...or in some other way degrades performance. I’ve been wary... in part because it appeals so much to my general leanings.... I continue to be skeptical, in part because there have been some pretty bad crises with lousy recoveries in countries that don’t have a lot of inequality. Consider, in particular, the post-1990 Swedish slump.... Just one piece of evidence. But I’m still having trouble with this one.
The poor have to spend their incomes in order to buy their necessities. The middle class have to spend their incomes to buy their necessities and the conveniences they need in order to ensure themselves that they are not among the poor. The rich can spend their incomes or not.
Hence the more unequal distribution of income, the more the potential for slack aggregate demand. With monetary policy constrained by the rules of the game that was the gold standard, Full employment in an unequal society required either unusually optimistic financiers and industrialists or something else. Hobson thought that the "something else" what inevitably be imperialism. Governments that spent to conquer and then forced the conquered colonies to spend buying the exports of the metropolis would tend to stay in power. Governments that did not would either be turned out at the ballot box or by the North Atlantic street.
Nowadays we see other ways out of Hobson's inequality trap. Monetary policy is not constrained by the gold standard and can, via low present and promised future interest rates, induce financiers and industrialists to spend on long-term investment projects--except to the extent that the euro, the sub 2%/year inflation target, the zero lower bound on short-term safe nominal interest rates, and fears that quantitative easing will somehow cause more "financial instability" than would near-permanent depression combine to create Golden Fetters of the mind as strong as those that bound the believers in the interwar gold standard. Legislatures are now allowed to borrow-and-spend for reasons other than real, created, or Potemkin military necessity. Banking regulators can take powerful steps to shrink risk premia and so encourage the animal spirits of those who are otherwise too fearful to defeat the dark forces of time and ignorance which envelope our future, and invest.
But, in my view at least, it remains a trap. Today as in 1902 the poor have to spend their incomes in order to buy their necessities. Today as in 1902 the middle class have to spend their incomes to buy their necessities and the conveniences they need in order to ensure themselves that they are not among the poor. And today the rich can spend their incomes or not, depending on current and expected future interest rates, the magic wand of the Confidence Fairy, the state of long-term expectation, the level of interest rates, the availability of financial markets to summon the Genie of Risk Tolerance, the Inflation-Expectations Imp, and other factors. The only major difference between now and then is that the spending of the social insurance state imparts, or ought to impart, enormous macroeconomic inertia--serving as an additional sea-anchor for aggregate demand.
Thus I would be astonished of the Hobson argument were not in some sense right. But things can be right without being first-order important. However, the shift of income distribution toward the top over the past 35 years have been so large that I would be astonished if the Hobson argument was not important.
But there is no rule that my visualization of the Cosmic All is correct. There is no law of nature that keeps me from being surprised and astonished.