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Theory of Secular Stagnation

In capitalist economies there is a tendency to fall in marginal efficiency of capital (MEC) in the long run. With the fall in MEC, profits are expected to fall after a limit, which results into a situation of secular stagnation. According to Keynes, "The richer the community, the wider will be the gap between its actual and its potential production, therefore, the more obvious and outrageous the defects of the economic system. Not only is the marginal propensity to consume (MPC) weaker in a wealthy-community but, owing to its accumulation of capital being already larger, the opportunities for further investment are less attractive." From the above analysis, it can be said that it is a situation where savings are more than investment and demand is less than supply in a capitalist economy. Causes of Secular Stagnation Secular stagnation in capitalist countries emerged due to two main reasons: Over saving Under investment                                               

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