Ratio Distortion and Consumption

Before and during the Great Depression there was under-consumption due to chronic under-payment of workers – fewer goods and services were being consumed than available workers and plant could structure. But what of the stagflationary situation, when chronic overpayment of workers was the distortion affecting more perfluent economies?

Obviously there cannot be “over-consumption” as a simple contrast to under-consumption. Goods and services can be sold more slowly than they can be made, leading to a pile-up of unsold goods, losses by manufacturers, reduced manufacture, thus job losses. But goods and services cannot be consumed faster than they are made available.

So what happens?

The depressing effect on economic activity caused by too much money flowing through the wages channel begins with its effect on prices.

Upward pressure on prices results from profits being too low, wages being too high a fraction of outlays, interest rates being high on borrowings that are too high a fraction of income and drawing on too low a capital pool, and demand pull from consumers. More will be said a few paragraphs hence on that point.

The resulting excessive rate of price increases reduces the marginal efficiency of capital, causing companies to withhold investment that might employ people directly or subsequently.

Apart from that the investment could be in some scheme, such as developing renewable or alternative energy sources, solar, biomass, oil shale, which would relieve the pressure on limited, non-renewable oil; or in new equipment to structure the same quantity of goods from less resources, thus retarding the progress of resource depletion and of value inflation.

The high price increase rate also aggravates its causes bu boosting interest rates and increasing pressure for wage rises.

If the Keynesian term “underconsumption” is changed to “inadequate demand”, then the opposite “excessive demand” makes more practical sense than “overconsumption” as a description of the case in a stagflationary situation.

The term consumer demand is equivalent to the proportionate flow of money through the wages, transfer payments, and consumer debt channels. Aggregate demand is not the same and will be discussed in the next post.

Referring to an earlier post, “The Throughput Chain”, we can picture the demand link being smaller than the “production” (goods and services structuring) link in the 1920s and 1930s, but larger than it in the 1970s and 1980s. In the former case, the effect was to depress prices and the rate of structuring, making it less than was possible given the existing workforce, plant, and resource availability. In the latter case, the effect is not to increase the rate of structuring of goods and services above what is allowed by the existing workforce, plant, and resource availability, since that would be impossible; rather, the effect is worked out entirely in pushing up prices.

Keynes foresaw that if consumer demand went on increasing after full employment had been reached, true inflation, a decrease in the value of money, would result. This came true in the 1970s and 80s and persisting over many years, caused employment to rise again. But this was not the same kind that could be banished by further increases in consumer demand, since this was what had caused it in the first place. Rather, consumer demand has an achievable optimum relative level (but see the next post, “Aggregate Demand – Components and Internal Ratio”). This is just repeating an earlier point in different terms. So job creation schemes based on boosting consumer demand may, under stagflationary conditions, which threaten to recur in our own time, become job destruction schemes. This will be discussed further in the post “Full Wage Indexation – Kindergarten Economics”.

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