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Underconsumption

Underconsumption

BIBLIOGRAPHY

Underconsumption is a macroeconomic phenomenon of deficient aggregate demand resulting from the failure of consumption expenditure to keep pace with rising output. It might equally be described as oversaving. Most (but not all) theorists of underconsumption explain it by reference to a parallel failure of real wages to keep pace with rising labor productivity, so that the wage share in national income tends to decline. Because non-wage-earners save much of their incomeunlike wage-earners, who spend all (or nearly all) of their incomes on consumer goods the ratio of consumption expenditure to total income also declines.

This low-wage version of underconsumption theory can be traced back to J. C. L. Simonde de Sismondi and Robert Owen in the 1820s; the slightly earlier theories of Robert Malthus and the Earl of Lauder dale are rather different. It is generally agreed that low-wage underconsumption formed part of Karl Marxs complex and poorly articulated theory of capitalist crisis. The doctrine certainly reappeared in the writings of his followers, from Karl Kautsky and Rosa Luxemburg before 1914 through to the theory of monopoly capital developed by Paul Baran and Paul Sweezy in the 1960s. A slightly different version of underconsumption theory was energetically propagated in the 1920s by the American writers William T. Foster and Waddill Catchings.

In the Marxist tradition underconsumption is seen as a fundamental contradiction of capitalism and a root cause of the Great Depression. It can be overcome only when capitalism itself is transcended through socialist revolution. Many Marxists, however, remain skeptical about underconsumption and emphasize other causes of economic crises, especially capital-intensive technological change that reduces the rate of profit but also (in certain circumstances) militant labor pressure on the profit share.

There is a reformist variant of underconsumption theory, associated with J. A. Hobson, in which it is argued that underconsumption can be avoided through comprehensive measures of social reform. Beginning in the 1890s, New Liberals and social democrats advocated redistribution of income through the tax system, labor market regulation to raise real wages, and the development of a comprehensive welfare state. Hobson and his coauthor Alfred Mummery (1889) had already argued that underconsumption was the principal cause of trade depression, which seriously damaged the interests of the workers, and supported a range of measures to increase real wages (including emigration, trade unionism, and a statutory eight-hour day). Subsequently Hobson argued that the consequences of failure to reform the system might be severe. He believed that capitalist imperialism was very largely a response to underconsumption: Colonial territories offered market opportunities that were unavailable at home because of the restricted purchasing power of the mass of the population. Hobsons ideas had a profound influence on Lenin and other Marxian theorists of imperialism.

Underconsumption has always been rejected by orthodox macroeconomists on the grounds that the economy has powerful adjustment mechanisms that remove any tendency toward chronic demand deficiency. Says Law was originally formulated, by Jean-Baptiste Say himself and by James Mill, largely in response to early advocates of underconsumption, and the law formed the analytical core of pre-Keynesian macroeconomics. Any tendency toward underconsumption, or oversaving, would in this view be eliminated through the inevitable reduction in the rate of interest that would occur; this would induce people to save less and thus to consume more. In equilibrium, output and employment are constrained by supply considerations and not by aggregate demand.

John Maynard Keynes denied that such a self-correcting mechanism could be relied upon because saving depends on income rather than on the interest rate and total output is normally constrained by demand. Not surprisingly, therefore, Keynes had considerable sympathy with underconsumptionist ideas, though he emphasized deficient investment rather than excessive saving and was therefore inclined to believe that increased investment expenditure could (at least in principle) generate enough effective demand to maintain full employment. The Keynesian growth theorists Roy Harrod and Evsey Domar denied this possibility because the capital stock cannot profitably be continually increased relative to consumption expenditure. This criticism is implied by the accelerator principle, which links investment to the growth of consumption; thus, the accelerator is closely linked to underconsumptionist ideas.

Another important heterodox economist with links to underconsumption theory was Michał Kalecki, who famously identified the tragedy of investment. Investment adds both to aggregate demand and to productive capacity, but in a capitalist economy, where there is no planning or coordination of investment decisions, it is only by accident that investment spending will be in exactly the correct proportion to consumption expenditure. Kaleckis version of underconsumption has affinities with both the Marxist and the Keynesian schools.

The revival of pre-Keynesian macroeconomics since 1970, however, has restored belief in Says Law and pushed underconsumptionist ideas back into the theoretical undergrowth. Today mainstream macroeconomists regard underconsumption as a faintly ludicrous radical heresy.

SEE ALSO Consumption; Overproduction; Stagnation

BIBLIOGRAPHY

Baran, Paul A., and Paul M. Sweezy. 1966. Monopoly Capital: An Essay on the American Economic and Social Order. New York: Monthly Review Press.

Bleaney, Michael F. 1976. Under-Consumption Theories: A History and Critical Analysis. New York: International Publishers.

Mummery, A. F., and J. A. Hobson. 1889. The Physiology of Industry: Being an Exposure of Certain Fallacies in Existing Theories in Economics. London: J. Murray.

Schneider, Michael P. 1996. J. A. Hobson. Basingstoke, U.K.: Macmillan.

J. E. King

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