Asia's Financial Crisis, Speculative Bubbles, and Under-Consumption Theory

By Leightner, Jonathan E. | Journal of Economic Issues, June 2000 | Go to article overview
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Asia's Financial Crisis, Speculative Bubbles, and Under-Consumption Theory


Leightner, Jonathan E., Journal of Economic Issues


One hundred and ten years ago, A. F. Mummery and J. A. Hobson wrote, "the East-end problem, with its concomitants of vice and misery, is traced to its economic cause, and that this economic cause is the most respectable and highly extolled virtue of thrift" [Mummery and Hobson 1889, 99; here after cited just by page number]. During the Asian miracle, economists praised Asia for its high savings rate. In direct contradiction to this previous praise, I will argue that Mummery and Hobson's "under-consumption" or "over-savings" theory explains an important part of the Asian crisis. Furthermore, if Mummery and Hobson are correct, then economists need to make significant modifications to their macroeconomic models and to their policy prescriptions.

Under-Consumption and the Asian Crisis

The core of Mummery and Hobson's Under-Consumption Theory relies upon a realization that consumption (not saving or investment) is the economic force that leads to community prosperity. Here "consumption" means what modern macroeconomists call "final demand sans investment." Thus, "consumption" includes government purchases of final goods and services and exports in addition to the purchases of consumers. The demand for investments, whether in the form of intermediate goods or additional capital, is derived from consumption. If no one buys the additional goods produced from saving/investment, then society has accrued all of the costs and none of the benefits from that production (and of the saving that made it possible), making the additional saving/investment foolish. A final buyer is essential for prosperity.

Just as "consumption" equals final demand sans investment, "savings equals production which is not consumed" [p. 36]. Thus, saving includes the direct investment of individuals, firms, and governments. "Over-savings," "under-consumption," "over-investment," and "over-production" all mean the same thing, and they occur if investment increases the amount produced and this additional production is not consumed.

It is important to realize that Mummery and Hobson make a clear distinction between the individual and society. From the individual producer's point of view, his or her goods have been demanded when a wholesaler buys them; in contrast, from society's point of view, a good is not demanded until a final consumer buys it. Thus, on a microeconomic level, we talk about the demand for unmilled wheat, but from a macroeconomic perspective (when calculating GNP or GDP), we avoid double counting that wheat by only considering the final good (bread) that is produced from it [pp. 56-99]. From society's point of view, all income is derived from final demand (sans investment) [p. 88]. If all of this income is not used to buy all the final goods produced, then a condition of under-consumption results, causing incomes to fall and a depression of trade to occur. [1] Individuals can consume more than their income, but the world community cannot spend more than the income directly derived from consumption.

While the community is unable to consume its capital, to consume its fields, railways, factories, steam-engines, shops, and iron foundries, to eat its growing corn, or wear its unspun cotton and unwoven wool, the individual suffers from no such disability. He can convert his fields or houses, his ironworks or growing crops, into champagne and truffles with the utmost facility. To explain the apparent paradox, that any individual can accomplish what the aggregate of all individuals cannot accomplish it is only necessary to. . . . [realize that if] any given individual wishes to live beyond his income, he can only do so provided that some other I individual or individuals will consent to consume as much less of their income or incomes as he wishes to consume more, and will hand over to him this excess in exchange for the machinery or raw material which he possesses. Thus the extravagant individual consumes his neighbours' incomes, whilst these thrifty neighbours become possessed of the capital whi ch he previously owned [pp.

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