underconsumption again--and Luxemburg

Steve.Keen at unsw.edu.au Steve.Keen at unsw.edu.au
Fri Jan 27 14:28:14 MST 1995

Dear Jon,

I don't have much time for the early underconsumptionist arguments,
such as those of Luxembourg; there is an extent to which they see
capitalism as a system which lacks an internal dynamic (why else
would its survival depend on parasiting other cultures?), whereas
Marx thought that it had such a dynamic (but perhaps that it was
coming to an end--and on this sub-point I side with Chris Burford
in thinking that such beliefs were a product of Marx's presence
in the 19th century mechanistic paradigm, rather than of his
unique logic).

After perhaps one of the worst sentences I have ever written...
I _do_ have some time for a later contribution on a similar level,
that of Janos Kornai. He has developed the concept of "demand-
constrained vs. resource-constrained economies" as a means of
explaining why capitalism, even though it is subject to periodic
crises, tends to grow faster than (idealised) socialism.

The basic argument is as follows:

In an idealised socialist economy, there is a bias towards income
equality and towards rewarding workers well for their labors.
Simultaneously there is a desire to expand output as much as
possible (this bit is perhaps realist rather than idealist--
"actually existing" socialist systems were normally
under-developed). Thus there was planned full-employment, an
immense desire to invest, and the desire to fulfil all those

In a stylised capitalist economy, there is a bias towards income
inequality; workers wages tend to be low, and unemployment is
tolerated (or even applauded). Each capitalist wishes to make
a profit, which encourages individual expansion in one sense,
but discourages it in another, in that you don't want to
invest unless there are prospects of a return. However the
danger always exists that in a volatile system, if a market
opportunity opens up and you can't fill it, your competitors
will: so you always plan to have excess capacity.

The irony in Kornai's analysis--and he was trying to explain
a real phenomenon--was that while the "statics" of socialism
are undoubtedly better than capitalism, capitalism tends to
grow faster than socialism.

With the socialist model, since all investment plans are
judged worthwhile, the planners strive to fulfil all of them.
But with an economy already working flat out, not all plans
can be met. Hence some sectors will not get the resources
they need to fulfil their plans--but since sectors are
inter-related, other sectors will find that supplies they
need are not forthcoming (even though they were allocated
all they need).

The system is thus resource-constrained, and practices
evolve to accommodate this. So producer units start to
"over-plan", to call for more investment than they actually
need, in the hope they'll get what they want. But since
everyone does it, plans get even further out of kilter with
resources than before. Planners respond by cutting back;
producers respond by hoarding resources, or with innovation
which generates multi-functional producer goods (in case one
breaks down, another different machine can do the job),
resulting in "technology hoarding".

At the same time, with the pressure from customers to
provide a volume of output way beyond the capacity of the
plant, innovation in products is shelved: the easiest way
to produce the required numbers is to produce to last year's

Meanwhile, in capitalism, investment is normally undertaken
in a "predatory" sense--as an attempt to invade someone
else's market turf. It is thus product innovation driven,
with the result of such products being to drive other
products into obsolescence. The obvious effect is on
consumer goods (I'm a bit weird here; I still prefer
vinyl records to CDs -:>), where the next innovation makes
the current products old-hat. But it also affects producer
goods--making current machinery obsolete and thus forcing

The driving force here is over-capacity: with everyone
building in excess capacity, everyone has the ability to
produce additional goods and to design new ones that eat into
competitors' markets. The real restraint is inadequate
aggregate demand--so you respond individually by advertising
and product innovation.

The end result is that capitalist investment tends to be
sporadic and innovation driven, with crises; but it is
rarely constrained by inadequate resources.

This is in its own way an underconsumptionist perspective,
but it has the ironical outcome that it predicts that a
capitalist system will tend to grow faster than a planned
one (or rather, it explains the observed phenomenon, without
reference to circumstantial fact--the purges, etc., which
also played a part in reducing growth).

A couple references here:

J Kornai, _Contradictions and Dilemmas_, 1985
   "      _Economics of Shortage_, 1980
   "      _Vision and Reality, Market and State_, 1990

I have also done a short piece which looks at the impact
of Fel'dman's growth model on generating the socialist
approach to planning:

S Keen, _Comment on "Fel'dman's Structural Model of Economic
Growth", in P Groenewegan & B McFarlane, _Socialist
Thought in the post Cold War era_, 1995, published by the
Journal of Contemporary Asia.

Steve Keen


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