The term “push on a string” is one that is attributed to John Maynard Keynes, a renowned British economist. The phrase was used in reference to the monetary policies that governments might employ to stop or halt a deflation in the economy. A deflation is the opposite of inflation and means that there is a marked reduction in the demand for goods and services during consecutive business cycles. Such a reduced demand is just as undesirable as an excessively high demand, because both affect the economy in a negative manner.
In order to address such an imbalance, the government may utilize tactics like increasing or decreasing the interest rates. In the case of a perceived deflation caused by decreased consumer confidence, the government may decrease the interest rates with the hope that such a move will entice consumers to spend more. If consumers take the bait and start spending more as a result of low interest rates, this will give a needed boost to the economy by increasing the Gross Domestic Product (GDP) and consequently, reversing the deflation.
Such an outcome is the result of the factors of demand and supply on the economy. Where the demand is high, the rate of production will increase to keep up with such an increase in economic activities. According to John Maynard Keyes, the manipulation of the economy by the government through increased interest rates is no guarantee that the consumers will respond by increasing their demand for products. Where there is no demand, the move can be likened to a push on a string.
Push on a string is a metaphorical reference to the fact that an object attached to a string can only be moved by moving the string away from the object. Pushing the string in the direction of the object will not have any effect on the position of the object. As such, the “push on a string” theory implies that manipulative monetary policies like increased interest rates are an exercise in futility if the target consumers do not respond to the reduction in interest rate by increasing demand. Just like the push on a string effect, the consumers still maintain their previous lack of interest in increasing consumption levels despite low interest rates.
Normally, the low interest rates will make it possible for banks to reduce the interest rates they charge on loans. Such a reduction will encourage consumers to borrow more money for purchases like houses, cars and other items. Following the push on a string theory, such a reaction by consumers is not always the case.