House wrote:This theory runs headlong into the fact that wealthy capitalist economies mostly do not produce consumer goods; they produce capital goods. Therefore it seems more income inequality, which results in lower consumer demand and higher savings, would in fact be beneficial to production in places like the US or Israel, where most manufactured goods are purchased by investors rather than end-users.
Just to make sure I understand you correctly, when you say 'higher savings' are you referring to household savings? And can you expand on how lower consumer demand and higher savings would be beneficial to production?
House wrote:Furthermore, even in an economy that produces its own consumer goods all that would cause is for prices to follow a declining trend, which would cause a disincentive to invest and lower growth (which can be easily fixed by permanent inflation), but I still don't see how it would cause the massive disruption necessary for a recession, let alone a depression.
I want to clarify that overproduction is only one (often serving as a long-term, structural and underlying) cause - though an important one. In other words, overproduction doesn't necessarily in itself cause an economic recession, but it slows down growth and discourage investment (as you point out), thus contributing to the conditions for a recession.
Take the example of the current economic recession. The issue of overproduction is kind of in the background - namely that due to overproduction/overcapacity, the capital accumulated has since the 70s been diverted from the productive economy into the financial market in pursuit of higher and quicker returns. While the financial market has blossomed, the underlying real economy continues to stagnate. When this divorce between financial market and real economy becomes extremely huge, it becomes a bubble itself built on others bubbles. In this context, more short-term and contingent causes like the bursts of dot-com or the real estate bubble would be able to trigger a crisis in the financial market e.g. the burst of a huge bubble, which without the support of a growing real economy, would very likely cause a severe recession.
House wrote:And again, why would this cause a disruption rather than a decline in the growth rate?
Overproduction, as you know, means that there are more products produced that can be consumed. This often results in the sacking of workers as demands slow down, or the use of cost-cutting strategy such as reducing wages or replacing workers with machines/new technology. All of these in turn would further depress consumer demands and may eventually lead to a downward spiral. This is not say, however, every time there is an overproduction issue, all of these would necessarily happen. But these are the general tendencies, and when coupled by other factors, may bring about a recession.