User:BernieBeau

UNDERINCOME

[Beaudreau (1996), Beaudreau (1999)] refers to a state of economic affairs in which aggregate real income is less than aggregate real output, resulting in recession and depression. Typically the result of technological change, underincome aborts what would otherwise be a smooth transition to a higher equilibrium growth path. Potential aggregate output increases as the result of technological change (e.g. electrification); however, wage income fails to rise. As profits are a residual, overall real income fails to increase, opening up a gap between potential output and actual income. May result in overproduction; however, firms may respond by not increasing output, in which case, overproduction will not occur. Potential output will, nonetheless, exceed actual output and income.

Aggregate excess capacity is the dual of underincome. Underincome implies underconsumption and underinvestment; however, the latter two concepts do not necessarily imply underincome.

History

Has a long history in political economy, going back to Jean-Charles Léonard Sismonde de Sismondi. Among those who studied underincome were Robert Owen, Robert Thomas Malthus, Thornstein Veblen, Henry Ford, Edward Filene, and Rexford Tugwell.

Causes

The principal cause is the failure of costs to rise commensurately with potential output. As costs are the dual of income (monetizing output), underincome results.

Firms have no private incentives to increase wages; hence, as profits are a residual income form, profits also fail to rise. Theoretically, underincome is the result of a coordination failure(Schelling-type).

Policy Implications

Beaudreau (1996,2005) argues that underincome was at the root of the stock market boom and crash of 1929, the Smoot-Hawley Tariff Act of 1930, the Great Depression, and the National Industrial Recovery Act of 1933, the flagship piece of legislation of the first New Deal.

References

Beaudreau, Bernard C. (1996) Mass Production, The Stock Market Crash, and the Great Depression: The Macroeconomics of Electrification (Westport, CT: Greewood Press).

Beaudreau, Bernard C. (1999) Energy and the Rise and Fall of Political Economy (Westport, CT: Greewood Press).

Beaudreau, Bernard C. (2005) The National Industrial Recovery Act Redux, Technoogy and Transitions(New York, NY: iUniverse).