Accelerator effect

Abstract: The paper begins by providing a very cogent and comprehensive account of the main findings and policy implications of the famous Keynesian Multiplier Theory. The author has brought out, through his analytical and perceptive arguments that the validity of the Keynesian Multiplier Theory, depends upon various crucial assumptions, most which are not valid in the case of underdeveloped countries. He argues that these assumptions include, inter alia, the following: existence of involuntary unemployment, upward sloping supply curve, existence of excess capacity in the consumption-goods industries, and comparatively elastic supply of the working capital, required for increased output. The paper brings out a path breaking result as follows: “a consequent blind application of the Keynesian formulæ to the problems of economic development has inflicted considerable injury on the economies of underdeveloped countries and added to the forces of inflation that are currently afflicting the whole world. The old-fashioned prescription of ‘work harder and save more’ still seems to hold good as the medicine for economic progress, at any rate as far as the underdeveloped countries are concerned”. The conclusions of this seminal paper have generated wide debate on the relevance of the Keynesian Multiplier Theory for development in the underdeveloped countries, like India.