In underconsumption theory, recessions and stagnation arise due to inadequate consumer demand relative to the amount produced. It is an old concept in economics, going back to Thomas Malthus if not earlier. The concept of underconsumption has been used repeatedly as part of the criticism of Say's Law until underconsumption theory was largely replaced by Keynesian economics which points to a more complete explanation of the failure of aggregate demand to attain potential output, i.e., the level of production corresponding to full employment. This article needs additional references or sources for verification. ... Robert Thomas Malthus, FRS (13th February, 1766 – 29th December, 1834), usually known as Robert Malthus, although he preferred to be known as Thomas Malthus, was an English demographer and political economist. ... In economics, Say’s Law or Say’s Law of Markets is a principle attributed to French businessman and economist Jean-Baptiste Say (1767-1832) stating that there can be no demand without supply. ... This article includes a list of works cited or a list of external links, but its sources remain unclear because it lacks in-text citations. ... In economics, aggregate demand is the total demand for goods and services in the economy (Y) during a specific time period. ... In economics, potential output (also referred to as natural real gross domestic product) refers to the highest level of real Gross Domestic Product output that can be sustained over the long term. ... In economics, full employment has more than one meaning. ...

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. This, of course, ignores other sources of demand, to which we return below.

Foster and Catchings

William Trufant Foster and Waddill Catchings developed a theory of underconsumption in the 1920s that became highly influential among policy makers. The argument was that governmental intervention, especially spending on public works programs, was essential to restore the imbalance between production and consumption. The theory strongly influenced Herbert Hoover and Franklin D. Roosevelt to engage in massive public works projects. William Trufant Foster (Jan. ... Waddill Catchings (Sept. ... Herbert Clark Hoover (August 10, 1874 – October 20, 1964), the 31st President of the United States (1929–1933), was a world-famous mining engineer and humanitarian administrator. ... FDR redirects here. ...

Theory

In his book Underconsumption Theories (International Publishers, 1976) Michael Bleaney defined two main elements of classical (pre-Keynesian) underconsumption theory. First, the only source 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. (See "Underconsumption" for this theory's role in business cycle analysis.) WORLD OF WARCRAFT IS THE BEST GAME EVER INVENTED AND PLAY IT. IF YOU DONT PLAY WORLD OF WARCRAFT, YOU ARE A nOOb. ... An abstract business cycle The business cycle or economic cycle refers to the ups and downs seen somewhat simultaneously in most parts of an economy. ... // [edit] Introduction [edit] Definition If we were to take snapshots of an economy at different points in time, no two photos would look alike. ...

Keynesian

Modern Keynesian economics has largely superseded underconsumption theories. Falling consumer demand need not 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. This article includes a list of works cited or a list of external links, but its sources remain unclear because it lacks in-text citations. ... In economics, aggregate demand is the total demand for goods and services in the economy (Y) during a specific time period. ... Fixed investment in economics refers to an increase in the amounts of real capital goods (real means of production) used in production or to the replacement of depreciated capital goods. ...

Marxian

Marx himself wrote, in Volume II of Das Kapital, the following critique of underconsumptionist theory: "It is sheer redundancy to say that crises are produced 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 support or the 'rogues.' When commodities are unsalable, it means simply that there are no purchasers, or consumers, for them. When people attempt to give this redundancy an appearance 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 working class receives a relatively greater share of the annual product intended 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 independent of good will or bad will. . . " [as quoted by Franz Mehring in his biography of Karl Marx, p. 404 of the 1935 Covici, Friede edition, tr. Edward Fitzgerald]. Marx argued that the primary source 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 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, Part 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. The tendency of the rate of profit to fall, commonly abbreviated to TRPF, is a hypothesis in economics and political economy, generally accepted in the 19th century, but mostly rejected by mainstream economists today. ... The organic composition of capital (OCC) is a concept created by Karl Marx in his critique of political economy and used in Marxian economics as a theoretical alternative to neo-classical concepts of factors of production, production functions, capital productivity and capital-output ratios. ...

Like Marx, many or most advocates of Marxian political economy reject underconsumptionist stagnation theories. However, Marxian economist James Devine has pointed to two possible roles for underconsumption in the business cycle and the origins of the Great Depression of the 1930s. (See his "The Origins of the 1929-33 Great Collapse: A Marxian Interpretation".) Marxian economics refers to a body of economic thought stemming from the work of Karl Marx. ...

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 mean that the economy as a whole must dwell in the economic cellar. In the 1920s, private fixed 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 kind 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 late 1960s, the U.S. saw "over-investment relative to supply," in which abundant accumulation pulls up wages and raw material costs, depressing the rate of profit on the supply side. Soap bubbles Bubble may refer to: Soap bubble, spherical liquid film, also possibly of bubble gum Cavitation, pocket of air caught in a liquid Bubble (economics), where speculation causes prices to rise to unsustainable levels a (normally) transparent dome Light bulb, in theater lighting terminology [1] in poker tournaments, the...

Second, once 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 irrational for the capitalist class as a whole. Cutting wages relative to productivity lowers consumer demand relative to potential output. With other sources of aggregate demand blocked, this actually hurts profitability by lowering demand. Devine terms this problem the under-consumption trap. In economics, potential output (also referred to as natural real gross domestic product) refers to the highest level of real Gross Domestic Product output that can be sustained over the long term. ...

References

• William J. Barber. Herbert Hoover, the Economists, and American Economic Policy, 1921-1933 (1985)
• Joseph Dorfman, The Economic Mind in American Civilization (1959) vol 5 pp 339-351
• Alan H. Gleason, "Foster and Catchings: A Reappraisal," Journal of Political Economy (Apr. 1959). 67:156+

See also

• Overproduction