What Is Underconsumption?
Let me explain underconsumption directly to you: it's when people buy goods and services at levels below what's available in supply.
Key Takeaways
- Underconsumption theory sees inadequate consumer demand as the sole cause of recessions, stagnation, and other aggregate demand failures.
- This theory claims that a capitalist economy always heads toward persistent depression.
- Modern economic theories argue that low consumer demand alone doesn't automatically trigger a recession, as other factors can balance it out.
Understanding Underconsumption
You should know that underconsumption is an economic theory about recession and stagnation. It happens when consumer demand falls short compared to the production of goods or services.
These theories go back hundreds of years, but they've mostly been overtaken by Keynesian economics and the concept of aggregate demand, which is the total demand for goods and services in the economy at a given time and price level.
Underconsumption vs. Keynesian Theory
Underconsumption theory states that consuming less than what's produced comes from insufficient purchasing power, leading to business depression. It also argues that since workers get paid less than the value they produce, they can't buy back everything, creating inadequate demand. Government intervention, like spending on public programs, can fix this by balancing production and consumption.
Keynesian theory, developed by John Maynard Keynes in the 1930s to explain the Great Depression, looks at total spending in the economy and its impact on output and inflation. Keynes pushed for more government spending and lower taxes to boost demand and end the depression. It's a demand-side theory focused on short-run economic changes.
Underconsumption pins recessions, stagnation, and demand failures only on inadequate consumer demand, implying capitalist economies stay in persistent depression. In contrast, modern theories note that low demand doesn't always cause recession because elements like private investments in factories, machines, and housing, plus government purchases and exports, can offset it.
Example of Underconsumption
Consider the automobile industry during the Great Depression as a clear example. In the 1920s, rising disposable income and affordable cars meant more people bought them, boosting demand and creating many independent dealers and manufacturers.
But when the stock market crashed and the Depression hit, unemployment rose and finances tightened, slashing purchasing power for cars against the supply. This drop in demand forced many independent manufacturers out of business.
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