More demand, more productivity

According to Marshall Auerback, a market analyst and commentator, after a year-long analysis of seven developed countries and six sectors, global management consultancy company McKinsey reported that: “Demand matters for productivity growth and increasing demand is key to restarting growth across advanced economies.” 

If deficient demand is not considered relevant as far as productivity goes, fiscal policy is diminished because there’s little point wasting limited financial resources on fiscal stimulus or higher real wages

And economic inequality doesn’t even factor into the equation. Rising inequality, growing polarisation and the vanishing middle class have all been seen as unfortunate, but inevitable, byproducts of globalisation rather than drivers of slow potential growth

However, there is a historical basis to support the authors’ view that demand does matter when considering the issue of productivity:

  • The post-WW2 period until the OPEC induced recessions of the early-1970s was a time during which wage gains grew in line with productivity increases
  • The resultant higher wages provided an incentive for firms to invest in labour-saving machinery, with the upshot that productivity growth surged as a result
  • After then, the link between productivity and wage gains was severed – more national income went to corporate profits whilst wage gains were suppressed because labour was seen as a cost input, not a source of demand
  • This redistribution of national income in favour of corporations and away from the workforce removed the incentives businesses had to invest in the modernisation of their capital stock, ultimately impacting productivity growth
  • Even as profits rose, incomes remained stagnant for a large proportion of the population
  • Globalisation and offshoring entrenched this new low wage-growth orientation of businesses, in combination with domestic labour market deregulation and de-unionisation.

The problem of deficient demand and wage stagnation was masked for a time as the use of financial engineering pushed ever-increasing debt onto the household sector as they used borrowing to compensate for stagnant growth in income

Bill Mitchell wrote:

  • “Riskier loans were created and eventually the relationship between capacity to pay and the size of the loan was stretched beyond any reasonable limit”
  • “The household sector, already squeezed for liquidity by virtue of non-existent wage growth, was enticed by lower interest rates and vehement marketing strategies of financial engineers to take on more debt.

The new global economy enabled the rich to have their cake (profits) and eat it (by channelling them to offshore tax havens)

Corporate CEOs, the so-called risk-takers, increasingly negotiated to have their compensation packages tied to stock price appreciation, which incentivised companies to use cash flow for stock buybacks rather than invest in plant and equipment

The scale of these buybacks was analysed by economics Professor William Lazonick, who documented that between 2003 and 2012, the 449 companies who comprised the S&P index used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock, almost all through purchases on the open market

As stock prices rose, so too did the CEO/directors’ overall compensation packages

The authors of the report cite the famous example of Henry Ford in the early part of the 20th century. Ford had the rare insight among entrepreneurs of his day that workers were not simply a cost input, but an important source of demand for the products they were producing: “When other employers followed suit, it became clear that Ford had sparked a chain reaction. Higher pay throughout the industry helped lead to more sales, creating a virtuous cycle of growth and prosperity.”

But Ford was not the originator of this insight.

John Atkinson Hobson, a British economist in the latter part of the 19th century and first part of the 20th century, was one of the first to champion a high wage economy:

  • He argued that wage suppression was unhealthy and immoral
  • He advocated redistributing income to low earners—i.e. moving toward greater equality— to reduce the capacity of the wealthy to save and place more spending power into the hands of those with higher consuming propensities
  • He also supported greater labour unionisation and was one of the early advocates of social welfare and public education
  • He thus promoted the notion of a “high-wage economy” to mitigate the problem of “an accumulation of capital in excess of that which is required for use”

Hobson and his co-author, A.F. Mummery, made the case that if productivity growth outstripped real wages growth, you would have “under-consumption,” the upshot being that overproduction would ensue

Such insights are finding resonance today

We have an economy where workers who traditionally relied on real wages growth to fund consumption growth now find themselves increasingly cut off from the fruits of national prosperity as their wage gains have been suppressed in the interests of securing higher profits.

The usual justification for this shift in income away from workers to corporations is that the latter use the resultant profits to stimulate investment, which will ultimately benefit the company as a whole, including its workforce – but corporate profits historically used for productive ventures have instead gone into stock buybacks, fuelling the speculative asset bubbles that have percolated across the global economy.

The substantial redistribution of national income toward capital over the last 30 years or so has undermined the capacity of households to maintain consumption growth without recourse to debt, and so increasingly hindered the economy’s growth capacity


  • Economic stagnation and sluggish productivity are the outcomes of conscious policy choices
  • They reflect a profound failure of sensible macroeconomic demand management
  • McKinsey are only the latest to affirm this economic reality

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