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Home Theories of Economic Growth Secular Stagnation - Hansen's Thesis

Secular Stagnation - Hansen's Thesis:

 

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 Thesis:

 

The followings are the salient features of this Thesis:

 

(i) The fall in the birth rate will affect the process of economic growth. In this way, the economic motivation will come to an end and the economy will experience stagnation.

 

(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 fig.

 

Diagram/Figure:

 

 

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.

 

Secular Underdevelopment Equilibrium:

 

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 employment.

 

Keynesian View about Secular Stagnation:

 

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 monopolistic competition.

 

(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 new investment.

 

(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 stagnation.

 

Criticism:

 

(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 decreasing it.

 

(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.

 

Relevant Articles:

 

Adam Smith's Model of Economic Growth
Ricardo's Model of Economic Growth
Classical Model of Economic Growth
Marxian Model of Economic Growth
J.E. Meade's Model of Economic Growth
Schumpeter Model of Economic Growth
Secular Stagnation - Hansen's Thesis
Kaldor - Mirrlees Model of Economic Growth
Golden Rule of Economic Growth
Neo-Classical Theory of Economic Growth
 

Principles and Theories of Micro Economics
Definition and Explanation of Economics
Theory of Consumer Behavior
Indifference Curve Analysis of Consumer's Equilibrium
Theory of Demand
Theory of Supply
Elasticity of Demand
Elasticity of Supply
Equilibrium of Demand and Supply
Economic Resources
Scale of Production
Laws of Returns
Production Function
Cost Analysis
Various Revenue Concepts
Price and output Determination Under Perfect Competition
Price and Output Determination Under Monopoly
Price and Output Determination Under Monopolistic/Imperfect Competition
Theory of Factor Pricing OR Theory of Distribution
Rent
Wages
Interest
Profits
Principles and Theories of Macro Economics
National Income and Its Measurement
Principles of Public Finance
Public Revenue and Taxation
National Debt and Income Determination
Fiscal Policy
Determinants of the Level of National Income and Employment
Determination of National Income
Theories of Employment
Theory of International Trade
Balance of Payments
Commercial Policy
Development and Planning Economics
Introduction to Development Economics
Features of Developing Countries
Economic Development and Economic Growth
Theories of Under Development
Theories of Economic Growth
Agriculture and Economic Development
Monetary Economics and Public Finance
History of Money

 

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