Crowding out (economics)

In economics, crowding out is a phenomenon that occurs when increased government involvement in a sector of the market economy substantially affects the remainder of the market, either on the supply or demand side of the market. One type frequently discussed is when expansionary fiscal policy reduces investment spending by the private sector. The government spending is "crowding out" investment because it is demanding more loanable funds and thus causing increased interest rates and therefore reducing investment spending. This basic analysis has been broadened to multiple channels that might leave total output little changed or even smaller. Other economists use "crowding out" to refer to government providing a service or good that would otherwise be a business opportunity for private industry, and be subject only to the economic forces seen in voluntary exchange. Behavioral economists and other social scientists also use "crowding out" to describe a downside of solutions based on private exchange: the crowding out of intrinsic motivation and prosocial norms in response to the financial incentives of voluntary market exchange. The idea of the crowding out effect, though not the term itself, has been discussed since at least the 18th century.Michael Hudson, “How economic theory came to ignore the role of debt”, real-world economics review, issue no. 57, 6 September 2011, pp. 2–24, comments, cited at bottom of page 5 Economic historian Jim Tomlinson wrote in 2010: "All major economic crises in twentieth century Britain have reignited simmering debates about the impact of public sector expansion on economic performance. From the 'Geddes Axe' after the First World War, through John Maynard Keynes' attack on the 'Treasury view' in the interwar years, down to the 'monetarist' assaults on the public sector of the 1970s and 1980s, it has been alleged that public sector growth in itself, but especially if funded by state borrowing, has detrimental effects on the national economy.

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Crowding out (economics)

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