Why not Keynes? - by Branko Milanovic

#economics #inequality #redistribution

Even a very cursory look at the fundamental equation which is A (aggregate supply) = C + I + G shows that if C (aggregate consumption) is a function of income distribution an obvious way to rebalance supply and demand is to “improve” income distribution, that is to transfer purchasing power from the rich to the poor. If $1 is transferred from a rich person who normally consumes only 50 cents, to a poor person who would consume 95 cents, aggregate consumption will increase. One can then fine-tune it until it closes the gap between the aggregate supply and the effective/aggregate demand. There is no need to introduce government spending, G.

The question is then, why was such an obvious path out of insufficient demand not taken by Keynes? He had in front of him two possibilities: one was to increase government spending; the second was to redistribute income towards the poor. The latter is an easier solution and entirely within the logic of the model itself, including within the logic of a new concept of “propensity to consume” which Keynes has introduced. But if income distribution is assumed unchanged or unchangeable, or if one does not want to touch income distribution for political reasons, then the only way out is the one taken by Keynes: increased government spending.

https://branko2f7.substack.com/p/why-not-keynes