The Impact of Consumption on Productivity and Economic Growth

The mainstream economic theory argues that savings positively affect economic growth. Keynes, on the contrary, claims that an increase in savings lowers economic growth, as reduced consumption negatively affects investment. A number of studies also argue that due to the adjustment costs and frictions in labor and goods markets, a reduction in consumption negatively affects economic growth. The paper argues that a significant reduction in consumption causes a recession, but a slight reduction in consumption contributes to economic growth. The paper also argues that 1) in countries with lower consumption, investment in R&D is higher than in countries with a higher consumption, which positively affects productivity and economic growth, 2) countries with higher R&D expenditure have a higher share of researchers engaged in R&D in the population, which positively affects productivity, magnifying economic growth