Capitalism and Consumerism

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The Christmas shopping period, beginning almost with a starter pistol on so-called “Black Friday” in November and culminating in the January sales, is one of the busiest in the year for the retail industry. The period of celebration, feasting and gift giving is critical to the annual revenue and profits of hundreds of consumer-facing industries, with the volume of spending increasing by more than 50% according to some estimates.

Against all of this is the charge that consumerism and capitalism has distorted and destroyed the older traditions and practices of the holiday season. What was once a period of religious observance and a time for more modest celebrations with one’s friends and family has mutated into a mass shopping frenzy where people care more about what they can buy rather than on the meaning and significance of Christmas. Greedy retailers encourage us to spend increasing amounts of money on clothes, furniture, electronics, and entertainment that most of us probably do not need. We merrily guzzle on tons of unhealthy sugary and fattening food and alcohol which simply expand our waistlines through a myriad of parties and get-togethers during the festive period. Once we have stuffed ourselves we then happily “invest” in our new year’s resolutions by forking out on so-called “detox” and exercise regimens, healthy foods and tight fitting clothes to the very same peddlers who made us fat in the first place.

Moreover, there can be little doubt that this “consumerism” has changed the traditions of the winter period in the past few generations, as retailers attempt to fill the long void between the end of summer and December 25th. Advent was previously a time of preparation and observance, during which the last of the harvest foods were brought in and preserved ready for the long winter ahead. Christmas, on the other hand, was the beginning of period of feasting and celebration that brought cheer and merriment to the cold, dark winter days which lasted until the arrival of Lent in mid to late February. With the evenings then growing lighter and the temperature warmer the inducement to “giving up” after the previous period of luxuriant consumption was altogether easier. Now, however, the period of celebration – parties, get-togethers and splashing out – has shifted to December and culminates, rather than commences, on Christmas Day. After that there is little more to look forward to other than new year’s celebrations, after which – at the darkest, deadest and least conducive period of the year – we are suddenly expected to start afresh by going to the gym and slimming down. It is for this reason that Christmas seems to come earlier every year. As so much is now packed into just three or four weeks of what is often still late Autumn weather all of the planning and preparation spills into the earlier months – sometimes, to the discontent of many traditionalists, as early as September when mince pies and Christmas crackers can be spotted in the supermarkets.

If we assume that this type of so-called consumerism is a bad thing and has, indeed, served to distort and ruin treasured seasonal traditions, advocates of the free market are faced with the charge that consumerism is a product of capitalism; that our greater ability to produce and raise the standard of living rather than live in a society characterised by mud huts and starvation has made us all slaves to materialism with no regard for anything deeper or more meaningful. (Never mind that capitalism, perversely, is also blamed for increasing the plight of the poor and benefiting only the rich. Critics of capitalism are seldom consistent in their indictments). The proper retort to such a charge is that capitalism is, in fact, the very opposite of consumerism, or rather that consumerism is the effect of a social order that is anti-capitalist. First, capitalism and the free market orders are distinguished by the fact that they involve the accumulation of capital – in other words a relatively high percentage of current income is saved and invested in capital goods that will only later yield a higher production of consumer goods. Consumerism, however, is distinguished by people not saving or investing, and instead deciding to spend a relatively greater proportion of their current incomes on consumer goods. In the lexicon of economics, a capitalist society is one of low time preference and wealth accumulation whereas a consumerist society is one of high time preference and wealth destruction. The worst case of consumerism, and one in which we partly live, is where people consume more than their current incomes on consumer goods by borrowing money. It is true, of course, that capitalism creates the wherewithal to produce a relatively greater number of consumer goods than any other social order and that those living in a capitalist society will, in fact, consume more than those living in a non-capitalist society. However, the charge of anti-consumerism is nothing to do with the absolute volume of consumer goods that are purchased. Rather, the problem is the obsession with and focus on consumption of whatever there is to consume at the expense of anything else. Consumerism, we might say, is a phenomenon of a previously capitalist-oriented society that has turned its efforts away from saving and capital accumulation and towards the consumption of everything that has thus far been produced – possibly even the consumption of accumulated capital.

From where does the inducement to this consumerism come? It is true, of course, that nothing about capitalism prevents people from turning towards desires for excessive consumption; but neither, too, does it encourage it. To the extent, therefore, that the phenomenon is widespread there must be some kind of systemic influence towards consumerism other than anything to do with capitalism itself. This systemic influence is the very opposite of capitalism, or rather, we might say, perversions of capitalist orders – the false economic theories and destructive economic practices of the state. These false economic theories, such as varieties of Keynesianism, promote consumption as the foundation of economic growth, whereas abstinence from consumption and saving are painted as cumulatively destructive practices. National accounting figures, which do little more than present the economy as one, giant number which, if rising, represents a good state of affairs and, if falling, represents a perilous state of affairs, have inbuilt consumption biases which give the illusion that consumption leads to prosperity. A large portion of so-called Gross Domestic Product (GDP) consists of consumption spending and government spending (the latter of which, by its nature, is also always consumption spending). Boost these figures and up goes the standard of living, so we are told. Moreover, the obsession with avoiding any kind of “double counting” means that a significant proportion of what is truly the gross annual product, such as investment in early stage capital goods, are simply discounted, further inflating the importance of consumption spending. Because of all this it is possible to have prosperous GDP figures, “moderate” interest rates and what appears to be relatively low price inflation that masks underlying economic distortions during a boom phase – such as was experienced in the period leading up to the 2008 financial crisis. And such financial crises are themselves, of course, the result of destructive economic practices induced by the state, such as the forced lowering of interest rates and the expansion of the volume of credit. Such acts do, of course, cause the ill-fated boom phase of the business cycle but they also encourage our main bugbear here which is consumerism. When people see their nominal wages and asset prices rising rapidly – something that would not happen in a genuine free market, which is distinguished by increasing real wages – they believe that they are wealthier than they actually are and thus they are duped into thinking that they have a greater proportion of their incomes available for consumption spending. If boosting their spending on consumer goods was not bad enough, however, they even begin to secure loans and borrowings against the rising value of their assets in order to further fuel increased consumption. In November of 2015, average debt per person in the UK stood at £28,877 – 113% of average earnings. Indeed, credit expansion anyway encourages a debt fuelled society – apart from actually creating the money to be loaned out, the accompanying price inflation makes debt-based finance more attractive than funding expenditure out of equity. The illusion that money is cheap, that everything can be bought now and that we do not need to be prudent and patient simply exacerbates the high time preference, consumerist society.

As we mentioned earlier, nothing about a free society will ever prevent people from becoming consumerist in the same was that it doesn’t stop people from becoming drug users or prostitutes or from engaging in other non-aggressive but otherwise illicit activities. However, we can make a case for saying that such acts are always likely to be more prevalent in the kind of high time preference society that the state encourages. A high incidence of drug use and prostitution, for example, indicates that people prefer a “quick fix” now and are not willing to wait for good feelings and pleasurable experiences to culminate as a result of longer or more difficult (but ultimately more rewarding) endeavours such as exercise and building strong relationships. And, as we have argued elsewhere, given that wealth in a free society accumulates to those who best serve the needs of consumers, more conservative virtues such as patience, prudence, trustworthiness, reliability, good taste and judgment, are likely to be the hallmarks of a capitalist society rather than substance abuse and casual sex.

If, therefore, consumerism is to be deplored we should focus our ire not at the capitalist system that simply permits us to enjoy the Christmas period however we want (and, moreover, creates the wherewithal for us to do so – plump roast turkeys on the table of almost every family on Christmas Day is a relatively new phenomenon). Instead, we should direct it at the state whose false prophets and destructive practices turn us from a society of wealth creators to one of wealth destroyers.

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Social Democracy

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The author responded to a lengthy article, posted online, that advocated strongly social democracy. Unfortunately the original link has broken but the text below quotes the article in its entirety, interjected by responses.

“Democracy is a form of government in which all citizens take part. It is government of the people, by the people, and for the people. Socialism is where we all put our resources together and work for the common good of us all and not just for our own benefit. In this sense, we are sharing the wealth within society.”

Socialism is the abolition of private property in the means of production, i.e. no individual owns the physical entity of or is entitled to the capital value of any capital or producer good. Once this has been accomplished there remains the problem of how to direct these resources to the most highly valued ends. Contrary to the tacit assumption of many socialist thinkers there is no separate, conscious entity who feels and knows what the “common good” is; there are only individual humans who each value different ends independently; they may agree, in some cases, on what are valuable ends but they still hold these values as individuals and they are liable to change. Further, there will be disagreement on how these ends are to be achieved and precisely which of the scarce means are to be allocated to them. So how is a) the most valuable ends and b) the most suitable means for those ends to be determined under Socialism? How is disagreement on these matters to be reconciled?

All valuable ends are confronted by the same problem – scarcity of the means of production. Hence the economic problem is how to direct scarce means to the most highly valued ends. You can advocate that this can be done either through socialised property or private property but you cannot argue in favour of both together – they are entirely different solutions to the same problem. If you start from the premise that “certain industries” may be socialised you are already advocating that at least some of the factors of production should be allocated to these industries, but this can only be arbitrary. How do you know? And if you know how do you know which factors should be allocated and in which proportion? How do you compare one set of allocations with another set?

A system of private property in the means of production answers this through pricing, profit and loss. For private property gives way to exchange which creates supply and demand which produces prices which produces profit and loss. Hence costs and revenue can be reduced to a single common denominator, the unit of exchange (money), that allows resource allocation to be compared across the entire economy.

In the absence of private property, however, there can be no exchange. There are therefore no prices in the factor of production and no profit and loss. How are the factors of production to be compared? How is the electorate or its democratically elected caretakers of the means of production to compare the cost of 5 tonnes of steel, 3 tonnes of wood, 40 labour hours, 500 sheets of paper, 6 billboards of advertising, 30 hours of telephone calls if it cannot reduce these inputs to a common denominator?

“Of course when people hear that term, “Share the wealth” they start screaming, “OMG you want to rob from the rich and give it all to the poor!”  But that is NOT what Democratic Socialism means. To a Democratic Socialist, sharing the wealth means pooling tax money together to design social programs that benefit ALL citizens of that country, city, state, etc.”

If a person is wealthy in a pure private property society (where trade is entirely voluntary) it is because he has produced a comparatively high quantity of goods that other individuals are willing to purchase. A poorer person has produced comparatively less. The wealth of the rich can only grow if they abstain from consumption of their income and invest it in order to increase the number of goods they can produce. Most of the wealth of the rich consists of, or is derived from, real valuable assets – factories, commodities, plant, shops and inventories. They continue to be rich because these assets are productive – other people are willing to exchange them for another valued good, i.e. money. If they cease to be productive their capital value will decline and so will the wealth of the owner.

If the amount of pooled wealth available for government programs is to increase these real resources have to be liquidated from their current uses and the workers have to be laid off and transferred to Government employment. For every resource that is consumed in a government program that is one resource less that can be used for something else. By which method do you calculate whether the resources are being put to their most valuable ends in the hands of private entrepreneurs or in government programs?

“The fire and police departments are both excellent examples of Democratic Socialism in America.  Rather than leaving each individual responsible for protecting their own home from fire, everyone pools their money together, through taxes, to maintain a fire and police department. It’s operated under a non-profit status, and yes, your tax dollars pay for putting out other people’s fires. It would almost seem absurd to think of some corporation profiting from putting out fires. But it’s more efficient and far less expensive to have government run fire departments funded by tax dollars.”

This is no different from insurance. Individuals pool their premiums together with a private provider in order to provide the resources for extinguishing fires in an emergency and/or compensating the unfortunate victims of fire damage. The only difference is that each individual can choose whether to pool his premiums with one particular provider or not (or at all). The insurer therefore has to act in a way that will retain its customer base, one of which is to keep premiums lower than those of its competitors. The primary method of accomplishing this is to minimise the amount that has to be paid out in compensation and the only way to do this is to prevent and control fires as much as possible. The insurer may, therefore, specify that your home be fitted with some basic fire-fighting equipment such as fire extinguishers or fire blankets and that all of your equipment is electrically tested, for example. If the cost of this is less than the saving you make on a lower premium then you are likely to do this. They may charge higher premiums in cases where flammable substances are stored on a property, or refuse to insure you altogether because the risk would be too great, thus discouraging the accumulation of dangerous materials. The result of this is that each person pays according to the amount of risk he is willing to bear and everyone, consumer and insurer, is equally interested in taking steps to minimise the number of fires as much as possible.

If a fire does start, however, the longer they burn the more the insurer has to pay in compensation to a covered individual. They are therefore likely to respond with the utmost urgency with their own, privately owned, fire fighting equipment or privately contracted fire fighting supplier in order to minimise the amount of damage.

All of these incentives are lost when fire-fighting is managed by the Government. The Government does not need to be concerned about losing your premium to a competitor – you have to pay it in taxes or it will incarcerate you regardless. Hence it is less bothered about minimising the amount of damage. Fewer homes will therefore be installed with preventive equipment and less electrical testing will take place. There will therefore be more fires. Further the tax paid towards fire-fighting services is not adjusted to your individual level of risk; rather it is determined by your income. There is therefore less incentive to avoid the accumulation of risks that contribute towards fire. Every preventative measure you take is an extra cost but there is now no added benefit – you still have to pay the tax and you are still entitled to the same service as everyone else. The result will be less prevention and more fires, more destruction of property and consequently less overall societal wealth.

And finally, once a fire starts, the Government is not going to lose any money if your house burns. Even if it has to pay you compensation the Government will not go out of business if it has to pay too much, unlike a private firm. The Government-employed fire-fighters know that, regardless of what happens to your house, they will, in principle, still be employed and paid tomorrow regardless of the cost to the Government of compensating you for your house. This is not to suggest that Government fire-fighting will always be slow, shoddy and negligent. But given these facts what is the likelihood that a Government fire service will respond more efficiently to a case of fire than a private fire service?

This is a typical case of Government having carried out a particular function for so long that everyone forgets what it looks like when it is carried out privately. Yet the above should demonstrate how it would most likely be done and to a higher degree of efficiency than by the Government.

“Similarly, public education is another social program in the USA. It benefits all of us to have a taxpayer supported, publicly run education system. Unfortunately, in America, the public education system ends with high school.  Most of Europe now provides low cost or free college education for their citizens. This is because their citizens understand that an educated society is a safer, more productive and more prosperous society. Living in such a society, everyone benefits from public education.”

No one denies that education is a beneficial and indeed a good and beautiful thing. But for every resource spent on education there is one less resource to be spent on something else. How do you know that education is the most productive use for these resources?

We could devote the entire productivity of the world to a huge and glorious education system where everyone pops out as smart as Einstein. But there would be no cars, no shops, no food, no computers, no houses, no offices, no factories etc. because all resources are devoted to the education system.

The problem faced by an economic system is not to determine what is valuable in the abstract – it is how to direct the scarce means to their most highly valued ends before all others.

“When an American graduates from college, they usually hold burdensome debt in the form of student loans that may take 10 to even 30 years to pay off. Instead of being able to start a business or invest in their career, the college graduate has to send off monthly payments for years on end. On the other hand, a new college graduate from a European country begins without the burdensome debt that an American is forced to take on. The young man or woman is freer to start up businesses, take an economic risk on a new venture, or invest more money in the economy, instead of spending their money paying off student loans to for-profit financial institutions.  Of course this does not benefit wealthy corporations, but it does greatly benefit everyone in that society.”

But the cost has to be paid by someone. If the graduate has to pay for his own education then yes he has less money to “start up businesses, take an economic risk on a new venture, or invest more money in the economy”. But if everyone else has to pay for his education through taxes then everyone else has that little bit less to do all of those wonderful things. The graduate has only gained what everyone else has lost.

“EXAMPLE  American style capitalistic program for college: If you pay (average) $20,000 annually for four years of college, that will total $80,000 + interest for student loans. The interest you would owe could easily total or exceed the $80,000 you originally borrowed, which means your degree could cost in excess of $100,000.”

If the cost of $80 000 tuition is paid back by the graduate without the interest of, say, $20 000 then that is $20 000 less that can be loaned to another student. There will therefore be fewer funds available to loan to more students for their education. Fewer students will therefore be educated. That is presumably not the intended outcome of this author. Governments, of course, could simply raise taxes to make up the shortfall. But again, all this will mean is that what the graduate has gained the taxpayer has lost.

“EXAMPLE  European style social program for college: Your college classes are paid for through government taxes.  When you graduate from that college and begin your career, you also start paying an extra tax for fellow citizens to attend college. Question – You might be thinking how is that fair? If you’re no longer attending college, why would you want to help everyone else pay for their college degree? Answer – Every working citizen pays a tax that is equivalent to say, $20 monthly.  If you work for 40 years and then retire, you will have paid $9,600 into the Social college program.  So you could say that your degree ends up costing only $9,600. When everyone pools their money together and the program is non-profit, the price goes down tremendously. This allows you to keep more of your hard earned cash!”

The cost of $20 monthly is arbitrary and no proof of this being the real cost under such a system is offered. The conclusion that “the price goes down tremendously” is, therefore, a non-sequitur. If anything, the cost of education is likely to go up as relieving every individual of the cost of his tuition will cause an increase in demand which causes prices to rise.

This is the reason, in the UK, for the recent “outrages” over higher education tuition fees. Government sanctioned loans systems artificially stimulate demand while the Government also caps the number of students, hence leading to a reduction in supply. Increasing demand and suppressed supply equals spiralling costs.

It is therefore Government interference with the higher education system and not private finance that makes bearing the costs of higher education so intolerable to graduates.

“Health care is another example: If your employer does not provide health insurance, you must purchase a policy independently.  The cost will be thousands of dollars annually, in addition to deductible and co-pays. In Holland, an individual will pay around $35 monthly, period.  Everyone pays into the system and this helps reduce the price for everyone, so they get to keep more of their hard earned cash.”

Healthcare premiums are so expensive in the US precisely because of Government interference in the insurance industry (and the only reason that insurance is the preferred method of funding healthcare is an anomaly that originates in The Great Depression). If Governments legislate so as to compel a provider to insure risks which are perceived by the latter as higher and more costly then the latter is forced to take on the burden of paying more than it would like when these risky events transpire (an almost guaranteed certainty if the insured event is something over which the policyholder has control. This is simply compensating individuals for their deliberate actions). Costs, therefore, rise.

Socialised healthcare under Medicare and Medicaid under which the healthcare consumption of an individual is divorced from its cost to the individual, the ease of malpractice suits, and lengthy and bureaucratic drug approval processes mandated by the FDA all contribute to the rise in healthcare costs in the US. None of these are phenomena of the free market.

Holland also operates on an insurance-led basis. One should investigate whether the lower cost allegedly associated with this is because of less and not more Government involvement.

“In the United States we are told and frequently reminded that anything run by the government is bad and that everything should be operated by for-profit companies.”

This is a list of Federal Government departments and agencies. Just a brief glance will reveal Government involvement in commerce, transport, housing, education, broadcasting, agriculture, labour, security, energy, healthcare, environment and engineering. Even if America is “frequently reminded” by somebody “that anything run by the Government is bad” no person can look sensibly at this list and conclude that Government does not already control or regulate vast areas of the US economy.

“Of course, with for-profit entities the cost to the consumer is much higher because they have corporate executives who expect compensation packages of tens of millions of dollars and shareholders who expect to be paid dividends, and so on.”

Executive compensation cannot determine market prices of consumer goods. Every good purchased by you is evaluated on its merits alone, not on the costs that went into producing it. If you deem the merchant’s asking price to be less valuable to you than the utility you will gain from the good then you will make the purchase. Otherwise, you will not make the purchase. It is therefore because an entity’s goods are so highly valued and consequently sell so well that companies are willing to pay more to hire the best employees. Not so if their sales are less successful.

Profit (and loss) is revenue minus costs. In order to make a profit you must increase your revenue as much as possible but what is forgotten is that you must reduce your costs also. Employee compensation is a cost and the higher it is in relation to revenue the lower the profit of the entity will be; the lower the profit, the less it will be able to invest in growth and the sooner it is more likely to stumble in meeting the needs of consumers which is the first step to insolvency.

In 2011, total executive compensation at Tesco plc was £21.7m against a turnover £60.9bn, approximately 0.0356%. Even if executive compensation did drive up consumer prices one has to wonder how such a small percentage could make much of a difference.

Finally, regarding very large corporations one might wish to investigate the effects of monopoly and regulatory privilege granted by Government and the effects of Government–granted limited liability in generating a preference for the large, publically-traded entity before implying that these beasts are creations of the pure pricing, profit and loss system.

“This (and more) pushes up the price of everything, with much more money going to the already rich and powerful, which in turn, leaves the middle class with less spending money and creates greater class separation. This economic framework makes it much more difficult for average Joes to ‘lift themselves up by their bootstraps’ and raise themselves to a higher economic standing.”

You cannot leave the general population with less spending money and push up the price of everything simultaneously. If the population was left with less money then it would have less with which to bid for goods and services. The latter would therefore remain unsold until prices were dropped. If prices were dropped, profits for vendors would drop. If profits drop then costs have to be cut. One of those costs is executive compensation.

If a firm, however, is able to continue to raise its prices without affecting sales and this increases profit margins beyond that experienced in other industries, resources are diverted away from the less profitable industries and into the profitable both by the existing entity and by new competition. Supply is therefore increased and prices consequently decrease.

It is therefore very difficult for an entity to raise its prices to increase profits without a) choking off sales or b) attracting competing investment.

The most effective way for the latter to be avoided is for the entity to induce the Government to regulate the industry. Compulsory licensing, planning permission, Government imposed trading standards, health and safety standards, employment regulation, etc. all serve to deter competition. For every extra regulation that must be complied with is an extra cost that a new competitor must meet and, by virtue of its status as a start-up, must consist of a larger portion of its costs that those of an incumbent provider. There is therefore a tendency for larger firms to become entrenched and for the “Average Joes” to be unable to “lift themselves by their bootstraps” – all because of Government intervention.

“So next time you hear the word “socialism” and “spreading the wealth” in the same breath, understand that this is a serious misconception.”

That is precisely what the effect of socialism is. In a capitalist society wealth accumulates to each person according to his productivity. If another system is adopted then the wealth must be distributed in a different way with a different result; otherwise implementing socialism would be pointless. Hence socialist writers devoted part of their theory to the problem of distribution of goods in a socialist society, i.e. to “spreading the wealth”.

“Social programs require tax money and your taxes may be higher.”

Correct.

“But as you can see everyone benefits because other costs go down and, in the long run, you get to keep more of your hard earned cash!”

What has been demonstrated, in fact, is that costs rise under socialism. If an individual does not have to pay for his consumption, all else being equal he consumes more. Hence demand rises and so do costs.

“Democratic Socialism does NOT mean taking from the rich and giving to the poor.”

It means taking from the productive to fund the unproductive. This can be the only logical outcome of a system other than private property, where the fruit of production accrues to the producer.

“It works to benefit everyone so the rich can no longer take advantage of the poor and middle class.”

It benefits the unproductive ahead of the productive. The unproductive are able to take advantage of the productive. Productivity therefore becomes less valuable and decreases whereas un-productivity becomes more attractive. Societal wealth therefore declines.

POSTSCRIPT: The main error of the author of the original article (apart from providing blatant examples of Bastiat’s famous “broken window” fallacy) is the belief that a market economy provides benefits only for some whereas “democratic socialism” provides benefits for all. Precisely the opposite is true. Under the free market all exchanges are voluntary. If A exchanges a good with B then it must be because they each value what they receive more highly than what they give up. Both therefore benefit from the transaction and we can say that social utility is increased. A system of “democratic socialism” however would necessarily involve violently enforced transactions (taxes). If an individual has to be coerced into a transaction then it necessarily means that he values abstaining from the transaction more than entering it (otherwise he would have entered it voluntarily). The recipients of Government spending may gain (as does the Government itself) but here, in contrast to a market economy, some have gained at the expense of others. As we cannot make interpersonal utility comparisons (i.e. we cannot “measure” utility) it is impossible to say that the gain to one is greater than the loss to another. But even if this wasn’t true the fact remains that the coerced individuals would have gained greater utility from not being taxed and to them the transaction is very much a loss; hence a system of “democratic socialism” does not provide “benefits for all”.

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