Written by V P Singh, on 10-23-2008

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INTRUDUCTION:  The present symptoms in the world market make us recall the beginning of the great depression of early thirties wherein markets were full of the gluts of commodities but customers were not available to purchase the commodities despite the prices were going down. The total demand in markets had lagged behind the total supply. It was Keynes to point out that the lack of effective demand had been the sole factor causing initiation of that great depression. The lack of effective demand was taken as resulted on account of investment lagging behind saving. The investment was lagging behind saving because the inactive portion of total saving was not being compensated through autonomous investment based on deficit financing. The problem was solved by adopting deficit financing and pump priming as suggested by Keynes.

THE PRESENT PROBLEM:  The present situation in the world market also points towards the lack of effective demand. But, this time the reason is not the lack of investment or, in other words, the uncompensated inactive portion of saving. The budget deficits in all the developing and the developed economies are not only being enormously increased but are also rapidly outpacing the inactive saving. In latter seventies a group of prudent economists had warned the developing world that inequalities of income distribution were going on increasing with the advancement on development path. They had opined that this would create a strong barrier on the path of economic development and economic growth. Their warning was neglected on account of two reasons. Firstly, the policy makers had a wrong notion in their mind that the slowly rising inequalities would create a sound group of rich investors to feed the future development based on heavy investment plans. Secondly, the policy makers were either under the influence of the rich group that was grabbing the fruits from distribution inequalities, or some of the policy makers belonged to the fruit grabbing rich group.  Therefore, some from the high income group started to rapidly become richer but their number went on decreasing side by side. The growth rate of their income remained considerably higher than the growth rate if national income on account of rising inequality of income distribution. The remaining of the riches, lagging behind in the fast race of rapidly becoming richer, were thereby slang down to the following middle income group to add to the number of persons in middle income group. On the other hand, the poverty alleviation programmes helped a considerable number of from the low income group shift to middle income group. Thus the mass of middle income group went on rapidly increasing in number and thereby the middle income group became a dominant consumer group. The middle income group has become so wide and so dominant that today the word ‘market' means the market of consumption items pertaining to the consumption of middle income group, unless it is otherwise specified. The rich minority heavily invested in the production of commodities pertaining to the consumption of the vast middle income group. But, the disposable income of this group increased with a lower rate than the growth rate of the production of their consumption items because of the rising inequality of income distribution. That is why we are coming across slackness especially in the market of the consumers' goods pertaining to the consumption of middle income group. The producers have to allure customers by launching various sale enhancement schemes. These schemes are though being proved fruitful up to some extent, so far, but on the cost of decreasing profit rate. Today's producer has much concern with the rate of profit (marginal efficiency of capital in the words of Keynes) instead of the total profit. Therefore, if the state of affairs remains persisting, the producers will have to cut production in the near future. This will become a green signal for the entrance of a real depression in the world market and this will harm the world economy not less than the great depression of early thirties.

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