[Continuing to read Pasinetti‘s 1981 tour-de-force Structural Change and Economic Growth. This post inspired by page 90-91 (available at Google Books preview).]

Following the advent in 2008 of the global financial crisis, government ‘demand management‘ again rose to prominence in mainstream economic debate and actual policy in many countries, under the label of ‘stimulus’, and indeed ‘austerity’^[1].

The rationale for macroeconomic demand management was one of the key insights of Keynes‘ 1936 General Theory. Full-employment (or the lowering of unemployment) will not be achieved without sufficient effective demand for goods and services. Keynes’ theory was subsequently caricatured/bastardised and distilled into a simplified policy prescription for government-led macroeconomic demand management. That policy was in the ascendant in the 1950s and 60s but came to be reviled during the 1970s and subsequently.

However, Keynes’ arguments (not be confused with the theories of the New Keynesian school) — while to my mind persuasive — were based on top-down macroeconomic reasoning, without explaining the guts of how this worked in terms of production, companies and industries all interacting.

Bottom-up foundations explaining the need for demand management were provided by Pasinetti (1981) (complete with mathematical equations for those who insist on such formalism). More than just giving deeper analytic roots to some of Keynes’ insights, Pasinetti’s work actually prompts a generalisation^[2]…

Since there is no intrinsic economic mechanism that will automatically ensure that effective demand is sufficient to support full employment “if full employment is to be kept through time, it will have to be actively pursued as an explicit aim of economic policy” (p90). The obvious institution is to carry out this policy is government. So far so Keynes(ian).

But in a footnote Pasinetti alludes (with little elaboration) to the possibility of a mechanism other than government to ensure full employment. In other words, what is required is macroeconomic demand management, but not necessarily (or perhaps to be more realistic, not exclusively) government demand management. Which got me thinking about…

Advertising. Cue Adam Curtis’ fabulously insightful BBC documentary Century of the Self (available on youtube, at least for now). His story, for our purposes, may be summarised as follows.

In the early 20th century, large American corporations were genuinely worried that there might not be sufficient demand for the volume of products that their mass-production processes were set to churn out. They faced a possible shortfall of demand.

The solution was demand management. But through advertising rather than government spending. In other words, ‘free-market’^[3] demand management. And with this soon being done systematically across corporate America, demand management via advertising went from being a niche microeconomic concern, to an integral part of the macroeconomic system.

Granted, such ‘free market’ demand management is not a perfect substitute for government demand management. Most notably, in an economic crisis people may remain reluctant (or unable due to lack of liquid assets and credit constraints) to spend no matter how much corporations are willing to spend on advertising. By contrast the government — with the permission of the bond market participants if it is unwilling to directly create and spend its own money — has greater spending capacity and (given the political will) the ability to spend into the recession at least temporarily (stimulus package) in a way that would bankrupt a household.

Yet outside times of crisis, ‘free market’ demand management has become such an entrenched part of late-modern capitalism that we don’t even see it happening.

Macroeconomic demand management is an integral part of our economy. Therefore the debate should be not about whether we should have demand management, but about who is managing demand.

We might like to think that the corporations are merely advertising to us, but we are making the choices; we each individually are managing our own demand based on our own autonomous preferences. Do you really believe that?

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[1] Austerity is government demand management in the downward direction, though proponents — who believe macroeconomic ‘multipliers’ from government spending to the wider economy be weak — typically would hold that this is a matter of the direct demand created by government spending and not wider macroeconomic demand.

[2] This may not be a generalisation of Keynes’ policy per se (I would have to re-read the General Theory), but it is certainly a generalisation of the mainstream digestion of his theory into policy prescriptions.

[3] I don’t believe any ‘market’ is 100% ‘free’ in any pure sense. What we are really talking about here is private corporation-led demand management. However, since this is what the ‘free market’ most often refers to in common usage, I’ll run with it.