Today Paul Krugman wrote a piece about China's high level of investment in the face of low domestic consumption. It is obvious to me that he is making headway in understanding the importance of low labor share of income.
Remember low labor share means high capital share. Capital income is dedicated to increasing the means of production, whereas labor income is primarily dedicated to purchasing the finished production. Paul Krugman refers to this directly...
"Chinese businesses were investing furiously, not to build capacity to serve consumers, who weren’t buying much, but to serve buyers of investment goods — in effect, investing to take advantage of future investment, adding even more capacity. Would there ever be final buyers for what all this capacity could produce?"
He is describing the dynamics of Effective Demand. He is also describing the dynamics of the growth model of effective demand. Yet, he is also describing the problem with the US economy where labor share of income has fallen below normal past levels.
Paul Krugman is on the verge of an illumination about the dynamics between labor and capital income. This blog of effective demand is full of the new models needed to describe the problems from an imbalance between labor and capital income.
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