#113 – The real culprit of consumerism

In a free market, the high price of a product is generally a function of supply and demand dynamics rather than the result of a “greedy capitalist” setting the price arbitrarily. The price reflects the relative scarcity of the product and what consumers are willing to pay for it. Consumers agree to pay this price because they value the product more highly than the money they must forgo to acquire it. If the supply of a product increases, the price will generally fall to a level where it matches consumer demand. Similarly, if the product becomes more scarce, its price will rise until it reaches equilibrium again.

Not only do prices broadcast knowledge about the scarcity of goods, but they also influence consumption habits. Consumers defer their consumption when they perceive goods as “too expensive”. They subjectively value the money they would have to spend more highly than the goods themselves. All this seems obvious, yet most people do not realize its implications.

Participants in the market convey their evolving preferences and conditions to one another by either making purchases or abstaining from buying at specific price points. Prices thus serve as a mechanism for coordinating the allocation and use of resources across a market. By accurately reflecting the relative scarcity of resources, they incentivize producers and consumers to use resources more efficiently.

In a capitalist system, prices are signals to entrepreneurs and consumers determined by supply and demand. High prices due to resource scarcity restrict consumption and encourage savings and investment.

As its name suggests, capitalism is primarily about accumulating capital, and capital growth. One cannot achieve this by consuming wealth. Capitalism promotes saving and investment by necessarily forgoing consumption. So, if not capitalism, what causes consumerism?

First, I should highlight that consumerism is a cultural attribute. A capitalist society is free to be as consumerist or non-consumerist as the individuals living under it wish to be. Nothing necessarily prevents a communist society from being consumerist. People under communism are under the whims of the central planners, and one should not assume that could never lead to a consumerist society. At least capitalism does not rob the choice of the people.

Interestingly, the people who criticize capitalism for promoting consumerism are the ones who argue that consumption “drives the economy”. So, they are literally the ones arguing for more consumption. I am referring to the Keynesian, and unfortunately, all too popular argument that “consumption is the key to a healthy economy”. Whereas, in reality, production precedes consumption and is thus responsible for driving the economy and creating wealth.

In 2010, as mainstream economists chastised the rich for not spending enough, Lew Rockwell succinctly summed it up: “The trouble is that spending is not the cause of economic growth. Investment, which begins in saving, is the root of economic growth. It doesn’t matter that consumption makes up a certain percentage of economic activity. That’s only the surface you are looking at. Spending and consumption without saving and investment is a prescription for devouring the prospects for prosperity down the line. In this case, the best thing that the rich can do for a future of economic growth is not to spend but to save toward investment.”

One reason for the existence of a consumerist society could be simply that its people like to buy material things as it gives them a sense of comfort or pride. A lack of financial literacy likely makes them prone to their materialist tendencies. However, governments can contribute to this trend by weakening the market-based reliable signals previously mentioned.

To “stimulate” economic activity in the short term, governments, often through central banks, will artificially push down interest rates. In a market economy, interest rates serve as a kind of “price” for money. High interest rates generally incentivize saving because the returns on cash saved are more attractive. Conversely, low interest rates make borrowing cheaper, and they tend to encourage immediate consumption of goods.

When the government artificially lowers these rates, it distorts these natural market signals. In response to these lower rates, consumers are more likely to take out loans for big-ticket items such as homes and cars or even for day-to-day expenses, under the impression that the cost of borrowing is low. On the surface, this increased spending can indeed stimulate economic activity. However, such intervention often leads to unsustainable levels of consumer debt, low saving levels, and excessive spending, i.e., consumerism.

Ironically, behavior induced by government intervention gets labeled as “consumerism”, yet the blame often erroneously falls on capitalism and free markets.

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