According to Keynes, fiscal expansion would increase the price of ‘wage goods’ (that is, consumer goods) as a result of diminishing returns. This would simultaneously reduce real wages and increase profitability. Yet the concept of ‘forced saving’ was denied. Forced saving occurs when investment expenditure is financed by monetary expansion: as resources are reallocated to the production of capital goods, fewer commodities are available to consumers, and so forced saving takes place. Forced saving provided a key element in the Loanable Funds theory of interest rate determination. Later attempts to reconcile the Loanable Funds theory with Keynes’s Liquidity Preference theory are critically examined, and the latter is judged to be an unwarranted generalisation based upon very special circumstances.
—G. R. Steele, introduction to Monetarism and the Demise of Keynesian Economics (New York: St. Martin’s Press, 1989), 4.
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