Clause 61: The Pushback Blog

Because ideas have consequences

Archive for October 2014

Underconsumption

leave a comment »

According to this article, people in the United States spent just under $400 million on Halloween costumes for pets in September of this year. That doesn’t include the people who waited until the last minute to find an outfit for Poochie.

It is worth reflecting on this because, a hundred years ago, we didn’t have any experience with living in a society with the scale of wealth we have presently. Many educated and sophisticated thinkers did not believe it would have been possible to have that kind of spending on pets. Instead, they thought that, as an economy grew and basic needs were met, “the masses” would simply stop spending and economic growth would ceiling out, resulting in perpetual unemployment and poverty.

The roots of this argument go back to Thomas Malthus, who obtained for economics the colloquial label “the dismal science.” Malthus is most famous for his  law of population and wages that he put forward in his 1798 book An Essay on the Principle of Population, in which he wrote that population growth would always push wages down to the subsistence level, where population growth would be checked by poverty.

The power of population is so superior to the power in the earth to produce subsistence for man, that premature death must in some shape or other visit the human race. The vices of mankind are active and able ministers of depopulation. They are the precursors in the great army of destruction; and often finish the dreadful work themselves. But should they fail in this war of extermination, sickly seasons, epidemics, pestilence, and plague, advance in terrific array, and sweep off their thousands and ten thousands. Should success be still incomplete, gigantic inevitable famine stalks in the rear, and with one mighty blow levels the population with the food of the world.
An Essay on the Principle of Population, chapter VII, paragraph

The assertion that “[t]he power of population is so superior to the power in the earth to produce subsistence for man” is fundamental to both Malthus’ thought and other arguments for underconsumption. In the 19th century, David Ricardo argued against this. Orthodox economic thought sided with Ricardo against Malthus on the issue of growth. However, like many other ideas, the concept did not go away. Marx, for one, picked up on it as an essential contradiction that could not be resolved and would bring down capitalism.

The idea also is related to the paradox of thrift, in which a society in which everyone saves does not prosper. There are various forms of this, with different conditions around what saving entails and what conditions are necessary, but the basic line of thought is that if everyone is saving, there will be insufficient consumption. Observations of this paradox go back to antiquity.

People curse the one who hoards grain,
    but they pray God’s blessing on the one who is willing to sell.
— Proverbs 11:26, New International Version

In the 1920s, the duo of Catchings and Foster published a series of then-influential books on the topic of underconsumption. William Trufant Foster was an academic; Waddill Catchings was an investment banker. They had known each other as classmates at Harvard. They argued that government spending, notably on large public works programs, was necessary or consumption would fail to keep up with production in the economy as a whole, leading to a state of permanent depression. Their ideas were known to both Herbert Hoover and Franklin Delano Roosevelt, and their influence can be seen in the Public Works Administration and the National Industrial Recovery Act.

Believing is seeing. When the Great Depression came and settled in for a long stay, followers of underconsumption theory said, “So the condition of permanent depression has arrived, just like the theory said it would.” There were even posters exhorting people to spend money:

But Who Was Confident Enough to Commit to Car Payments?

Buy a Car with What? I Don’t Have a Job Myself!

Look at Social Security as an example. The idea that you should expect Social Security to supplement your savings for your own retirement is rather recent. In the thirties, we absolutely did not want you to be saving for your own retirement. We wanted you spending what you made right now to get the economy moving again. In this thinking, the economy depends on a continuous flow of money through you: you earn and you spend. Saving is a “leakage” out of this flow and ultimately results in economic catastrophe, a manifestation of the paradox of thrift.

John Maynard Keynes accepted underconsumptionist thinking as a starting point:

Practically I only differ from these schools of thought in thinking that they may lay a little too much
emphasis on increased consumption at a time when there is still much social advantage to be
obtained from increased investment. Theoretically, however, they are open to the criticism of
neglecting the fact that there are two ways to expand output. Even if we were to decide that it would
be better to increase capital more slowly and to concentrate effort on increasing consumption, we
must decide this with open eyes after well considering the alternative. I am myself impressed by the
great social advantages of increasing the stock of capital until it ceases to be scarce. But this is a
practical judgment, not a theoretical imperative.
The General Theory of Employment, Interest and Money (1936), Chapter 22, Section VI

Keynes was seeking greater levels of investment rather than consumption to stimulate the economy, but so were Catchings and Foster when they advocated public works projects. Furthermore, this begs the question of where the returns to the investment were going to come from. Could you just keep up a perpetual cycle of investment, where your investment causes you to buy from me, and then I invest to meet your demand and buy from you? What happens when the “animal spirits” assert themselves and one of us loses confidence, shutting off the investment spending?

In actual practice, all these thinkers seem to be somewhat lacking in imagination — and possibly somewhat smug about what “the masses” were capable of. Since then, we have seen a consumption explosion and an economy that few people from a hundred years ago could have imagined. An economy where people can spend almost $400 million on Halloween costumes for pets in one month.

Nevertheless, the consequences of this thinking are all around us, in the legacy of design decisions made in the face of a depression or the fear that we would have another one. It is important to understand what those decisions were and why they were made.

 

Advertisements

Written by srojak

October 31, 2014 at 4:33 am