Dean Baker understands Effective Demand

In a piece yesterday called High Asset Prices, the Savings Glut, Secular Stagnation, and Unemployment, Dean Baker wrote…

“The idea that the economy could be subject to an ongoing problem of inadequate demand used to be grounds for eviction from the realm of serious economists. But anyone who is willing to look at the evidence with a straight face really can’t escape this conclusion.”

This idea of inadequate demand is not crazy. Keynes said that weak effective demand could keep the economy from reaching full employment.

“This analysis supplies us with an explanation of the paradox of poverty in the midst of plenty. For the mere existence of an insufficiency of effective demand may, and often will, bring the increase of employment to a standstill before a level of full employment has been reached. The insufficiency of effective demand will inhibit the process of production in spite of the fact that the marginal product of labour still exceeds in value the marginal disutility of employment.” (source, General Theory, Chapter 3)

So Dean Baker shows us that he understands the nature of effective demand to limit economic output and the utilization of labor.