A defining feature of the MWM perspective is that an inability to sell output can prevent firms from fully employing an economy’s resources. In addition, we argue that demand constrains output most of the time. It will usually be the case that an increase in spending will lead to more production and higher employment. It will nearly always be the case that reduced spending will lead to greater unemployment and wasted resources.
As other pages have discussed in detail, we cannot rely on automatic economic mechanisms in the economy to create enough demand to get to full employment. Neither automatic interest rate adjustment nor flexible wages and prices can be trusted to do the job. This perspective has important implications.
If demand is not “automatic,” policy can play a central role in assuring that modern economies do not waste their resources. We discuss how policy can address problems of insufficient demand in a sequence of pages on monetary policy and fiscal policy. More broadly, the path of the economy through time will be determined in large part by the evolution of the components of demand (consumption spending, business investment spending, government activity, and international trade). To understand both strong and weak periods of economic performance, we need to analyze how demand behaves (for example, see our pages on the recent economic crisis, the Great Recession).
This focus on demand as the proximate engine of economic activity, however, should not be taken to mean that supply does not matter. Supply imposes constraints on how far demand expansion can raise production. Economies like that of the U.S. could not have grown as they did over decades without extensive growth on the supply side. And the ability to provide a better material life for future generations will require further improvements in supply-side factors, most obviously technology. Both supply and demand are necessary for economic success, and neither should be viewed as automatic. All economists understand this point as it applies to the supply side. It is a central goal of the MWM project, however, to make clear that the demand side too cannot be taken for granted.