If the government increases a certain amount of public expenditure, it will reduce the corresponding amount of private investment, so the total demand remains unchanged. Western economists have two different opinions on crowding out effect. Economists who oppose state intervention believe that the crowding out effect is undeniable. Because whether the money of public expenditure comes from private taxes or private loans, if the money supply remains unchanged or increases little, the increase of public expenditure will cause pressure on money demand, force the interest rate to rise, and thus reduce private investment. Therefore, the crowding out effect will not change the total demand.
Keynesians who advocate state intervention believe that: (1) The crowding out effect of public expenditure must be analyzed according to specific circumstances. Generally speaking, crowding out effect will exist only after full employment is achieved. Under the condition of insufficient effective demand, there is no problem of public expenditure crowding out private investment during the depression. (2) Besides the level of interest rate, there are also expected profit rate factors that affect private investment. If increasing public expenditure can improve the expected profit margin, then public expenditure will not "crowd out" but "crowd in" private investment. In addition, even if public expenditure affects the level of profit rate, because private investors are more sensitive to changes in expected profit rate than to changes in interest rate, public expenditure cannot "crowd out" equal private investment. Therefore, increasing public expenditure can still increase aggregate demand.
(Editor in charge: s)
