It is often recounted how Henry Ford cleverly realized that if he was to sell his cars, he would have to pay his workers a wage sufficient to afford them. This is the basis of a how an economy works. Income must be sufficient to purchase output, taking into account funds diverted to savings that won't be consumed in the present period.
This implies that demand leads supply in the sense that demand sends a signal to invest. Insufficient demand to purchase potential output results in economic underperformance and rising unemployment.
Bill explains how the seeds of the crisis were sown based on this:
"In the past, real wages grew in line with productivity, ensuring that firms could realize their expected profits via sales. With real wages lagging well behind productivity growth, a new way had to be found to keep workers consuming.
"Here a link between the real economy and the financial sector emerged. The deregulation push not only affected the real economy (wages, conditions etc). The neo-liberals lobbied hard to ensure that policy makers also reduced their oversight of the financial sector. The myth of self-regulation leading to efficiency and optimal outcomes for all was generalised.
To keep consumption growing at the same time as the power elites were “stealing” more and more real output via the redistribution mechanism noted above [productivity gains not being passed on], the financial sector became more sophisticated (which in this context doesn’t connote good or better) and we observed the rise of “financial engineering,” which pushed ever increasing debt onto the household sector.
"It was such a lurk. Capitalists found that they could sustain sales and receive an additional bonus in the form of interest payments – while also suppressing real wage growth. Households, enticed by lower interest rates and the relentless marketing strategies of the financial sector, embarked on a credit binge.
"The increasing share of real output (income) pocketed by capital became the gambling chips for a rapidly expanding and deregulated financial sector. Governments claimed this would create wealth for all. And for a while, nominal wealth did grow—though its distribution did not become fairer. However, greed got the better of the bankers, as they pushed increasingly riskier debt onto people who were clearly susceptible to default. This was the origin of the sub-prime housing crisis of 2007–08."
Why is it time to get angry? Even though this theory was discredited by the crisis, it has arisen from the dead and is still dominating the policy debate. What does it take to kill a zombie. A depression?