Summary: The Economics of Consumption (Consumer culture)

The book The Consumer Culture: a reference handbook, is a goldmine of information on consumerism and consumption.  I’m providing a series of summaries to help educate people on topics about consumerism. 

Consumer Culture: A Reference Handbook

Douglas J. Goodman, Mirelle Cohen, ebook 251 pages, 2003 ,ABC-CLIO

Chapter: 2, economics of Consumption (part of the larger chapter of ‘The contradictions of consumer culture’).

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The supremacy of the market has become the natural law of the land in our liberal society. With that, we also have the general public becoming more suspicious of government, seeing it more as a bureaucratic interference of the economy, rather than a moderating force from the excesses of our economic system (pg.28).

Historically the actual role of the consumer gets limited treatment in classical economic texts, yes, they do get some mentions, but very limited expanded thought.  Goodman & Cohen quote Adam Smith who wrote this about consumers (pg.28):

 

“consumption is the sole end and purpose of all production and
the interest of the producer ought to be attended to, only so far as
it may be necessary for promoting that of the consumer. The
maxim is so perfectly self-evident, that it would be absurd to attempt to prove it” (Smith 1937, 625).

The consumer in early texts was treated as important, but as I already said, did not receive much analysis.  Consumption was just seen as consumers meeting needs, increase in income usually resulted in more consumption because consumers could meet more needs or increases in consumption was the result of greed. I think the view is very consistent with the classical liberal view of people and the emphatic view of the individual as the most important unit in the economy.

In today’s time consumption is paid attention to closely.  After 9/11 President Bush told the nation that our patriotic chore would be to continue consumption.  A few years later, amid domestic unrest Bush urged the nation to go shopping again.

“The unemployment rate has remained low at 4.5 percent. The recent report on retail sales shows a strong beginning to the holiday shopping season across the country. And I encourage you all to go shopping more.” –George W. Bush 2006 at a news conference. Full transcription here.

I’d like to also point out, that the way we measure economic growth, or economic success, using gross domestic product (GDP), uses consumption as a variable.

GDP = C + G + I + NX

C: consumption, G: government spending, I: investment, NX: is net exports i.e., (export subtract import).  The point being, that consumption is not just important but a bedrock principle of our economy (a post-structural critique might suggest that these traditional views of the economy are outdated).

Goodman & Cohen put lists the four stages of the economic view of consumption(pg.29):

  1. Consumption as detrimental to the accumulation of wealth
  2. Consumption as a propellant that keeps the economy rolling
  3. The consumer as a rational agent that determines the allocation of resources
  4. the consumer as a social agent involved in complex ways with fashion trends, social competition and emulation.

Goodman & Cohen assert that the capitalist economy began with the idea about accumulating wealth and then investing it.   In this view, consumption is actual seen as detrimental because it distracts from the task of accumulating wealth (pg.29).

John Maynard (why does every mention of Keynes always include his middle name?) Keynes was the first to really embrace the role consumption in economic theory, Keynes spins consumption as a positive role in the economy.  I’d like to add on as an aside that this is where the factoid, “war is good for the economy” comes from (war is typically not good for the economy).

Keynes subscribed to the idea that low consumption meant a sluggish recovery and suggested the cure to be increased consumption, at the behest of the government. For Keynes , the type of consumption did not matter, as long as consumption was being had. This type of thinking, influenced FDR and the New Deal all the way up to contemporary policy with Bush and Obama priming the pump.  Even in Canada, former PM Stephen Harper made sure to spend.  Which I thought was interesting, because Harper wrote his economics master thesis on public choice theory, an economic idea at odds with Keynes. Yet when Harper was in power he used, what is now orthodox economic policy to help the economy.

Next Goodman & Cohen look at the neoclassical approach, the underlying idea that the world embraces today.  The neoclassical approach sees the consumer as a rational utilitarian purchaser (pg.30).  It further states that since the individual is rational, their net action of steering the economy is also rational.  The economy may go the ‘wrong way’, but the aggregate action of consumers will right the economy eventfully. But here’s the thing, people i.e., consumers aren’t really that rational.  Studies show that consumers aren’t really that rational and the book I am currently reading, Predictably Irrational speaks to this (review forthcoming).

There has been acceptance of a new approach to economics that still puts consumers as irreplaceable drivers of the economy.  This alternative view is emphatic of the role of the social processes, a more sociological approach.  It states, the very irrational nature of the economy and it’s dependence on fashion trends, emulations and competitive consumption is what is driving the economy (pg.30). This view, much like the neoclassical view, thinks of the government as never being able to have the information to make economic decisions.  Instead the focus is on the irrationality of consumers, and that irrationality is the cornerstone of the economy.

Comparative Advantage
The Ricardian principle of comparative advantage is one of the bedrock principles of free trade. In short, comparative advantage is about specialization.  It’s also about opportunity cost, for example if one state can produce wine at a lower cost (maybe because it has lots of access of grapes), then it should at the expense of say, computers.

 

Goodman & Cohen reference Micheal Porter’s work.  Porter argues that the driving factor for states strengthening their comparative advantage is the consumer pursuit of trends.  Such examples of this is:

Japanese interest in audio and photographic equipment,
the Italian love of fashion, the German love of cars, the British
love of gardening, the American love of fast food (pg. 31)

These pursuits of trends has resulted in the huge growth of each respective industry. In our globalized economy this is crucial point of understanding.  As long as international markets have predictive trends, producers will be supplying.  For instance, Americans value food that is fast,  as long as other markets are valuing food and speed, American fast food corporations will be able to grow out that market.

Consumption is more than just economic theory, consumption, is central to our culture (pg. 31).  The next section deals with this topic.

_____________________________

Reference

Smith, Adam. 1937. An Inquiry into the Nature and Causes of the Wealth of
Nations. New York: Modern Library.

 

Photo credit: Stuck in Customs via VisualHunt.com / CC BY-NC-SA

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