Continued from Part 1 ….
Something reverse can happen which would be even more damaging than the just discussed case. Instead of Consumption growing at a faster rate than Savings, it might so happen that Savings and Investment grow at a much faster rate than Consumption. For example, prior to Great Depression, the importance of aggregate demand as explained by Keynes was not understood. As a result government policies normally favored huge Investments and were not geared towards propelling aggregate demand. It is well documented that one of the reasons for the Great Depression was US government policies which led to uneven distribution of income heavily in favor of the rich and the consequent depletion of the buying power of the households. So Great depression could have easily resulted from Investment/Savings growing at a much faster rate than Consumption. Huge Investment/Savings would mean that huge surpluses are realized by the producers of the Consumption sector. This would prompt them to invest in an even bigger way in plant and machinery and this huge Investment/surplus pattern continues for a few years. After a few years, we have huge capacities with...
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