savings across the population having declined because of lower incomes and a weaker economy.

What if this becames a fundamental shift in long term behaviour? We’d likely see corresponding material changes in the economy, financial markets and how we live. Would stock markets collapse when the fallacy of continuous growth was revealed? What companies would go bankrupt? What industries would cease to exist entirely, which would thrive and what new ones will emerge? Infrastructure needs will shift – perhaps we’d see less cars on the road, with less people needing to commute to work? Housing prices in some areas will also likely plummet as jobs are lost or people migrate to where they want to live rather than where the jobs are.

Thankfully change isn’t like flicking a switch, so I really don’t think we realistically need to worry about the paradox of thrift effect. It won’t happen instantly, or even over a short period. Change in attitudes about money, and societal behaviours embracing frugality, will be gradual, if they happen at all. This is more likely to be a generational change.

While it’s easy to get caught up in doomsday scenarios, I’d like to think we’d ultimately end up with a much more positive and better off society, if more people were mindful about their consumption and spending habits. I admit to being doubtful that frugality or Financial Independence will become embraced by the mainsteam, but more people being exposed to the concepts and benefits of these alternative lifestyles can only be a good thing.

We don’t need to be worried about the paradox of thrift as a society, but as individuals many of us need to find a more sustainable balance regarding our personal finances, ecological impact and relationship to things.

Thanks for reading

Mr Simple Life


Subscribe to Simple Life Compass

Processing…
Success! You're on the list.

6 thoughts on “The paradox of thrift – what if everyone became more frugal?

  1. I often think about this. We are frugal here and becoming even more frugal each day. We rarely buy anything new unless we have no choice. Lately I’ve even been seeking local food sources. I can see pros and cons but lean wirh the pros of more people becoming frugal and shopping mindfully and locally

    Liked by 1 person

  2. In some ways the idea of achieving FI assumes that others will keep consuming the products the companies that you own produce. I through trackers hold tobacco shares – there’s no conceivable benefit to society of this type of company but they are profitable. If everyone stopped smoking would I be poorer? Probably – would the world be better off? Yes.
    That’s the dichotomy but all I can really do is invest / spend my money as I see fit. The big risk is that we can always invent more money but we can’t invent more resources – sustainability and survival will be themes for the next century.

    Liked by 1 person

    • Thanks for the very thoughtful comments. I agree that we are dealing with finite resources which logically has to be incompatible with the markets collective desire for continuous growth. The tobacco analogy is very powerful!

      Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s