Demand, Structural Interdependence, and Economic Provisioning

Introduction The function of an economic system is to enable the individuals who comprise it to meet their material needs. Different systems do this in different ways; some do the job "better" than others, according to various criteria (the rate of growth of per capita income; access to subsistence; distributive justice; and so forth). Owing to the division of labor, industrial and post-industrial economies are characterized by a high degree of structural interdependence: technical interdependence among productive sectors; interdependence between demand and employment; and interdependence between state and economy. Structural interdependence has been the subject of economic analysis since the emergence of classical political economy in the 17th century, notably in the Tableau Economique, in Marx's schemes of reproduction, in the post-Marx writings on the trade cycle, in Input-Output economics and activity analysis, and in the Sraffa model. This article reflects upon the role of demand in the context of such models of structural interdependence. Once an economy attains a level of economic development in which the technology enables a substantial portion of the population to enjoy a standard of living significantly above subsistence, "the material needs" of the system become difficult to define because they are interconnected with the relations of production in complex ways. In particular, demand comes to play a key role in the subsequent development of the system. Wages are no longer analogous to the fuel that is needed to power an engine, or the fodder that a team of oxen need to enable them to pull a plow. Aggregate demand drives growth, and the composition of demand regulates the allocation of resources. Under modern capitalism, the situation is complicated by the fact that the composition of demand is shaped in large part by the marketing activity and wage policies of powerful oligopolistic entities. This article examines these issues in the light of the class of structural models associated with Leontief, Pasinetti, Lowe, and Sraffa. These models avoid the pitfalls of the conventional treatment of demand in terms of price-elastic demand functions, but they have made only tentative progress in explaining the evolution of demand. The aim of the article is not to provide a theory of demand, but to assess how these structural models have treated demand and suggest how the theory of demand can be further developed within the broad framework of such models. The Provisioning Process in the History of Economic Analysis The first attempts, by the mercantilists in the 16th and 17th centuries, to describe how market economies work were necessarily primitive, and with few exceptions (for example, Mun 1664) barely scratched the surface of the problem. Focused as they were on commerce--on flows of goods and money--the mercantilists had little to say about how those goods get produced, allocated, and reproduced in such a way as to enable the economy to persist through time. On development and structural change they offered nothing at all. In the 17th century William Petty (1662) correctly identified production as the ultimate source of income, an insight that represented a significant advance on the misleading mercantilist view that trade is the basis of national prosperity. Petty also introduced the crucial idea that an economy is prosperous in so far as it is capable of producing a surplus over and above the wage goods and material inputs consumed in the production process. By the next century, even before the onset of industrialization in Britain, political economists had thoroughly internalized Petty's outlook. Bernard Mandeville, less a political philosopher or social scientist than a mischievous wag who specialized in poking the eye of bourgeois complacency, recognized not only that production is what enables a society to thrive, but also that once the economy has advanced beyond a bare subsistence standard of living, production is to a large extent driven by demand. …