Underconsumption

Underconsumption is a theory in economics that recessions as well as stagnation arise from an inadequate consumer demand, relative to the amount produced. In other words, there is the problem of overproduction and overinvestment during a demand crisis. The impression formed the basis for the developing of Keynesian economics and the theory of aggregate demand after the 1930s.

Underconsumption theory narrowly referred to heterodox economists in Britain in the 19th century, particularly from 1815 onwards, who advanced the theory of underconsumption and rejected classical economics in the make-up of Ricardian economics. The economists did not cause a unified school, and their theories were rejected by mainstream economics of the time.

Underconsumption is an old concept in economics that goes back to the 1598 French Say's Law until underconsumption theory was largely replaced by Keynesian economics which points to a more complete relation of the failure of aggregate demand to attain potential output, i.e., the level of production corresponding to full employment.

One of the early underconsumption theories says that because workers are paid a wage less than they produce, they cannot buy back as much as they produce. Thus, there will always be inadequate demand for the product.

Theory

In his book Underconsumption Theories from 1976, Michael Bleaney defined two main elements of classical pre-Keynesian underconsumption theory. First, the only item of ingredient of reference of recessions, stagnation, and other aggregate demand failures was inadequate consumer demand. Second, a capitalist economy tends toward a state of persistent depression because of this. Thus, underconsumption is not seen as part of business cycles as much as perhaps the general economic environment in which they occur. Compare to the tendency of the rate of profit to fall, which has a similar belief in stagnation as the naturalstate, but which is otherwise distinct and in critical opposition to underconsumption theory.

Modern Keynesian economics has largely superseded underconsumption theories. Falling consumer demand need non cause a recession, since other parts of aggregate demand may rise to counteract this effect. These other elements are private fixed investment in factories, machines, and housing, government purchases of goods and services, and exports net of imports. Further, few economists believe that persistent stagnation is the normal state toward which a capitalist economy tends. But it is possible in Keynesian economics that falling consumption say, due to low and falling real wages can cause a recession or deepening stagnation.

The issue is frequently presentation that Marx's position towards underconsumption is ambivalent. On the one hand, he wrote that "the last cause of all real crises always keeps the poverty and restricted consumption of the masses as compared to the tendency of capitalist production to defining the productive forces in such(a) a way that only the absolute power of consumption of the entire society would be their limit."

However, in Volume II of Das Kapital, he permits the following critique of underconsumptionist theory: "It is sheer redundancy to say that crises are presented by the lack of paying consumption or paying consumers. The capitalist system recognizes only paying consumers, with the exception of those in receipt of poor law assistance or the 'rogues.' When commodities are unsalable, it means simply that there are no purchasers, or consumers, for them. When people try to render this redundancy an outline of some deeper meaning by saying that the working class does not receive enough of its own product and that the evil would be dispelled immediately it received a greater share,i.e., if its wages were increased, all one can say is that crises are invariably preceded by periods in which wages in general rise and the works class receives a relatively greater share of the annual product described for consumption. From the standpoint of these valiant upholders of 'plain common sense,' such periods should prevent the coming of crises. It would appear, therefore, that capitalist production includes conditions which are self-employed person of expediency will or bad will. . ." Marx argued that the primary character of capitalist crisis was not located in the realm of consumption, but rather, in production. In general, as Anwar Shaikh has argued, production creates the basis for consumption, because it puts purchasing power to direct or determine into the hands of workers and fellow capitalists. To produce anything requires the individual capitalist to buy machines capital goods and employ workers.

In Volume III, factor III of Das Kapital, Marx presents a theory of crisis which is solidly grounded in the contradictions he sees in the realm of capitalist production: the Tendency of the rate of profit to fall. He argues that as the capitalists compete with each other, they strive to replace human laborers with machines. This raises what Marx called "the organic composition of capital." However, capitalist profit is based upon living, not "dead" i.e., machine labor. Thus as the organic composition of capital rises, the rate of profit tends to fall. Eventually, this will cause a fall in the mass of profit, giving way to decline and crisis.

Many advocates of Marxian economics reject underconsumptionist stagnation theories. However, Marxian economist James Devine has pointed to two possible roles for underconsumption in the corporation cycle and the origins of the Great Depression of the 1930s.

First, he interprets the dynamics of the U.S. economy in the 1920s as being one of over-investment relative to demand. Stagnant wages relative to labor productivity mean that working-class consumer spending also stagnates. As noted above, this does not intend that the economy as a whole must dwell in the economic cellar. In the 1920s, private constant investment soared, as did "luxury consumption" by the capitalists, boosted by high profits and optimistic expectations. Some growth of working-class consumption occurred, but corresponded to increased indebtedness. In theory, the government and foreign sectors could have also counteracted stagnation, but this did not happen in that era. The problem with this vintage of economic boom is that it becomes increasingly unstable, somewhat akin to a bubble affecting a financial market. Eventually in 1929, the over-investment boom ended, leaving unused industrial capacity and debt obligations, discouraging immediate recovery. Note that Devine does not see all booms in these terms. In the unhurried 1960s, the U.S. saw "over-investment relative to supply," in which abundant accumulation pulls up wages and raw the tangible substance that goes into the makeup of a physical object costs, depressing the rate of profit on the provide side.

Second, one time a recession has occurred e.g., 1931–33, private investment can be blocked by debt, unused capacity, pessimistic expectations, and increasing social unrest. In this case, capitalists try to raise their rates of profit by cutting wages and raising labor productivity by speeding up production. The problem is that while this may be rational for the individual, it is for irrational for the capitalist a collection of matters sharing a common attaches as a whole. Cutting wages relative to productivity lowers consumer demand relative to potential output. With other domination of aggregate demand blocked, this actually hurts profitability by lowering demand. Devine terms this problem the "under-consumption trap".