The Trouble With Capitalism: Market Saturation

pp. 35 & 36:

Market Saturation

The increasing maturity of most consumer markets in the industrialised countries was becoming a noticeable constraint to economic growth in the industrialised world by the end of the 1960s. This meant that in addition to static demand for non-durable goods (food, drink and clothing) the markets for most durable products (automobiles, television sets etc.) tended more and more to be governed mainly by replacement demand rather than by the continuous opening up of new groups of first-time buyers, which had been possible throughout the 1950s and early 1960s. Hence demand for goods generally began to grow more in line with population — which was in any case increasing more slowly than in the immediate post-war period — rather than at the rapid rates recorded up to the mid-1960s.

The result was that companies serving these markets were obliged to diversify into new products or services in their unavoidable quest for further expansion, especially as they were barred by anti-monopoly restrictions from taking over their competitors, at least within their national frontiers. One consequence of this was the emergence, particularly in the USA, of 'conglomerate' groups or companies with diversified activities ranging from telephone equipment manufacture to hotel chains....

One thing that I'm particularly sensitive to in reading this book, and elsewhere, is the idea that at least a significant part of the trouble with the modern economy is exaggerated expectations of return on investment on the part of investors. This is essentially one reference to it here. Still, it doesn't seem to crop up as much as I'd guessed it would. I'm not sure whether this is because the author understates its role (or I'm just wrong in its significance), or he just assumes it as a near-axiom, not worth mentioning because it's a given.

Yet gradually, as may now be recognised with the benefit of hindsight, the development of such new consumer markets proved insufficient to offset the impact of the saturation of existing ones.... Thus for many it was an article of faith that every economy was subject to a normal or 'underlying' growth rate or trend, from which it might be expected to deviate only under abnormal circumstances and, implicitly, for relatively short periods. Likewise, as already noted, many of the cruder apostles of Keynes had convinced themselves that 'demand management' could actually permit the stimulation of increased consumption simply by injecting more money into the economy, and that consequently excess productive capacity need never be a problem again. Thus they, along with most OECD governments, failed to appreciate that, once the short-term limits of purchasing power have been reached, the only consequence of artificially trying to extend them further is bound to be inflation.³

3. Even now it is quite common to find economists who reject any notion of limits to demand growth, usually on the grounds that it is based on the 'lump of labour fallacy' — that is, the suggestion that there is a fixed amount of output (and hence labour) required to meet demand (cf. S. Brittan, Capitalism with a Human Face, Fontana, London 1996). The obvious perversity of this argument is based on a refusal to bring the time factor into the equation, since it is not a question of suggesting that demand is finite in any absolute sense but only over a given time period. Yet since rates of return on capital are reckoned in relation to periods of time it should not be necessary to point out that it is the short- or medium-term limitation which is crucial in defining whether there is a ceiling on demand growth.

I think we're getting pretty close now to the "limits of purchasing power," "bound to be inflation" point he's talking about. By the way, have you checked the price of wheat lately?