A detractor for the Keynesian model

We are living in a bright era of unprecedented economic growth through technological innovations. But this promise of ever-utopian world comes with a dark side, that of the anxiety and the trepidation of growing human irrelevance, economic slump and falling consumer demand threatening stagnation. Over the ages, the classical Keynesian economic stimulus has come to our rescue in such troubled times. but often, such efforts have failed in a significant manner to bring long term sustainability or brought localized, temporary support at best.

Today we are going to talk about an idea that detracts this Keynesian economic model to deliver sustainable economic growth.

If you forecast a higher growth for an industry once the idea is discounted in the market it would cause a boom, which means that the capital will flow-in from the other industries to the booming industry. In such a case, the drive would be to increase employment in the said domain with the needed skills. This is likely to cause an increase in wages. Now if the wages rise faster than the rate of productivity, this increase in the wages will reduce the profitability of the capital as the corporates would focus on competitive pricing of their products. The profit rate of capital (which is the comparative difference in the return on investment among industries minus the interest rates) is what motivates investments and this boom. So, in a way, higher wages without relatively higher productivity would pose a threat to potential economic growth.

With the higher growth of wages (compared to the growth of productivity) and competitive pricing policy, the real return on capital investment would first stall and then start to plummet. This will lead the capitals to look for a better investment opportunity via a favourable opportunity-cost analysis. In such conditions the central banks will step in, to act to revive the opportunity cost in the given industry. Now the steps of fiscal stimulus are either to cut the interest rates, which means reducing the base rate-of-return of capital to increase the return margin of investment or to inject more cash by printing money. Both options are susceptible to increase more and more pressure on the mechanisms of checking inflation in the economy.

With higher wages and more money in circulation, the consumer purchasing power would increase adding a strong case for too much money chasing too few goods provided the productivity isn't increasing at an equivalent pace which doesn't culminate into the top-line growth for the organizations. What this pressure on the profitability of capital does is that it leads the organizations to reconsider their employment portfolio and having realized that they have excess baggage which doesn't significantly add to the marginal productivity, they start to dump employment. Hence the final outcome of economic stimulus begins to undermine the very philosophy of the stimulus since it ends up creating unemployment.

If the productivity doesn't increase at a high pace, the Keynesian model of injecting stimulus is not going to help an economy from the blow-back caused by the high rate of wages. In history, there was one example where this Keynesian model was successfully paralleled, and it was during the reign of Hitler in Germany and also implemented by Roosevelt in the US during the same time. After WW I, Germany was devasted in terms of economic health. The unemployment and inflation both grew at a staggering rate to culminate into a dismal social life. With Hitler’s take over, the unemployment literally vanished along with a radical increase in the social output. This is because Hitler was able to cut the correlating cord between wage and profit. He asked the companies to stop increasing their prices while asking the workers to stop asking higher wages which led to a secured middle ground between revenue and cost. Add more time in the recipe, and you get profitability mounting. Now had that model been given a chance to continue, we would have seen that the owners of the capital would have gained a hefty share, while at the same time the wage earners been freed from the peril of ever-increasing inflation. The surplus of return on investment would find its way to the economy, boosting the productivity the hard way by investment in technology and human knowledge sharing. With more and more people joining the work-force and earning a steady wage, the demand for consumer goods would increase and the extra capital would secure a larger production mechanism to enjoy the economic benefit of large-scale.

So, here's my question, can the current world run on the model of regulated pricing and wages to develop a sustainable growth pattern? I know there are many gaps in the models, but we can start the dialectic process and fill in the gaps...