By: Shahab Sabahi, Energy and Environment for Development –
Research Group
The conventional macroeconomic model implies when demand for
goods and services falls, revenues to firms are reduced, leading to job losses
and reduced investment. Reduced investment leads to a lower capital stock
which, together with a lower labor input, in turn reduces the productive
capability of an economy. Public revenues also fall, debt increases and the
economic system has a tendency to become unstable. This logic supports the fundamental
idea of rising and continuing consumption growth for long term economic
stability.
The model argues that a lasting consumption growth is
feasible. It provides a formulation the key relationship between supply and
demand. In a simple way, it says, income is calculated as labor input
multiplies by the productivity of labor. In this simple formulation the
dependency on capital, technological progress, efficiency and resources is all
rolled into the factor of labor productivity. Thus labor productivity can be
thought of as the average amount of income generated by an hour of labor input.
In effect, if the labor input remains constant then growth is determined merely
by the increase in the labor productivity. In capitalism, labor productivity is
expected to grow over time, as technologies advance. It benefits the
supply-side by increasing output and eliminating the need for additional expensive
labor input. Furthermore, this increase in income, the model advocator believes,
promises society-wide prosperity. Though
in the real world, the evidence tells different story
If labor productivity grows in a larger pace than labor
input growth rate (e.g. aging population or purposefully reducing the share of expensive
labor input in production), the only way to stabiles economic output, in long
term, is by reducing further the labor input that means accepting some
underemployment. Not only unemployment leads to low consumption demand which in
return undermines the economic system, but it destabilizes the society.
By persisting only in the idea of improving labor productivity
and continuing consumption growth, we just try to mend the economy. Particularly
it is the case for developed countries. Mending economy may work for a while
but soon or later it will stall. There is no doubt that continuing labor
productivity improvement is essential. But the question is about its pace. Its
growth rate should be in harmony with labor input growth rate. It is not easy
sailing, but few strategies have been adopted by governments; such as work-time
sharing which, look promising toward a long term social stability. We should
discuss more about this subject before getting fooled by another version of this
complex macroeconomic model. 