Is world economy held to ransom by consumerism?

This discussion that I posted on linkedin attracted diverse views. It makes a very good reading as it introduces one to different perspectives on economic activity drivers, free market, role of Govt. and sustainability.

Ashutosh

Is world economy held to ransom by consumerism? Requesting views...
What is the way out of recession? Increase consumption... Wars bring us out of recession because they stimulate fresh demand.
For fast economy growth? Again stimulate demand and increase consumption.
Just consume and consume and keep creating piles of waste.
We are living in age of consumerism. Everywhere, be it on tv, roads, we are being exhorted to consume. The consumption is key to welfare of our economy and the only way forward.

What happens if people become spiritual and lower their demand of material pleasures? Will the world economy collapse? Can the world economy survive with its citizens being less demanding, less consuming and simple living?

Comments (15)

Jeff Hardy
Vice President of Business Operations at SmarterTools

I have heard variants of this line of thinking in the past. Let me see if I can clear it up a little for you.
People consume because of only three things: they have disposable income, they feel economically and physically secure, and they are free to allocate as they see fit. If people did not consume, then there would be less incentive for them to generate work and value. They generate excess work and value specifically because they have something that they want to buy. Having the opportunity to have disposable income is the result of efficiency and security. Equally, if they are not free to spend their money as they see fit, the incentive to create excess value is diminished. The economy is therefore not held captive by consumerism. Rather thriving economies generate consumerism and synergy is built.

If a reduction in consumerism is to be attempted through socio-economic or political processes, it can be curtailed by reducing the productivity and income of individuals, making them feel less secure, and/or making them less free. You will find me strongly resistant to such efforts.

This is not to say that there is no arguement to be made for a simpler life lived with a focus more on spirituality and less on materialism. But such a discussion is a philosophical and religious one.


Ashutosh

Thanks for your detailed explanation. The points you have made are very valid. I am not at all for any coercive means of reducing consumerism.
Maybe my discussion is more on philosophical side.

I agree that efficiency and security are important. But the way the world is consuming, we are depleting resources, generating waste and stress in people' lives. Pursuit for better living standards and lifestyle is right of every person. But what if it comes at a cost. All the development till date has come at a cost to environment and society.

How can we have thriving economies which don’t cost us or coming generations?


Jeff Hardy
Vice President of Business Operations at SmarterTools

Economics is not a zero-sum mechanism. All economic activity has costs. The magic is in the free-market allocation of resources that have alternative uses—hopefully they are directed to the highest-best use.

Remember that there is a great chasm of a difference between price and cost. You are correct that costs are not always measured in currency (I might argue rarely) and that costs can be measured in resource utilization, time, effort, and opportunity (among other things perhaps).

In your two posts you also repeated the concept of “waste.” First—from a purely physical perspective—it has been estimated that all of the trash generated by all of humanity for the next hundred years would fit into a landfill of average depth 40 by 40 miles square; which is approximately 800 square miles or a little more than 1/1,000th or 1% of the world’s land area. Considering that the world is made up of….well, there is no other way to say it…the world is made of resources.

This is not to say that we should not be good stewards and plant two trees for each one that we harvest (etc.) and that we should not pollute beyond the natural ability of the environment to adapt and recover (etc.). But this suit to point out that the steel we produce to make our cars and televisions creates much economic good for ourselves and our posterity--and since steel is a recyclable, we use it again and again. We therefore "consume" many cars and gain substantial economic and social benefit with minimal waste--less and less waste with each passing year. And the parts of that car those are not recyclable and end up in a landfill? Well, that is likely the smallest part of the whole equation.

The news is not all bad. And technological innovations make for cleaner manufacturing processes, more efficient uses of power, and much more. Economic activity is a “good” in and of itself that gets forgotten far too quickly.

You may not think that the glass is half full, but at least consider that the glass might not be half empty.


Ashutosh

Thanks for sharing your views. I agree that its not that bad, glass is half full and some technological innovations are in right directions.

But I doubt that market forces alone can guarantee best allocation of resources. I may be wrong. But in my opinion there is need to actively divert resources towards right cause rather than leaving it on market forces. Do we have a market force which pushes a company to check its pollution to environment? There could be similar other examples.

To solve world problems like climate change, energy and water shortage, in my opinion conditions have to be created for directing market forces towards these problems. Carbon trading, preferential tariffs for renewable sources are steps in that direction, but they are with government support. I believe in power of market forces but doubt their judgement of what is good or bad for society as a whole.

Directing market forces on sustainability issues can also generate economic growth, jobs etc. But in the absence of such focus, I get the impression that present economic growth drivers are capable of doing much harm. The sub-prime crisis is a good example.


Christian Bieck
Insurance Practice Leader, IBM Institute for Business Value at IBM

Starting from the OP "What happens if people become spiritual and lower their demand of material pleasures? Will the world economy collapse? Can the world economy survive with its citizens being less demanding, less consuming and simple living?"

If people become spiritual, they raise their demand for "spirituality services" - you can be pretty sure that there will be a thriving spirituality industry. Consumption does not have to mean material goods, and indeed, if I look at my personal budget, a large part is dedicated to services of some kind. Even spirituality services will be wasteful in some way (everything that needs energy is) but there is nothing good or bad about it, and no reason to think the economy will suffer.

On the matter of the mythical beast "Market" - as you say, Jeff, players play within the rules set. Only in theory does the market produce an efficient outcome - in reality, the assumptions needed for efficiency are impossible to meet, starting with the assumption that market actors are rational. (Humans are very seldom rational - why should they magically become so when entering "the market"? I recommend reading Dan Arielly's "Predicably Irrational"). It always reminds me of the joke about the economist starving in the closed room, with the tin of food before him chanting "I define you to be open"... ;-)

The rules are there to try to approach the theoretical assumptions needed to make the market efficient, starting with such obvious stuff as "don't shoot the other guy, make a contract with him". You wouldn't want to live in a world without rules affecting the market, and it is not at all obvious where the boundaries are where we should start leaving the market alone. (If market actors, i.e. humans, were rational, we wouldn't need the "don't shoot rule" - we could be sure that the few shooting there are would be in the best interest of all, even of the one being shot.)

The rules we have don't allow for market efficiency in the resource area, simply because prices don't reflect (long-term) costs when it comes to the "free" resources like water and air. Why should they? Humans (not being rational) seldom on their own think long term - some less, some more, mostly culturally determined. Without subsidies (which I agree are not the best way to steer) and "free-market restricting" rules there probably wouldn't be a single renewable energy industry, and a lot more Chernobils.

A final comment: in Friedman's heyday, this discussion was really more of academic interest, and we could afford to be wrong about trying as much free market as possible, because not much could happen - economy was always local. Today, that is not the case - the world is so interconnected that single events can bring the card house down. That is why the rule structure needs to be robust enough to ensure that the house is not built of cards but something more durable - and there is no reason to believe "the market" on its own will accomplish that...


Ashutosh

Thanks for the comments Mr. Beick .
I agree that human beings are not rational. Moral hazard lurks everywhere. Market forces have not always achieved the desired ends.
In India, Govt. promoted competition and market forces in telecommunications and aviation. Both produced good results, but simple thing like catering in railways did not. The quality of the food deteriorated and cost went up, when it was thrown up to private players.
Proper rules are required. The Bloomberg article suggested from Mr. Jeff also points out that how Govt. failed to bring a regulation which might have avoided sub-prime crisis.
Mr Jame talked about growth rate. Quick growth or steady growth. Thinking from a corporate view, any growth more than sustainable growth rate is not healthy. The sustainable growth rate can be calculated before hand based on return on equity and other parameters.
Do such thing is applicable for any country or sector also? Was the dream of providing a house to every American (though everyone could not afford it) was ill-founded? Apparently yes. What could be a sustainable growth rate for a sector or even for a country? Or should one just go for unbridled growth?


Jame Rasheed
Experienced Business Development, Product Designing and Market Developer

Sustainable growth can be valued under certain parameters however; it has become obvious asymmetric information in the valuation system is often to aggressive and over shadows the obvious short comings of the valuation systems. The corporate valuation systems are usually need a balance of the numeric valuation and perceptive valuation both of which are crucial.
One of the obvious problem that came about from this economic down turn is that even though the projections were accurate numerically their perceptive projections were often did not correspond to the upcoming problems that were more of a phenomenon. What is effective is a check and balance system of the process. What we are facing is either a complete privatization of the economy or complete regulated economy such as preached in communism. Irony is that both are like sides of a coin with no balance adding to this is the obvious environmental problems that has risen from the ashes of the decades over usage of the natural resources. I would say is that, it would not be question whether we should be thinking about unbridle growth or vice versa what we should start thinking about at how we should grow without over depleting the existing resource that we have and how we can go towards more efficient form of growth with less with a check and balance ideology.


Tom Stroud
President and General Manager AFFINEX, LLC

The US economy is facing a reduced-consumption profile. The savings rate is up and retail sales and resource consumption falter.

Companies with high fixed costs and some form of monopoly and/or government support are responding with raised prices. For example, electric utilities are imposing new surcharges. Containership consortia are colluding to raise prices to cover high fixed costs even though their individual inputs (fuel etc) have declined. Credit card companies see declining use so impose new fees upon current balances.

Since the price raisers generally own our politicians, it is hard to see this cycle ending. We will continue to see 'necessity' inflation.

Meanwhile, back at the clothing store or electronics big box, expect to see some offsetting deflation. But, this will be dulled by that drop in consumption. The biggest impact will be further and expanding collapse of the commercial real estate market. Expect TARP 2. More money will go to bad banks who will in turn reward bad bankers.

Needless to say, the unwinding of consumption proves most aggravating.

To paraphrase Frank Rich's Sunday NYT article, prudence is being punked.


Ashutosh

Thanks for your views Mr. Tom. Recently I read that Chinese government is working on motivating chinese people to spend. Chinese are known for high savings and Govt wish to change this habit. :)

As you said 'Prudence is being punked'.


Tom Stroud
President and General Manager AFFINEX, LLC

Perhaps the most perplexing issue: what can replace consumption as the primary economic driver?

Of course, one method is to merely charge more dearly form necessary consumption. But that does not generally lead to full employment.

Another method is to publicly fund more 'common- experience' consumption such as public squares, museums, mass transit....

What are your thoughts?


Ashutosh

When money changes hand, so also goods and services. I agree that more and more people have to involve in economic activity so that necessary goods and services can reach them. This promotes economic well being in the society. Increased consumption facilitates this as more and more people get involved in creation of goods and services. Its not the consumption per se but the nature of the consumption is what we need to look into. Is the consumption pattern sustainable?

When one changes his iphone after 3 months to a new model, where does the old model land? In a landfill or in a recycling process and finds its way back into other electronic components? How much waste a industry generates while producing a product? Nature produces hard corel shell without using high temperatures and generating waste. Can our manufacturing process mimic nature and produce without generating waste? Is our consumption of energy today creating a scarcity for the coming generations? When a person takes a mortgage for a house, is he in position to pay it back?

Blatant, unbridled consumption is akin to deforestation, where the whole forest is wiped out without bothering to grow it back.

Taking more debt to finance one's consumption and taking further debt to pay off previous debt and more consumption is no different from a Ponzi Scheme. Referring to the China, which has high savings rate, does lead to sustainable consumption. It gives a confidence that any house mortgage will be repaid. The government can take that people’s savings and invest to generate more economic activity. Creating goods of common consumption can certainly do so.

As every human being aspires for better living standard, consumption will remain the driving force behind the economy. But one can control the consumption pattern. People can be persuaded to use recycled paper instead of normal paper. Its possible to invest more and improve mass transportation and persuade people to travel in it rather than individual cars. The need is to revisit our consumption pattern and ensure that it is sustainable. I would put it like this. Eating is essential to survive and everyone aspires for better food, but only right eating habits provides health and long life. Only right consumption pattern will provide a healthy and sustainable economy.