posted on Aug, 23 2006 @ 12:40 AM
Since the 1980s, it has become unfashionable in popular economics (which is driven largely by politics) to recognize the importance of consumer demand
on how the economy operates, or the factors that cause consumer demand to fluctuate. But in truth, assuming an ample flow of natural resources (which
we can't, but I'll come back to that momentarily), demand is the single most important factor in determining economic performance.
In order for an industrial economy to keep going, products must be sold. In order for products to be sold, there must be people able to buy them. In
order for people to be able to buy them, those people must have money. And in order for people to have money, real wages must be kept high.
Yet as Number23 pointed out, a corporation in a capitalist economy exists to maximize profits for its shareholders. Profits equal sales revenue minus
cost of business. Wages are a cost of business, and so corporations seek to cut wages as much as possible and still get the labor they need to
produce and market their products. This is the fundamental paradox of a capitalist economy: that what benefits the bottom line of any individual
coporation hurts the bottom line of all of them. Because when real wages are cut, or even simply fail to keep pace with productivity improvements,
when wealth is distributed in a hugely unbalanced fashion, then demand fails to keep up with supply and the economy stalls out.
There is of course a limit to how far a company CAN cut wages, but that limit is not static. It follows the law of supply and demand, and both the
supply of and the demand for labor are subject to either technological or political manipulation. Corporations use their political influence to keep
the supply of labor high, so that they are able to keep real wages down. This helps the shareholders in the short term, by keeping business costs
low. But it hurts the shareholders (along with everyone else) in the long term, because it depresses consumer demand and so hurts sales revenue.
The U.S. economy experienced two sea changes in government policy towards the capital-labor dispute since the Civil War. One of those occurred in the
1930s, and the other in the 1980s. In the 1930s, the Roosevelt administration shifted government policy strongly to labor's side of the struggle.
Unions were encouraged rather than discouraged, certain labor rights were guaranteed, and the government created the first of a series of entitlement
programs that helped shore up demand even when people were not working for one reason or another (job loss, retirement, disability).
In the 1980s, the Reagan administration went a long way -- although not all the way -- toward reversing things back to the way they had been under
Calvin Coolidge. But the impact on the economy and on the distribution of wealth was much greater than Reagan's domestic policy changes could cause
themselves, because that was when the trend towards "free trade" agreements that encouraged companies to export capital to poor countries with
oppressed work forces began. American workers still enjoy many of the protections they gained in the 1930s, and have even added some new ones. But
since a large percentage of the nation's manufacturing jobs have now moved to third-world countries, where oppressed workers with no protected rights
to speak of work for U.S. corporations under sweatshop conditions, we must now consider those foreign workers as part of the "American work force,"
just as low-paid immigrants working on the railroads were in the 1890s. And if we factor that in, which we must, then America's work force is not
being paid anything like enough to maintain the demand that can absorb the goods being produced and keep the economy running.
No administration subsequent to Reagan has reversed this reversal in policy. It remains the way the government does business.
If we look at U.S. economic performance during the period 1865-1929 and again during the period 1946-1973, the comparison is illuminating. (Note:
the years of the Great Depression and World War II, 1930-1945, I set aside as anomalous. Also, the years from 1973 to 1980 I set aside because of
resource shortages, which undercut all purely economic calculation. I'll return to that.)
Growth rates in the U.S. economy more than doubled during the period 1946-1973 compared to 1865-1929 on a per capita basis. This despite higher taxes
in the latter period and increased government regulation of the economy. To those who understand and acknowledge the effect of demand on the economy,
and how demand depends on egalitarian wealth distribution, this is not surprising. To those who believe in "supply side economics" and that pumping
up the rich is the best way to boost the economy, however, the facts require explanation.
Since I'm a firm believer in demand-side economics myself, I believe that we are undercutting the foundation of our economy by promoting such a huge
disparity of wealth, with so much of what is produced going to the richest 1% of our citizens. As a result, I predict that we are heading for a great
and terrible fall, and would be even without resource shortages.
But we will not be without them, and they will make things even worse. Next post.