Underconsumption

Underconsumption is an old concept in economics that goes back to the 1598 French mercantilist text Les Trésors et richesses pour mettre l'Estat en splendeur (The Treasures and riches to put the State in splendor) by Barthélemy de Laffemas, if not earlier.

Compare to the tendency of the rate of profit to fall, which has a similar belief in stagnation as the natural (stable) state, but which is otherwise distinct and in critical opposition to underconsumption theory.

These other elements are private fixed investment in factories, machines, and housing, government purchases of goods and services, and exports (net of imports).

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.

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.

In the 1920s, private fixed investment soared, as did "luxury consumption" by the capitalists, boosted by high profits and optimistic expectations.

Eventually (in 1929), the over-investment boom ended, leaving unused industrial capacity and debt obligations, discouraging immediate recovery.

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.

The earliest reference given was to Barthélemy de Laffemas, who in 1598 in The Treasures and riches to put the State in splendor "denounced the objectors to the use of French silks on the ground that all purchasers of French luxury goods created a livelihood for the poor, whereas the miser caused them to die in distress,"[6] an early form of the paradox of thrift.

A number of other 17th century authors, English, German, and French, stated similar sentiments, which Heckscher summarizes as: The Fable of The Bees by Bernard Mandeville, of 1714, was credited by Keynes as the most popular exposition of underconsumptionism of its time, but it caused such an uproar, being seen as an attack against Christian virtues, specifically attacking temperance, that underconsumptionism was not mentioned in "respectable circles" for another century, until it was raised in the later Malthus.

The paradox of thrift was stated in 1892 by John M. Robertson in his The Fallacy of Savings, and similar sentiments date to antiquity,[17][18] in addition to the mercantilist statements cited above: There is that scattereth, and yet increaseth; and there is that withholdeth more than is meet, but it tendeth to poverty.

[19] William Trufant Foster and Waddill Catchings developed a theory of underconsumption in the 1920s that became highly influential among policy makers.

The theory strongly influenced Herbert Hoover and Franklin D. Roosevelt to engage in massive public works projects.

Today these ideas, regardless of provenance, are grouped in academia under the rubric of "Keynesian economics", due to Keynes's role in consolidating, elaborating, and popularizing them.

[20][21] The theory of underconsumption has been criticized by classical economists such as James Mill, Adam Smith who wrote "What is prudence in the conduct of every private family can scarce be folly in that of a great Kingdom," and on grounds of Christian morality.