Definition of the word crowd out

The term "crowd out" refers to the displacement of private investment by public investment in a particular market or sector. It is a concept in economics that suggests that when the government increases its level of spending, it can result in a decrease in private investment as individuals and businesses may shift their resources to seek higher returns offered by government projects. The original use of the term "crowd out" can be traced back to the 1930s when American economist John Maynard Keynes introduced it in his seminal work "The General Theory of Employment, Interest and Money." According to Keynes, this phenomenon occurs due to the increased borrowing required by the government to finance its spending, which results in higher interest rates that make it less profitable for private investors to lend money for private projects. This, in turn, can lead to a decrease in private investment, as investors prefer to fund government-guaranteed projects rather than riskier private investments. Since then, the concept of "crowd out" has been used to assess the impact of government borrowing and spending on private investment in various contexts, including the debates around social spending, fiscal policy, and international financial crisis response. It is a crucial concept in macroeconomics, as it highlights the trade-offs between government spending and private sector investment and the need to strike a balance between the two.