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                                                                                                                 
Over saving: In capitalist economies main causes of over savings are:
Increase in marginal propensity o save (MPS)
Unequal distribution of income and wealth 
Saving schemes 
Institutional savings
  Under investment:
In developed countries, investment does not increase at the same rate as the income does due to the following reasons:
Decreasing rate of population growth
Existing stock of capital goods
End of colonisation
Change in nature of technology
Criticism of the theory of secular stagnation

Prof. A. P. Lerner says that changes in wants, fashion and tastes of consumers occur continuously. As a result, changes in these will increase consumption, which will further increase the investment. Economist believed that due to the following two reasons there will be no danger of secular stagnation:

Advancement in technology will provide more opportunities for investment.
Increase in productivity pushes up the prospective yield
Suggestions to control secular stagnation

It was believed by some economist that if secular stagnation can not be controlled in capitalist economies then the decline of capitalism starts. Following measures should be done in this regard:

Government should remove the inequality of income and wealth
Increase in public expenditure
Capitalist economies increase investment in underdeveloped economies
By adopting cheap monetary policy
By adopting the policy of deficit budget