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