underconsumption again--and Luxemburg

boddhisatva foucault at eden.rutgers.edu
Thu Feb 2 19:28:53 MST 1995

		Mr. Keen,

	Working out of my hat, I'd say that there may be an interesting
parallel between Stalinist overinvestment and supply-side overinvestment
(redistribution, consolidation, what have you).  Perhaps the dynamic you have
elaborated could work itself out in a capitalist economy in this way :
Increased capital stocks (among the rich) may be causing an expansion that
cannot be reflected in real wage increases because the increased demand for
profit from the capital owners may choke off increased wages despite firms'
having more cash.  Perhaps, like Stalinist firms fixed on pure output over
innovation, capitalist firms are fixed on increased profit over natural wage
growth.  Perhaps, as overinvestment produces fixation on productivity (gross)
in a socialist system, it produces fixation on productivity (net) in a
capitalist one.  Socialist firms act artificially to prop up wages at the
expense on investment in durBble produces goods (factories, new machinery,
etc.).  Instead they have only the money for replacemnt parts that perpetuate
their high output.  Capitalist firms subject to overinvestment sacrifice
wages for profits.  Their capital investments in durables have the effect of
inflating their perceived net worth, which pushes up their stock price
to satisy investors.  They could builds these castles in the sky because
credit, and capital were unnaturally cheap.

	Furthermore, because the oversupply of capital was systemic, firms
find that their customers have the cash to pay for the goods that they are
selling.  Firms can also increase their employment base (just like buying a
new machine as far as they are concerned).  They cannot, however, afford to
pay more to workers, because they must buttress their perceived net worth
with increased profitability.

	Overinvestment requires unnatural behavior from firms.  In Stalinism
the positive supply shock is translated immediately into wages, consumer
markets are still efficient, so this creates increased demand.  This demand
does not have the channel of profit to return to capital supply, so the
effects of the initial supply shock are perpetuated, and firms cannot grow
with demand.  In capitalism, the positive supply shock creates both
oversupply AND an initial increase in demand, but demand markets are
inefficient.  Capitalists de-link expansion from wages.  First, they control
wages.  Second, they extract profit.  Third, they keep the economy far below
full strength with unemployment.  These three factors mean that the gross
rise in the economy will cause a much smaller net rise in disposable income
(of course diminished marginal propensity to consume doe sthis anyway, to a
smaller extent.  THis creates a "demand wall" for the rate of expansion.  In
addition, the increased supply of profit instrunments lowers the value of
those instrunments.  Firms must now increase profitability to maintain the
value of their shares.  They cannot rely on expansion, because of the demand

	Thus, like Stalinist firms running as fast as they can to supply the
efficient consumer markets, without the benefit of a natural rise in capital
supply, capitalist firms must do all they can to increase profit, without the
natural benefit of equally incresaing demand.

	Having gone so far out on this limb, I will take my saw in hand, and
say that this may explain how the systemic inflation to which the American
Federal Reserve Bank is reacting can occur despite FALLING mean income.  I
believe this is possible because efficient capital markets could have created
uniform conditions for firms, much in the same way Stalin's overarching
economic power did.

	Wow, I think I really went to far.  I'm going to have to talk to that
muse about quality versus quantity.  Nonetheless -



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