Keynesian economists claim that cost cutting by companies in order to protect profits can lead to an economic slump. They believe that if everyone tries to cut costs, demand from retrenched workers for goods and services weakens, and as a result corporate revenues and profits come under pressure. This necessitates new layoffs, and the downward spiral accelerates. Popular thinking presents economic activity as a circular flow of money: spending by one individual becomes part of the earnings of another individual, and spending by this other individual becomes part of the first individual’s earnings. The idea is that recessions occur because consumers—for unknown reasons—cut expenditures and increase savings.
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