The concept of insufficient aggregate demand is strongly embedded in "modern economics".
It will, however, gall most "trained" "modern" economists to know that their delusion that recessions have anything to do with underconsumption had been long demolished by economists like Ricardo, Say and J.S. Mill. But Keynes, given the enormous clout he wielded, plucked this failed and rejected idea and made it the centrepiece of his theory of unemployment in 1936.
Keynes actually did not advocate this idea till much later, when he came upon Malthus's writings on the subject. But others (in USA) before him had started a great murmuring about this rejected idea. And so, Hayek, who heard about this murmuring, decided to demolish this absurd idea once again, in an article entitled, The "Paradox" of Savings in 1929 (available here).
Why did Hayek bother to refute something that had already been refuted on innumerable occasions in the past?
Because, as he noted: "it is not impossible that with able exposition and extensive financial backing it may exert a certain influence on policy in Anglo-Saxon countries. For this reason it seems worthwhile subjecting this theory to detailed and exhaustive criticism." He was right to take pre-emptive action, but it failed to stop Keynes's "able exposition" in 1936 that exerted a "certain influence" on policy – an influence our "economists" have yet to get over.
This is what Hayek wrote:
The assertion that saving renders the purchasing power of the consumer insufficient to take up the volume of current production, although made more often by members of the lay public than by professional economists, is almost as old as the science of political economy itself. The question of the utility of “unproductive” expenditure was first raised by the mercantilists, who were thinking chiefly of luxury expenditure.
The idea recurs in those writings of Lauderdale and Malthus that gave rise to the celebrated Théorie des Débouchés of James Mill and J.B. Say, and, in spite of many attempts to refute it, it permeates the main doctrines of socialist economics right up to T. Veblen, and Mr. J.A. Hobson.
But while in this way the idea has found a greater popularity in quasi-scientific and propagandist literature than perhaps any other economic doctrine hitherto, fortunately it has not succeeded as yet in depriving saving of its general respectability, and we have yet to learn that any of the numerous monetary measures intended to counteract its supposedly harmful effects have been put into practice.This state of affairs, however, may yet be endangered by a new theory of underconsumption now current in the United States and in England. Its authors are people who spare neither money nor time in the propagation of their ideas. Their doctrine is no less fallacious than all the previous theories of underconsumption.
All the words in red above can readily apply to Keynes, who was a seriously incompetent economist. His followers have taken economics almost back to the time before Adam Smith, a regression in theory that the world cannot afford.
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