Excess Savings, Under-Consumption and Secular Stagnation: A Critique of Modern Stagnation Theories

Abstract

Hansen’s theory of secular stagnation has been resurrected in mainstream discourse today through economists such as Lawrence Summers and Paul Krugman. The modern theory of stagnation believes that excess savings – brought about due to slowing population growth and the savings habits of developing economies - cannot be absorbed due to the inability of the nominal interest rate to go below zero. This theory is flawed in calling itself “Keynesian” since its focus on the interest rate as bringing savings and investment into equilibrium runs counter to Keynesian thought. A search for the theoretical antecedents of modern stagnation theory leads one to the under-consumption theories of Hobson and Malthus, in its focus on excess savings and constraints on consumption. As such, the central flaws of under-consumption theories find themselves repeated in modern stagnation theories, namely, its neglect of investment and its mistaken conception of the capitalist production process.

Keywords: Secular Stagnation, Under-Consumption Theories, Keynesian Macroeconomics, Excess Savings, Natural Interest Rate

JEL Classification: B22, E12, B50