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

29 Pages Posted: 24 Sep 2018

See all articles by Rahul Menon

Rahul Menon

Tata Institute of Social Science

Date Written: May 7, 2018

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

Suggested Citation

Menon, Rahul, Excess Savings, Under-Consumption and Secular Stagnation: A Critique of Modern Stagnation Theories (May 7, 2018). Available at SSRN: https://ssrn.com/abstract=3245694 or http://dx.doi.org/10.2139/ssrn.3245694

Rahul Menon (Contact Author)

Tata Institute of Social Science ( email )

S.R. Sankaran Block, TSIPARD Campus
Rajendranagar
Hyderabad, Telengana 500030
India

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