On Interest, Investment and Economic Growth

In “The Interest Rate Affair,” Sugata Marjit (EPW, 4 April 2015) points out the deficiency of one particular mainstream macroeconomic viewpoint. Marjit’s counterpoint, which we are in broad agreement with, is that a lower rate of interest does “not spur investments” because “[t]he rate of investment depends on other factors” (p 14). However, there are logical issues with his neoclassical economic methodology.

Without implicating them, we acknowledge G Omkarnath and Tanya Sethi for their very useful comments.

In “The Interest Rate Affair,” Sugata Marjit (EPW, 4 April 2015) points out the deficiency of one particular mainstream macroeconomic viewpoint. Marjit’s counterpoint, which we are in broad agreement with, is that a lower rate of interest does “not spur investments” because “[t]he rate of investment depends on other factors” (p 14). However, there are logical issues with his neoclassical economic methodology. Another claim of his, which we disagree with, is also critically examined, albeit very briefly, in this short response: “[w]hat an interest rate cut does is directly increase the profits of the corporate sector” (p 14).

Our response begins at a more basic level and asks the following question: what determines economic growth? Subsequently, we discuss the determinants of investment wherein Marjit’s simple model capturing the “incentive to invest” is critically assessed. This comment ends with some observations on the connection between interest rate and corporate profits.