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I refer t0 “The Aggregate Demand Problem in Capitalism Solved” – July 15, 2022, Tim Di Muzio
Tim Di Muzio notes the difference between US Wages and Salaries and Real GDP and notes the gap as very large: “the average percent difference is as high as 71%”. This gap is assumed, I guess, to explain the lack of aggregate demand for goods and services. But where is the accounting of profit? Profit matters for consumption too. Do not profits go, at least partly, to re-investment (plant and equipment, materials, energy, consumables) and to capitalists, shareholders etc. who also consume? Would it not be better to mention this? Granted, there are issues like the “lower marginal propensity to consume” (for capitalists compared to workers) but there is also the issue of the “departments” as Marx called them.
“He (Marx) therefore introduced a distinction between two departments: Department I comprises the production of means of production, that is, of “commodities having a form in which they must, or at least may, pass into productive consumption”, and department II consists of industries for the production of articles of consumption, that is, “commodities having a form in which they pass into the individual consumption of the capitalist and the working class” – Christian Gehrke.
Tim Di Muzio seems to leave aside consideration of capitalist personal consumption (perhaps considerable once we get to $500 million superyachts) and of the Department 1 consumption, to use Marx’s terminology.
Granted, if we limit the analysis to Department 2, the individual consumption of the capitalist and the working class, then the mark-up seems to explain that the situation. But don’t we need to look at it dynamically too? The over-production presumably gets soaked up by growth, demographic and economic (when things are working well and everything is stoked by continual debt creation).
I find myself wondering if this above is a good example of capitalism’s reliance on endless growth. Without endless growth (and in cyclical downturns) do the overproduction and aggregate demand problems really come to the fore?
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Why wages are central to economic crises
Crisis is a process of change, which is why economists tend to think of it in terms of growth. When output and employment decelerate, they say we have a recession; when they contract, they call the result a great recession; when they plunge, they speak about depression; and so on. The reason for these oscillations is the subject of ‘crisis theory’.
In line with JB Say’s maxim that supply creates its own demand, most mainstream economists think of crisis as an exogenous, temporary phenomenon. Since every sale is made for the purpose of a purchase, goes the argument, demand is never lacking, and occasional excess or shortage are quickly cleared by flexible, self-equilibrating prices. If the crisis lingers, the reason is always ‘exogenous’: external shock, government intervention, market imperfections – the outside spoiler list is endless.
Keynes critiqued this barter-like conviction. In capitalism, he pointed out, sales and purchases are mediated through money and separated in time, which means that demand can be reduced by saving. And since the incentive to save (withdraw earnings) is often inverse to the urge to invest (inject earnings to create new capacity), lingering recession and depression are possible not only in practice, but in theory too.
Marxists have a developed a full battery of crisis theories, summarized lucidly in Part Three of Sweezy’s 1942 book The Theory of Capitalist Development:
A second generation of crisis theories – post-Keynesian and neo-Marxist – married Keynes’ macroeconomics with Marx’s emphasis on class to examine more closely the impact of income distribution and concentrated market structures (Kalecki, Steindl, Baran & Sweezy, Magdoff, Braverman, Robinson, Kaldor, Eichner, Lee, Lavoie, etc.)
Keynesianism and Marxism, as well as their post- and neo- variants, consider the crisis role of both wage and non-wage income on aggregate demand. But wages are central in the following sense.
Aggregate demand comprises more than the consumption of workers alone. It also includes the consumption of capitalists, their investment in new capacity, the spending of government, and the purchases of foreign buyers.
On the face of it, then, it seems that capitalism can prosper even if labour income falls short of overall income – provided other earners consume, invest and spend enough to compensate for the shortfall.
But the analytical possibility of non-labour demand growing to compensate for the falling consumption of workers, argue Marxists and post-Keynesians, is tenuous in practice. Capitalist consumption is limited by the capitalist need to invest. Rising governments spending is restricted by the overriding logic of free enterprise. And most importantly, current investment is determined by the expectation of future demand, and since this demand depends mostly on workers’ consumption, investment is highly sensitive to the prospect of reduced wages (export demand is subject to all these limitations).
So, in the final analysis, wages, although making only part of aggregate demand, are central to all crises.
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“Aggregate demand comprises more than the consumption of workers alone. It also includes the consumption of capitalists, their investment in new capacity, the spending of government, and the purchases of foreign buyers.”
Credit is another major component of aggregate demand and typically the source of investment (as understood with respect to GDP, which does not consider speculation in equity markets to be investment) and government spending.
“So, in the final analysis, wages, although making only part of aggregate demand, are central to all crises.”
I’d argue that credit, not wages, is central to all crises. For example, according to Steve Keen, if the rate of change of debt contracts, the unemployment rate rises, and aggregate wages go down. Also, the loosening of credit and its extension to workers (e.g., through credit cards) are what allowed the suppression of wage growth reflected in Di Muzio’s graph. Bob Meister has a good discussion of what led to this dynamic in chapter 2 of Justice is an Option at pages 55-58. Finally, in addition to contributing to aggregate demand, credit creation is the source of the liquidity needed to service existing debts, and principal payments are not reflected in the GDP metric (only interest payments are).
Without credit, there is no money. Without money, there are no wages.
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I’d argue that credit, not wages, is central to all crises.
1. Note that my rough-and-ready description rehashes the convention perspective of economics, not my own view. It is meant to explain why Marxists and post-Keynesian see the general movement of wages as central for aggregate demand, even though it is only a segment of that demand.
2. And yes, credit and capitalization more generally are the key organizing principle of capitalism. But the expansion of credit depends on distributional dynamics. If the wage share trends downward, credit expansion can surely fill the gap — but only to a point. The likelihood of banks lending more and more to increasingly wage-strapped workers and firms with bloated excess capacity is fairly small.
3. The figure below shows U.S. ‘real’ GDP growth along with the overall wage share in gross national income. The chart demonstrates that the wage share rose till the early 1970s and fell thereafter, and that ‘real’ growth followed a similar periodicity. The short-term differences between the series may have been affected by credit, but the long-term trends were not.
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I’d argue that credit, not wages, is central to all crises.
1. Note that my rough-and-ready description rehashes the convention perspective of economics, not my own view. It is meant to explain why Marxists and post-Keynesian see the general movement of wages as central for aggregate demand, even though it is only a segment of that demand. 2. And yes, credit and capitalization more generally are the key organizing principle of capitalism. But the expansion of credit depends on distributional dynamics. If the wage share trends downward, credit expansion can surely fill the gap — but only to a point. The likelihood of banks lending more and more to increasingly wage-strapped workers and firms with bloated excess capacity is fairly small. 3. The figure below shows U.S. ‘real’ GDP growth along with the overall wage share in gross national income. The chart demonstrates that the wage share rose till the early 1970s and fell thereafter, and that ‘real’ growth followed a similar periodicity. The short-term differences between the series may have been affected by credit, but the long-term trends were not.
Thanks, Jonathan. The additional explanation was helpful.
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