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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Means, Ends, Production and Consumption

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One of the apparent weaknesses of economics (of any school of thought) is that as soon as one gets past the “Robinson Crusoe” stage of an isolated individual and proceeds to the elaborate explanations of production, exchange, and the division of labour, it becomes extremely easy to forget that at the start of every economic system, at the bottom of every theory, is the individual acting man, the person who has ends that he achieves with means through actions. There are two, seemingly contradictory (although actually related) dangers from this oversight. First, by separating the categories of production, consumption, saving, investment, entrepreneurship and so forth into separate personae under the division of labour, we forget that these qualities are inherent in the action of all human beings and are simply abstractions from the different categories of action applied to different groups in order to demonstrate their role in the economic system as a whole. What results, therefore, is atomistic appreciation of these different categories, so that, for example, we talk of the needs of “producers” or of the welfare of “employees” or of interests of “borrowers” or of “savers” being punished, and so on. Secondly, we can go to the opposite extreme and only look at the whole economy, concluding erroneously that what is “good” for the economy (if such a thing can be said) is also good for the individual human beings who make up that economy. These two dangers we will explore in turn.

 The Atomised Categories of the Economy

When looking at an individual human being, it is not outrageously difficult to understand how the object of each human being is to achieve his most highly valued ends with the scarce means available to him. We do not need to enter a deep, praxeological analysis to understand how the individual human will, all else being equal, seek to maximise his gains and minimise his costs. He will attempt to inflate the former and deflate the latter as far as it is possible for him so to do. It is also clear that the final object of all of his action is consumption – the enjoyment of the fruits of his toil, the benefit of which he predicts will outweigh the disutility of that toil. If, therefore, in a situation of isolation, a human decides to plough a field, plant seeds and then sow the resulting crop we can readily understand that he will seek to achieve the highest yield of crop possible while ploughing the field and sowing the seeds in a manner that bears him the lightest labour and the lowest cost. If he is able to achieve the same yield with a lower cost or a higher yield with the same cost, he will, all else being equal, proceed to do so. Hence, if he is suddenly gifted a tractor that halves his ploughing time, we can understand easily why he will make use of it. If he can purchase a new type of seed that doubles the crop yield but with no extra work then, again, no one will have any difficulty in appreciating this. The idea that we will always take the shortest route to the same end or the same route to a higher end can be empathetically understood by any human – we are always trying to spend less and have more, cut down on X and increase Y, all to yield the highest benefit for the minimum cost1.

What we can also readily appreciate in this scenario is the different categories of action inherent in the single, lone human. He is a consumer, a producer, an entrepreneur, a saver, an investor, and a capitalist. He must carry out all of these activities with the means available to him on his own behalf. And hence it should be obvious that all of these activities are carried on not for their own sake but for the valuable ends and the improvements to his life that they achieve. If all of the ends could be achieved with no work, production, no saving, no investment and no capital accumulation whatsoever few would doubt that he would be in a far better position. How many of us would turn down the opportunity to purchase anything we wanted without having to go to work each day? Judging by the fact that more than half of the eligible population play the national lottery, it stands to reason that this would be few. It would, therefore, be absolutely absurd for us to say that a person’s life would be made better by loading additional burdens onto the ones that already exist. Who in their right mind would say that our lone human would be better off digging the soil with his bare hands rather than with a tractor and plough? Or that he is better off having to transport water on his shoulders than with the aid of pipes and irrigation? This would only mean that he would endure more work, more hardship but for the same end. No one in his right mind would advocate such a course of action. Additionally, no one would ever say (all else being equal) that a person has “produced too much”. We would not take the fruits of our labour and burn a half of it because the extra productivity means that we might not have to work next week. The result of this would be that a person forces himself to endure the same work for a lesser end. Again, all of this is readily understandable and no person would advocate such courses of action and expect to be taken seriously.

Unfortunately, however, this appears to be the approach that we take as soon as the division of labour comes into play and we examine the economy as a whole. For now, when considering the economy in such a manner, while all persons will still retain their multi-faceted characteristics2, the roles of consumer, producer, saver, investor, entrepreneur and so on are not concentrated in an individual but are split out so as to understand them in the new context of the division of labour and exchange. This is, of course, highly useful as it is only by utilising this approach that we can hope to gain any understanding of economic phenomena in the world in which we live, a world that is certainly not isolated but where each individual relies heavily on the productivity of everyone else. However, there is a danger in compartmentalising these activities and considering them only in isolation. With our lone human, we noted that less work means the same enjoyment for a lower burden of effort. A labour saving device, such as machine to pick fruit, for example, would obviously be of a benefit to him. But in the whole economy where the roles of consumer and producer are split, if such a device is introduced, the relative benefits and burdens appear to be split also. Hence, person X, the purchaser and consumer of fruit, is benefited by the lower cost of the product that the machine has permitted. But person Y, who might have been a fruit picker before the machine was introduced, might now find himself completely out of a job (or he may find that at least the demand for his services is drastically reduced) with apparently no corresponding benefit. The conclusion that is often drawn is that there has been a great harm and that “something must be done” to alleviate the plight of the formerly employed fruit pickers. This becomes manifest in a number of policy considerations such as “make work” rules, subsidies, campaigns against machinery and so on, many of which are instigated under union pressure.

The errors of these conclusions come from looking only at the production element of the economy and ignoring the consumer element. For no one in their right mind would say that an individual human should “make more work” for himself or destroy productive machinery to “give him a job”. It is obvious that such things would be a detriment to his ability to consume the fruits of labour. Nor would he be able to subsidise himself by taking money out of one of his pockets and putting it into the other. The very aim of every individual person is to gain as much as he can while doing less work, not more. Yet this is precisely what we do when looking at the economy as a whole. If productive machinery is allowed to displace jobs then this means that the consumers benefit with lower prices and/or increased product. To ward off the loss of jobs by artificially restricting the saving of labour is simply to “benefit” the production end of the economy but to “burden” the consumer end. But the whole point of production is consumption. These people, being kept in jobs that are unneeded, are in no way contributing towards the benefits of consumption. Their work continues as a deadweight cost and there is neither dignity nor achievement in perpetuating their pointless labour. Furthermore, while it is true that they will suffer unemployment in the meantime, the increased supply of free labour will cause wages to fall temporarily. This means that new lines of employment, those that were not previously economic when the people’s labour was desired to pick fruit, are now suddenly viable. New entrepreneurs will rush in to hire the spare labour and devote it to their new enterprises. One must not forget that there will be a degree of hardship during the transition, particularly if one was in a now redundant job for many decades or if a particular skill or talent has now become obsolete. But by deploying the labour to new lines of work, the array of consumer goods now increases. The labour saving device enables more consumption for lower prices, the final end of production, rather than stifling it in the production of the same goods for the same prices. In his role as a consumer every person will feel this benefit over time as real wages increase as a result of the increased productivity.

All of this goes to show that, far from failing to explain anything noteworthy, the economics of the isolated man – so-called “Robinson Crusoe” economics – must be thoroughly borne in mind if one wishes to avoid these misunderstandings.

The Broad View of the Economy

The second error we outlined above was of the opposite ilk – that, rather than looking at parts of the economy in compartmentalised components, one looks only at the whole economy and only thinks in terms of hermetically sealed aggregates and totals. With the individual, lone human we noted that anything that increases his consumption and reduces the burden of production is of a benefit to him. When he is, in effect, his own “mini-economy” all burdens are felt by him and all benefits are enjoyed by him; the one is weighed against the other in the same mind. If, for example, a person desires more to bake more bread and to achieve this he is going to deliberately curtail his production of meat then there is no problem in saying that the burden of the reduction of meat is offset by the increase in bread, for this individual feels both the burden of less meat and the benefit of more bread. His action demonstrates that he prefers bread to meat. This is not the case in the economy as a whole, where roles are concentrated under the division of labour and burdens and benefits are scattered across many – literally millions of – different people. It is a mistake to assume that there is any one, particular event that will be “good for the economy as a whole”. For the economy is just a number of people trading and co-operating peacefully; it is not an entity in its own right, it does not feel, it does think, it does not desire and feels neither pleasure nor pain. While we can, for example, say that a decline in meat production offset by a rise in steel production is a benefit “for the economy as whole” in the sense that the individual members of this economy have chosen to prefer steel over meat (and that jobs in the meat industry will shift to steel production), it is not the case that some broad measures of “output” and “input” leads to the conclusion that all is well. The most pervasive manifestation of this error is the almost ubiquitous obsession with GDP, a figure that is calculated from numerous aggregates that bear no relationship whatsoever with the underlying desires of the acting humans. A particularly crucial element in this aggregates is that of government spending. If GDP starts to fall, say, from the onset of a recession, then Government can simply prop it up by increasing its share of the GDP pie. But it does not follow from this that there is any benefit from this spending. It can only be concluded that an exchange is beneficial if the parties to exchange are volunteers. They only exchange because their action demonstrates that they desire the good that is gained more than the good that is given up. Government spending, however, is funded by taxation3, a compulsory exchange, not a voluntary one. Because the exchange was compulsory it demonstrates that the tax-paying party would prefer not to have his money in the hands of the government. If he did so prefer he would have paid it across voluntarily. When the government spends this money, therefore, it can only do so in ways that are less valuable to those people who provided the funding. There is no sense in which anyone is “better off”. The big aggregate numbers may look impressive following this expenditure but what has not been realised is that they are completely severed from the preferences of the individual people. The situation is no different from one man holding a gun to another’s head and forcing the latter to devote his productive resources to churn out stuff that he doesn’t want. The effort, the production and the physical results may look impressive but there is no point in producing anything if it does not satisfy someone’s most urgently desired needs. What has been gained, like Bastiat’s famous broken window, has simply been at the expense of something that was more highly desired. The same is true also of so-called “infrastructure” spending, which ignores the intricate web of the capital structure. This has been dealt with in detail here. Suffice it to say for the moment that government spending on capital goods does not help the economy; rather, the effect is to divert the economy from a path on which it was meeting the needs of individual people onto a path where it must adapt itself to the new capital resource. Lines of production that depend upon that resource will become profitable, but only at the expense of other, more highly desired lines that have to be abandoned because their funding was compulsorily diverted to government capital expenditure.

The same fallacy – of viewing the economy only as a whole – is evident in the whole saga of the business cycle and credit expansion.  For while the forced lowering of the rate of interest swells the aggregate numbers – everyone is employed, stock markets climb, skyscrapers start shooting up, etc. – what has been forgotten is the underlying preferences of the individuals in the economy. They are not willing to devote the resources necessary to sustain the new capital structure which is precisely why, when the credit expansion stops, the whole lot comes tumbling down. Indeed, the entire approach of mainstream economists seems to be that the economy is doing well as long as somebody, somewhere, is spending on something, i.e. as long as there is some kind of “activity” then there is no cause for alarm. Their failure to acknowledge the wastefulness of the boom and the necessity of the bust demonstrates their lack of comprehension of the fact that spending the scarce resources at our disposal on stuff that is simply not wanted is emphatically not economising activity – it is just waste. The lesson from the 2008 financial crisis should be that you cannot build houses if people are not prepared to pay for the bricks.

The Praxeological Method

These two errors – of looking at the economy too narrowly and then too broadly – can only be avoided by following the praxeological method. For both errors have their root in the failure to grasp the same basic point – that all economising activity is initiated by humans who desire, choose and act so as to devote the scarce resources available to best meet their most highly valued ends. By understanding this crucial fact one would never focus too narrowly and advocate a programme to help certain producers at the expense of others; but neither also would one look too broadly and conclude that what appears to be some kind of economic activity – expressed through aggregates, totals and figures – is always a good thing. Human choice, actions and ends are the foundation of economic understanding and it is vital that is restored to its rightful place in economic thought.

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1We do not, of course, have to assume that every human wants to “have more” in the sense of material fulfilment; rather that every human wishes to meet his ends for the lowest costs whatever the substance of these ends may be.

2A labourer, for example, must, to a degree, possess entrepreneurial skill in choosing the employer from which his labour will yield the highest return; he will also be a saver and investor if, for example, he saves some of his income in a pension fund. And everyone, whatever their broader role in the economy, is also a consumer.

3Even if it is funded by borrowing not only must these borrowed funds be repaid with tax loot but also government borrowing crowds out private borrowing.