A.H. Hansen is also known as American Keynes. He has
analyzed trade cycles,
as well as he has suggested the measures regarding sustained economic growth.
The basic notion behind 'Secular Stagnation' is this that the capitalistic
economy is basically characterized with instability. Therefore, to create a
coordination between the economic activities state should interfere.
Features of the
The followings are the salient
features of this Thesis:
(i) The fall in the birth rate will affect the process of economic growth.
this way, the economic motivation will come to an end and the economy will
(ii) The economic motivation and development will also be influenced by fall in
autonomous investment due to fall in population. Again the discovery of new
resources will also become difficult.
(iii) The population of a country, the number of its people, and the people
itself play an important role in the economic life and in economic fluctuations.
The other economists like Mathews, Gordon, Handerson and Kurihara have also
supported Hansen. They are of the view that the fluctuations in supply of labor
play an important role in the determination of time schedule of trade cycles.
After 1930's Great Depression a thinking developed in US and UK that they cannot
only face short run unemployment, but they can also experience the depression
and crisis relating to long run period. This may occur due to fall in MEC in
long run. The economic growth in long run is attributed to rise in per capita
income. While the stagnation shows that in long run the per capita income has
become constant or it has fallen down, or it increases less than earlier.
According to Hansen, such all happens
that the capitalistic economies fail to maintain that high level of income and
employment which could be possible due to the potential resources of the economy
and technical progress. The secular stagnation theory is concerned with the
Maturity stage of capitalistic economies, where the savings increase at the
level of full employment but the net investment falls. As a result, the economic
activities shrink. The short run crisis and depressions become acute and tense.
The boom and prosperities are weaker and short-lived whereas the depressions are
stronger and long-lived. Hansen further says that the sick type of revivals die
even in their infancy while the depressions become powerful and powerful.
Consequently, the problem of unemployment gets acute day by day.
Thus, according to this theory a developed and mature economy may experience
'Deflationary Gap'. And in case of long run the determined level of income
may be at below full employment level of national income. In such situation
there will be unemployment and the level of the output of the economy will be
far less than that output which could be possible because of the resources of
the economy. In such situation the level of income may be less than earlier, or
the increase in output of the economy may be very slower. It is explained with
Here YP represents that crude level of GNP which an economy can produce,
whereas YA curve represents actual GNP of the economy. The secular stagnation of
the economy starts at time "T", and after the time "T" the difference in between the
potential GNP and real GNP increases. When the actual GNP of the economy reaches
the point S the secular stagnation starts, as after S the income of the economy
increases slowly. It may assume the shape of YC where income is increasing at a
constant rate; or income may fall down as shown by YD curve.
At the secular under employment
level, equilibrium may occur due to two reasons:
(i) At full employment level the
investment is not capable enough to offset the savings.
(ii) The propensity to consume
remains more or less constant.
Because of these reasons such a level
of equilibrium will come into being where unemployment will grow in the economy.
This situation will last for a longer time. And when unemployment or under
employment lasts for a longer period of time it is given the name of secular
stagnation equilibrium. It is explained with fig.
We suppose that the point Eo represents full employment equilibrium
level of NI. Here the AD curve (C + I) is capable enough to offset the savings which are
being made at Yo level of NI (assumed to be full employment level). In
other words, here the investment of full employment is equal to savings of full employment. Because of many a
reasons, the investment decreases - as shown by the curve C/ + I/. This intersects C +
S curve at E1
leading to the income level of OY1. This level of income is lower than Yo.
Because of fall in income the people will get unemployed. Therefore, in order to maintain the
income of full employment either the savings will have to be decreased or
investment will have to be increased. If savings decrease the consumption will
increase and AD will not fall and the economy will go on operating at full
employment. In this way, the secular stagnation could be avoided.
According to Hansen, because of fall in MEC the level of investment comes
down. The decrease in investment ultimately generates unemployment and
stagnation. Not only Hansen, but the orthodox economists like Smith, Ricardo,
Marx, J.S. Mill and modern economists like Schumpeter, Harrod and Domar agree upon it that in
capitalistic economies the rate of profits have a tendency to fall down. As a
result, the capitalistic system will face stagnation and crisis. The same like
is identified by Smith and Ricardo's models of economic growth which state that
after economic maturity an economy enters into 'Stationary State'. While Marx
and Schumpeter's model conclude with the "Demise of Capitalism". Again,
according to H - D model it is difficult to maintain equilibrium at full
Keynesian View about
Keynes himself did not present any theory regarding secular stagnation.
However, he was agreed with this that because of fall in population investment
will decrease. To meet this situation, either the rate of interest will have to
be decreased or consumption expenditures will have to be increased. Moreover,
Keynes says as an economy gets affluent the gap between actual and potential
output will increase. In such situation the defects of capitalistic system will
come to lime-light- In affluent societies the MFC becomes weakened as well as
the attraction in investment opportunities comes down because of concentration
of capital in a few hands.
Therefore, according to Keynes and MRs Robinson, followings are the reasons
of secular stagnation:
(i) The exogenous factors like technology, increase in population, and
discovery of new regions and markets.
(ii) The endogenous factors like concentration of industries and growth of
(iii) The social changes in the society as govt's control over the businesses
and pressure of trade unions.
In addition to these basic reasons the economists present the following
theoretical reasons regarding secular stagnation.
(i) The paradox of thrift.
(ii) The income inequalities which promoted savings.
(iii) The increased corporate savings, the increase in the ratio of dividends
and the growth of insurance business which increased savings.
(iv) The population declined in Europe and US which reduced investment.
(v) Because of fall in population and non-discovery of new regions etc. the
expenditures will not have to be made on means of transportation, bridges,
canals and power houses etc. As a result, the investment will decrease.
(vi) Along with growth of capital the MEC will decrease. This will discourage
(vii) Because of growth of capitalism the demand for capital saving technology
also increased which decreased investment. As with the growth of atomic
technology the demand for hydle and thermal plants has decreased.
(viii) The inventions and innovations reduced employment or encouraged
unemployment. Again, with the passage of time the space race expenditures and
defense expenditures are decreasing. With this all investment is decreasing.
(ix) The external trade sector problems are rising; the exports are not
increasing; the climate for foreign investment is not improving; and the flow of
foreign aids and loans is decreasing. Consequently, the investment and
expenditures remain low.
Because of all the above mentioned reasons either the savings increase or
investment decreases. As a result, the capitalistic economy will face secular
(i) The economists like Fellner, King and J.H. Williams have discarded the
Hansen thesis. They say that it is based upon exaggeration. They say that in
UDCs the population is decreasing and the discovery of new territories
has also come down. As a result, the investment has come down in UDCs. But as
far as Pakistan, India, Africa and Latin American countries are concerned such
like situation is not available there. In such countries the economy as well as
society is moving towards a change. The non-monetized economy is converting
itself in a monetized one. The plough is replaced by a tractor; and the
handicrafts are being replaced by manufactured goods. Accordingly, in such
economies how the secular stagnation will come into being. Here, neither over
savings nor under investment is taking place.
(ii) In case of DCs the Keynes psychological law of consumption has been
refuted which states that MFC < 1. As according to Dusenberry, Modigliani and
Friedman's theories of consumption the value of MFC is equal to one, and the APC
is not decreasing in case of affluent societies. Consequently, the rising of
consumption expenditures in DCs will lead to increase the investment, rather
(iii) Haberler, Peterson, Dusenberry and Learner are of the view that the
secular stagnation theory is based upon 'fall in population'. But it is
incorrect to say that investment would take place just on the basis of increase
in population. The changes in the tastes of the population can also become
responsible for increase in investment. In mature economies the style and
designs of automobiles, aircrafts and other consumer durables are changing day
by day. All this is increasing investment. In such situation, the secular
stagnation theory will be nothing more than an exaggerated story.
(iv) If we observe the circumstances of DCs we find that in these countries
govts are spending reasonable amounts on transfer payments, old age benefits,
subsidies, and social security measures. Again, the easy monetary policies are
also being followed in these economies. All such is increasing aggregate demand.
Rather creating secular stagnation they are creating inflation.