Rational microeconomic decisions and their non-optimal macroeconomic outcomes: the role for social institutions

The paper analyzes possible policy and institutional responses to underconsumption (deficient consumption spending that leads to depressed economic activity). Underconsumption is an effect of a specific market failure; uncoordinated rational microeconomic decisions to keep labour costs low result in sub-optimal macroeconomic outcomes. Traditionally, any manifestations of demand constraints have been corrected with expansionary fiscal and monetary policies. These methods have ceased to be effective and viable. Alternative measures aimed directly to change income distribu- tion are considered. Such measures (progressive income tax, stronger labour unions) would rather not gain acceptance of entrepreneurs even though in principle they should boost business activity. Non-confrontational solutions are beyond the reach of economic policy but good apprehension of the problem at hand in the democratic debate might lead to a better compromise with respect to social distribution of incomes.