There is a great controversy over the question whether inflation promotes economic development. A group of economists including Keynes is of the opinion that inflation, in one form or the other, is a factor which helps economic growth.
Usually, two main arguments have been advanced in support of the view. Firstly, it is argued that inflation tends to redistribute income and wealth.
The redistributive effect of inflation is always in favour of profit-earning class, that is to say, it redistributes income always from the wage-recipient class towards the profit-recipient class in the community.
As a result, the saving ratio will increase because the marginal propensity to save of the profit earners is generally high as against the high marginal propensity to consume of the wage- earners because of their near-subsistence level of income.
This increased saving, then, can be profitably invested by the entrepreneurial class in productive channels, thereby raising the level of employment, output and income.
Thus, the rationale of a policy of "development through inflation" is that inflation raises the ratio of profits to aggregate community income (or national income) and the process continues till profits increase to the extent that entrepreneurs can finance the higher rate of investment from the saving out of their profits without any further recourse to credit, i.e., monetary expansion.
Keynes favours mild inflation on the ground that it tends to stimulate business optimism through rising prices, resulting in high profit expectation (a high marginal efficiency of capital) which stimulates further investments, employment, output and income.
Another argument advanced in support of the view that inflation stimulates development is that creation of new money (i.e., printing more money) by the government in view of deficit financing, though inflationary, is an important