Abstract
Secular stagnation—a condition of low growth and underemployment of resources—can arise when some agents intend never to spend a portion of their income. If savers intend to spend all their income in the future, there is an incentive to invest to meet that future demand. If savers do not plan to spend all their income in the future, the portion of income not intended to be spent is “Accumulation”. If Accumulation is correctly anticipated, it will lower expectations of future demand and deter investment, which will cause the economy to operate below full employment. If Accumulation is not correctly anticipated, investment will go on, but will lead to a crisis of over-production in the future, when the anticipated demand fails to materialize.1
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Notes
After completion of the final draft of this chapter, the author became aware of an earlier paper that anticipated the essential ideas of this chapter. The author wishes to acknowledge Palley, Thomas (March 1993) Under-Consumption and the Accumulation Motive. Journal of Radical Political Economics, 25, pp. 71–86.
Malthus, Thomas Robert (1836) Principles of Political Economy, second edition, reprinted by August M. Kelly, New York (1964), pp. 322 and 326.
Smith, Adam (1776) The Wealth of Nations, Modern Library Edition. New York, NY: Random House Inc., 1994. Modern Library Edition, p. 715.
Woodford, Michael (2003) Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton, NJ: Princeton University Press, p. 37.
See Wicksell, Knut (1936) Interest and Prices. London: Macmillan Ltd.;
Hayek, F. A. (1933) Monetary Theory and the Trade Cycle. London: Jonathan Cape Ltd.;
Hayek, F. A. (1967) Prices and Production. New York: August M. Kelly.
The effect of interest rates on consumption is a core driver of economic fluctuations of the contemporary “New Keynesian” models of the economy, which posits that sluggish adjustments of wages and prices to exogenous shocks to the underlying conditions of supply and demand in sectors of the economy can be offset by central bank adjustment of nominal interest rates. For example, a shock that causes income to contract can be offset by a reduction in nominal interest rates, since (1) sluggish wage/price adjustment ensures the nominal reduction will be a real reduction (at least for some time), and (2) the reduction in real interest rates will induce consumers to increase current spending, by reducing the amount of future consumption that must be foregone to indulge in an increase in current consumption. Thus, the impact of interest rates on economic activity in New Keynesian models is quite similar to their effects in the Wicksell/Hayek model. See Clarida, Richard, Jordi Gali, and Mark Gertler (December 1999) The Science of Monetary Policy: A New Keynesian Perspective. Journal of Economic Literature, XXXVII, pp. 1661–1707.
Leijonhufvud, Axel (2007) So far from Ricardo, So close to Wicksell. Paper given at the 2007 Jornadas Monetarias y Bancarias, Central Bank of Argentina, June 4–5, session on “Trade-off between Monetary and Financial Stability.” p. 6. http://www-ceel.economia.unitn.it/staff/leijonhufvud/files/axel4.pdf
Malthus, Thomas Robert (1836) Principles of Political Economy, second edition, reprinted by Augustus M. Kelley, New York, 1964, p. 325.
Fisher, Irving (October 1933) The Debt Deflation Theory of Great Depressions. Econometrica, 1 (4), pp. 337–357.
Fisher’s] diagnosis led him to urge President Roosevelt to subordinate exchange-rate considerations for the need for reflation, advice that (ultimately) FDR followed. Fisher’s idea was less influential in academic circles, though, because of the counterargument that debt-deflation represented no more than a redistribution from one group (debtors) to another (creditors). Absent implausibly large differences in marginal spending propensities among the groups, it was suggested, pure redistributions should have no significant macroeconomic effects. Bernanke, Ben S. (February 1995) The Macroeconomics of the Great Depression: A Comparative Approach. Journal of Money, Credit, and Banking, 27 (1), p. 17.
Ben Bernanke led the re-appraisal of Fisher’s idea and emphasized the balance sheet channel of propagating distress into the economy. See Bernanke, Ben S. (June 1983) Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression. American Economic Review, 73, pp. 257–276.
Richard Koo has become the leading contemporary advocate of the debt-deflation theory, which he has re-labeled “balance sheet recession.” See Koo, Richard (2014) Escape from Balance Sheet Recession and the QE Trap: A Hazardous Road for the World Economy. Hoboken, NJ: John Wiley.
Several additional costs flow from the contraction in lending, including the costs of reorganizing bankrupt borrowers and banks, and the decline in new ventures or the expansion of existing ones. As an example, Ricardo Caballero and his colleagues showed how, in Japan in the 1990s, banks continued lending to zombie borrowers, with dim prospects for profitable investment, in order to avoid the realization of the loan losses on their accounting books. Channeling loans to zombie borrowers diverted the flow of savings away from productive investments and deterred entry into the industries occupied by the subsidized zombies. Both effects reduced economic growth and job creation. See Caballero, Ricardo J., Takeo Hoshi, and Anil K. Kashyap (2008) Zombie Lending and Depressed Restructuring in Japan. American Economic Review, 98 (5), pp. 1943–1977.
It must be said, however, that economists have not been successful in modeling behavior when the economy is out of equilibrium—even where an equilibrium set of prices exist. For a well-respected, but unsuccessful, attempt to grapple with the problem, see Fisher, Franklin (1983) Disequilibrium Foundations of Equilibrium Economics. Cambridge, UK: Cambridge University Press.
See Krugman, Paul (1998) It’s Baaack: Japan’s Slump and the Return of the Liquidity Trap. Brookings Papers on Economic Activity, Vol. 2. Washington, DC: Brookings Institution, pp. 137–204.
See Leijonhufvud, Axel (1981) The Wicksell Connection: Variations on a Theme. In Information and Coordination: Essays on Macroeconomic Theory. New York: Oxford University Press, pp. 131–203.
Keynes, J. M. (1936) The General Theory of Employment, Interest and Money, pp. 210–211, London: Macmillan Press, Ltd, 1973.
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Aronoff, D. (2016). The Theory of Accumulation and Secular Stagnation. In: A Theory of Accumulation and Secular Stagnation: A Malthusian Approach to Understanding a Contemporary Malaise. Palgrave Pivot, New York. https://doi.org/10.1057/9781137562210_4
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