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Thrift, Marginal Competence Of Capital

 Thrift, Marginal Competence of Capital

   On the saving side, Keynes considered saving as a social vice for its surplus of saving that leads to a drop in total demand. Again, this notion is not appropriate to under developed nations for the reasons that saving is the universal remedy for their economic backwardness. Capital formation is the key to fiscal development and capital formation is feasible through amplified saving on the part of people.

   Underdeveloped nations can advance by restraining consumption and rising saving, as divergent to the Keynesian view of hoisting consumption and plummeting thrift. To under developed nations, savings is a virtue and not a vice.

  1. Marginal Competence of Capital

       As per Keynes, one of the significant aspects of investment is the marginal efficiency of capital. There is an inverse relationship amidst investment and MEC hikes. This relationship is nevertheless not applicable to under developed nations. In such financial systems, investment is at a low level and the MEC is also low.

       This paradox is due to the insufficiency of capital and other resources, small size of the market, low demand, high costs, under developed capital and money markets, uncertainties etc. All these aspects keep the MEX and investment at a low level.

  2. Rate of Interest

       The rate of interest is the second determinant of investment in the Keynesian system. It is in turn ascertained by liquidity preference and the supply of money. Of the purpose for liquidity preference, the transactions and precautionary purposes are earnings elastic and they do not influence the rate of interest. In underdeveloped nations, the liquidity preference for transactions and precautionary purpose is huge and for the speculative purpose low.

       Hence, liquidity preference fails to influence the rate of interest. The other determinant of the interest rate is the supply of money. As per Keynes, enhance in supply of money lowers the interest rate and encourages investment, earnings and the level of employment. But in underdeveloped nations an enhancement in the contribution of money tends to the rise in prices rather then to the drop in the interest rate.

       As Keynes himself observed in citing a developing nation’s example, “The history of India at all times has provided an example of a nation impoverished by a preference for liquidity volume to so strong a passion that even an enormous and unremitting incursion of the precious metals has been inadequate to bring down the rate of interest to a level which was compatible with the growth of real wealth.”

       Thus the rate of interest in under developed nations is not prejudiced so much by the demand for and the supply of money as by customs, behaviour and organizational aspects.

  3. The Multiplier

       As per Dr.Rao, Keynes never formulated the fiscal difficulties of underdeveloped nations nor did he discuss the relevance to these nations for either the objective or the policy that he proposed for the more developed nations. The result has been a somewhat obtuse application of Keynesian economics to the problems of under developed nations.

   The Keynesian concept of multiplier depends on the following four postulations.

  1. In-deliberate redundancy

  2. An organisational financial system where the supply curve of productivity inclines upward to the right but does not become vertical till after a substantial interval

  3. Surplus competence in the consumption  goods firms and

  4. Relatively elastic supply of the working capital required for enhanced productivity.

       Given that the above postulations, if we relate the multiplier thesis on underdeveloped nations, the multiplier value will be in fact much greater than even in a developed nation. We know that the multiplier is based on the dimension of the marginal inclination to consume.

       As in an under developed nation the marginal inclination to consume is reasonably huge, small percentage increase of investment are tended to encourage full employment much prior as in a developed nation where the marginal inclination to consume is squat. This is something inconsistent and divergent to reality.

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