Keynes versus Krugman: A Discussion on Increasing Returns & Monetary Policy Perspectives.

AuthorPadhi, Satya Prasad

A debate that Keynes's focus is on demand stimuli to actualize savings-led expansions, and such Keynes versus classics distinction, could be much misplaced. Perhaps, fiscal deficits and other demand stimuli have no role to play in savings-led expansions. Savings, as aspects of greater skill and dexterity and foresight, etc. target some specific contract-based expansions, and the expansions would target substitution-led reallocation of resources. Demand stimuli, then, can translate into higher demand-led inflation (facing the supply constraints) and can negate the desired contracts and substitution-led expansion or the resultant forced savings negate the loans and other contracts underlying the bank credits (Robertson, 1961).

Keynes started with a particular criticism of pure savings-led expansions. An increase in income can generate savings that may not face any new investment opportunities-based expansions. Does the indicated periodic over-savings outcome, inducing demand constrained unemployment, require the demand stimuli? This could be a neo-classical focus that would underpin how to formulate fiscal and monetary incentives that can translate into a higher (real savings in line with money savings-linked) investment prospect (Blinder & Solow, 1973; Tobin & Buiter, 1974; Tobin, 1980).

However, Keynes was speaking of an over-saving situation that is caused by the lack of increasing returns and such macro expansions. He provides an entirely novel solution that aims at increasing returns in production possibilities. Expansion in one line of production would be associated with such expansions elsewhere. That is, a situation in which higher savings, or increases in it, would also face the expansion of consumer goods industries and, then, could negate the unemployment situation. Keynes (2013: 16-17), in correspondence with Hawtrey, notes how a scheme to increase the propensity to consume does not in the least will have the effect of diminishing savings. Further, to quote, "That you should be capable of confusing measures to increase the propensity to consume with measures to diminish saving seems to show that on the whole of this vital part of my theory our minds have still not met." He goes on to argue (:26), to quote (with restructured paragraphs), "I am not sure that the following is not the best definition of full employment in my sense: 'There is less than full employment if, the propensity to consume being assumed unchanged, an increase in investment will cause an increase in consumption.' As against this the normal assumption of the classical theory is that an increase in investment will involve a decrease in consumption." In a similar vein, in correspondence with Hicks, he (: 71) points out, to quote, "I should say that my theory provides for the supply of consumption goods and of goods in general having, or being capable of having, some elasticity, whereas the classical theory assumes that the supply of output as a whole is wholly inelastic; increase in one direction being necessarily offset by a decrease in another. If I were writing again, I should indeed feel disposed to define full employment as being reached at the same moment at which supply of output in general becomes inelastic."

The investment need desired for the increasing returns cannot be met by savings-led investment and reallocations. The periodic investments would exceed savings in the period and they have to be finance-based (independent of savings), but that would bring forth an increase in income that could allow for increases both in consumption and real savings.

Beyond the seminal contribution towards the short run income determination process, which otherwise suggests that expansions of savings and consumption goods complement one another with feedback effects and the need for the related policies for overcoming over-savings situations, Keynes's...

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