PRAGOTI

The problem Mr. Patnaik essentially deals with is deflation(a decrease in money supply--I know this ain't the mainstream definition of the term). I, of course, don't agree a dime with Mr. Patnaik's theories. Unlike what is implied in the book, deflation does not precede crises in Capitalist economies. It's the side-effect of depressions that causes a sudden drop in money supply(caused by people hoarding money, banks contracting credit, clearing out of mailinvestments etc.) causing the deflationary spiral. So let there be a rethink of actual facts. In fact there were decades of deflation in the US in the 19th century, without any resultant depression. There was the crises of 1836, but deflation then was the result of contraction of bank credit caused by the crises. That is, the crises preceded deflation, not the other way round.

Anyways, what is really so bad about hoarding? Suppose 50% of the money in the economy is hoarded, and lets roughly assume it causes a price level drop of 50%. Yes, businesses will find their selling costs crash, leading them to losses. What next? Are we gonna remain in the crash forever? No. Businesses are gonna sell their excess inventories at cheap costs, and start doing business again. Now with decreased levels of money in the economy, the raw materials will be bid at lower prices to adjust to the new set of lower selling costs. There will be changes in the pattern of ownership as well.

I do not by any chance claim that this process will happen really quick, but lesser the intervention by governments, quicker will the process be.