When one person saves, that person’s wealth is increased, meaning that he or she can consume more in the future. But when everyone saves, everyone’s income falls, meaning that everyone must consume less today. Explain this seeming contradiction.

The difference is whether one consumes now or in the future.

The seeming contradiction between individual saving increasing wealth but collective saving leading to a decrease in income can be explained by understanding the difference between individual and aggregate (or total) saving.

When an individual saves, they reduce their current consumption and set aside a portion of their income for the future. This personal saving contributes to their wealth accumulation over time. By saving, they are essentially deferring consumption to a later date, allowing them to invest or spend on higher-value items in the future.

However, when everyone in an economy saves, it can have a different effect on the overall income and consumption. In an economy, one person's spending is another person's income. When people collectively reduce their consumption and save more, there is less demand for goods and services in the economy. This decrease in demand can lead to a decrease in production and employment since businesses need customers to buy their products to generate income.

If everyone in the economy saves more and reduces their consumption, businesses may face a slowdown in sales, leading to reduced profits. As a result, they may need to cut costs, which can include reducing wages or laying off workers. This, in turn, can lead to decreased income for individuals and an overall decrease in economic activity.

Additionally, when savings are not invested back into the economy through channels like investments or loans, it can limit the availability of capital for businesses and hinder their growth and expansion. Reduced investment can also suppress innovation and productivity improvements that drive long-term economic growth.

So, while individual saving can increase personal wealth, if everyone saves simultaneously without productive investment, it can result in a decrease in overall income and consumption in the economy. It highlights the delicate balance between individual financial security and the importance of aggregate demand for a healthy and growing economy.