Rational microeconomic management and its non-optimal macroeconomic outcomes: the role of social institutions

Abstract The paper analyzes possible policy and institutional responses to underconsumption, which is viewed as an effect of a specific market failure. Microeconomic rational decisions to keep labor costs low, resulting in suboptimal macroeconomic outcomes. Traditionally, constraints arising out of deficient demand have been corrected with expansionary fiscal and monetary policies. These methods have ceased to be effective and viable. Alternative measures should be targeted at changing income distribution; low labor income is the reason for underconsumption. Such measures (progressive income tax, stronger labor unions) would probably not gain any acceptance of entrepreneurs, even though, in principle, they should boost business activity. Non-confrontational solutions are beyond the reach of economic policy but an informed democratic debate might lead to a desirable compromise.