Thank the State for Consumerism

Source: https://markstoval.files.wordpress.com/2012/11/6a00d83452719d69e2014e86055c29970d-800wi.jpg

Author’s note: I am currently thinking of ways to formalize my thoughts here into a more concrete economic model. I have some ideas, but please do not hesitate to contact me to shoot me yours. I am always open for collaborations. Research is fun.

Oftentimes, consumerism gets associated as an effect of capitalism. That this system of organizing the economy through private property claims toward both capital and consumer goods, and in which the redistribution of wealth is determined by the free market, is derided for allowing a culture of consumption. Those who have read the economic works of Ludwig von Mises, Friedrich Hayek, Eugen Böhm-Bawerk, and many other great Austrian school economists would find this statement lacking.

What is consumerism? Merriam-Webster defines consumerism as, “the theory that an increasing consumption of goods is economically desirable; also: a preoccupation with and an inclination toward the buying of consumer goods.” One can further say that consumerism is this ideology of acquiring, and as the name implies, consuming goods and services in increasing amounts over time. Given this statement, can we say that it is inherent in capitalism? It would be intellectually dishonest for one to say that it is, for consumption is an inherent part of human nature. The fact of life is that scarcity exists, and since that is so, we tend to want to find an efficient way of allocating these resources so that they do not run out too quickly. Since we, as humans, need some form of sustenance to survive, and given the fact of life of scarcity, consumption does not, in of itself, seem to be a bad thing. However, much of those who oppose free market capitalism still inevitably deride it for promoting consumerism.

One may well argue that consumption is not, in of itself, the bad thing, as it is obviously part of human nature, as I have demonstrated in the previous paragraph. However, and rightfully so, the argument is that capitalism promotes the culture of consumption, the culture of buying more and more. Is this the case? Does free market capitalism promote this sort of culture?

The State

Source: http://www.azquotes.com/picture-quotes/quote-the-state-is-a-gang-of-thieves-writ-large-the-most-immoral-grasping-and-unscrupulous-murray-rothbard-85-75-57.jpg

In the Weberian framework, the State possesses the legitimate monopoly on violence within a certain geographical location. To finance the continued existence and operation of the State, it needs assets. The State appropriates wealth from the productive sector of its citizenry to both feed itself the necessary funds it needs to survive, and in most cases, to redistribute portions of that wealth back to the population. I have addressed welfarism here and here. This wealth appropriation scheme comes in forms such as taxation, arbitrary asset forfeiture, eminent domain, et al. Indeed, the State exempts itself from private property norms.

But how does the State play a role in promoting consumerism? Before answering that question, we must define one other term, namely time preference.

Time Preference

In his book entitled Democracy: The God that Failed, Dr. Hans-Hermann Hoppe illustrates time preference in saying that,

In acting, an actor invariably aims to substitute a more satisfactory for a less satisfactory state of affairs and thus demonstrates a preference for more rather than fewer goods. Moreover, he invariably considers when in the future his goals will be reached, i.e., the time necessary to accomplish them, as well as a good’s duration of serviceability. Thus, he also demonstrates a universal preference for earlier over later goods, and for more over less durable ones. This is the phenomenon of time preference.

Time preference tells us that, majority of the time, people tend to want now more than later. The classic example is the following: If inflation will not hit, then will you take $10,000 now or 10 years later? Most people will say now since they will be able to satisfy the immediately-not-yet-satisfied wants of right-now. Almost nobody would say 10 years later, unless a higher value is presented. Whatever that higher value is, say $50,000, will reflect the premium to which you will be willing to sacrifice now more than later. This is also known as the interest rate.

Can be found in page 8 of Hoppe’s “Democracy: The God that Failed”

Figure 1 is Hoppe’s way of modeling time preference rates and schedules. A movement along the curve, say from 11 → 12 or 21 → 22, is a fall in the rate of time preference. This means that you have a larger amount of present goods while still being “the same.” I say “the same” because a change in personality or outlook, say from being a rowdy teenager to being a responsible adult would change one’s perspective over how one spends one’s time and money. As we grow older, we tend, hopefully at least, to be wiser and more knowledgeable. The movement from t11 → t22 then describes the process of civilization, as Hoppe would like to put it. Over time, we develop farsightedness and we tend to be more careful with consuming our available resources. A change in personality happens, in other words. Decivilization would be our “barbaric” roots of just consuming without regard or awareness for how scarce resources really are, while the process toward civilization is the process in which we discover scarcity, develop farsightedness, and consume and allocate our resource with more care and regard. The example I used in one of my past articles is the example of a parent spending more now, without regard for the accumulating debt that is being incurred by the family. After the parent’s death, the child/children now bears the burden of paying it off. In what world can that be called responsible?

In the same book, Hoppe continues to drive home his explanation of time preference by saying that,

Man will only exchange a present good for a future one if he anticipates thereby increasing his amount of future goods. The rate of time preference, which is (and can be) different from person to person and from one point in time to the next, but which can never be anything but positive for everyone, simultaneously determines the height of the premium which present goods command over future ones as well as the amount of savings and investment. The market rate of interest is the aggregate sum of all individual time-preference rates reflecting the social rate of time preference and equilibrating social savings (i.e., the supply of present goods offered for exchange against future goods) and social investment (i.e., the demand for present goods thought capable of yielding future returns).

Now we can begin our analysis of how the State plays a role in promoting this increasing tendency toward more consumption.

Let us take a simpler case: Robbery. When you get robbed, your claim to your property gets violated. The economic implications of it is that you now have less stuff on your hands. Why is this a problem? That stuff you once had could have been used in aid of satisfying future wants. In other words, the goods stolen possessed some form of future investment, use, or serviceability to you that is now gone. For example, if your washing machine gets stolen, it halts all future possibility of making your life easier in terms of washing your clothes. Now that it is gone, and until you find a way to replace it, you either must spend money to pay someone to clean your clothes for you, or you will have to do it yourself, incurring more costs than you would have if your washing machine did not get stolen in the first place. According to Hoppe,

If violations of property rights occur and the goods appropriated or produced by A are stolen, damaged or expropriated by B, or if B restricts the uses that A is permitted to make of his goods in any way (apart from not being allowed to cause any physical damage to the property of B), then the tendency toward a fall in the rate of time preference will be disturbed, halted, or even reversed.

When our stuff gets stolen now, or when we get prevented from using them now, our rate of time preference will tend to rise. Another example to illustrate this point is when all our stockpile of food either becomes spoiled or stolen. Now that they are gone, we will tend to buy more food now to compensate for the loss, reflecting the increase in the rate of time preference. The good news is that eventually we go back to equilibrium when no such occurrences of further property violations or the prevention of using our own property arise.

Time preference rates and schedules naturally fall over time because, as we grow older, we tend to become more farsighted. As kids, all we wanted to do was consume, demanding more this and that from our parents, clearly being unaware of the reality of scarcity. But, as we grew older, we come to the realization that things are not always readily available, and that things are indeed scarce. The amount of money that you have can only get you so far, so it is about finding a way to utilize one’s spending, saving, and earning capabilities that enables one to have a better future.

The more we consume our resources now, the less we can consume in the future. As was noted above, time preference rates and schedules can indeed fall when property violations or measures to disallow the use of one’s property emerges. Robbery, however, rarely happens in a high-functioning society. And in most high-functioning societies with clear property laws in place, getting just compensation and retribution from the evil doers is assured. Furthermore, investment in security becomes common once one possesses the needed funds. A good question to ask is: What if this form of robbery is persistent? What happens to one’s time preference rates and schedules?

State Wealth Appropriation

As was mentioned before, the State’s continued existence relies upon its legitimate monopoly on violence. Without it, the State would be rendered moot and its wealth-appropriating powers gone. Today, it continues to make its case relevant by “taxing the rich and giving to the poor.” Taxing the productive sector of its citizenry, charges a talent and operations fee, and then proceeds to redistribute that wealth. Talk about actually redistributing the wealth out of your own good will. Hoppe notes that,

The distinctive mark of government violations of private property rights is that contrary to criminal activities they are considered legitimate not only by the government agents who engage in them, but by the general public as well (and in rare instances, possibly even by the victim). Hence, in these cases a victim may not legitimately defend himself against such violations.

All things considered, what happens to time preference rates and schedules of individuals whose property get violated? What we should observe is a rise in time preference rates in the short-term, and inevitably a rise in time preference schedules in the long term. In effect, individuals are incentivized to obtain or consume goods and services now more than later. Why? As we have said before, the State appropriates wealth, and seeing as that is within the time horizon, individuals decide to plan ahead and consume now. Allow me to put it this way: If you know you will be robbed tomorrow, and there is no stopping it, what do you do with your current resources? Majority of you will probably answer that you will consume more now than later, because there will be no more of your resources later for the obvious reason that they got stolen.

I cannot stress enough how good Hoppe describes this phenomena in his book. He does not directly discuss consumerism, but a close reading and a little thinking should lead one to conclude the same ideas as I have. He states the following,

Like crime, government interference with private-property rights reduces someone’s supply of present goods and thus raises his effective time-preference rate. Yet government offenses — unlike crime — simultaneously raise the time-preference degree of actual and potential victims because they also imply a reduction in the supply of future goods (a reduced rate of return on investment) … Because they are legitimate, governmental property-rights violations are continual. The offender does not disappear into hiding but stays around, and the victim does not “arm” himself but must (at least he is generally expected to) remain defenseless. Consequently future property-rights violations, rather than becoming less frequent, become institutionalized. The rate, regularity, and duration of future victimization increases. Instead of by improved protection, the actual and potential victims of government property-rights violations-as demonstrated by their continued defenselessness vis-a-vis their offenders-respond by associating a permanently higher risk with all future production and systematically adjusting their expectations concerning the rate of return on all future investment downward.

Central Banking

Another institution that the State can use to promote consumerism is Central Banking. With its monopoly on money, tinkering with the forces of the market can become regular. For instance, quantitative easing or negative interest rates are nothing more than tools that inevitably decrease the value of the currency at hand with every new one being printed. One only should know the concept of diminishing marginal returns, or value for this case, to figure that out.

Source: https://cdn.meme.am/cache/instances/folder360/41573360.jpg

The central idea we need to consider here is the role that interest rates play in the structure of production. As we have mentioned earlier, interest rates reflect the time preference of society. Higher interest rates mean that people tend to want to consume now more than later. In practical terms, people are not saving their money, meaning that there is not enough money around or inside bank vaults to lend out. Since this is the case, interest rates tend to get pushed up. On the other hand, what about lower interest rates? Just the opposite: People are saving more than they are spending, meaning there is more money around the bank vaults to be lent out.

Interest rates play an important role in allocating resources over time. Some goods require a lengthier period before a return on investment is made, meaning they become a riskier investment venture. These goods, also called higher-order goods, can then be said to be interest-rate sensitive. If the interest rate is currently 15%, and your project costs you about $1,000,000, with a $1,500,000 return on investment after 5 years, your profit will be $350,000. Imagine the difference if the interest rate was 8% with the same costs and return on investment. This would lead you with a profit of $420,000. That is a lot of money.

This is the Hayekian triangle. Those in the left-most side are goods and services that do not require long production processes (haircuts, making a sandwich, et al.), while those on the right-most side do require long production processes (housing, infrastructure, mining, et al.). Source: https://www.auburn.edu/~garriro/fig51.jpg

There are many things that can happen when interest rates are lowered, mostly notably the business cycle, however, let us look at what happens with the consumer. Artificially lowered interest rates do not reflect the real time preference of society. What happens when a society that currently wants to consume now gets faced with artificially lowered interest rates?

Ludwig von Mises notes in Human Action that “a monetary expansion results in misinvestment of capital and overconsumption.” Here, overconsumption is what happens when both entrepreneurs and consumers fight for scarce resources at the same time, in effect bidding up prices. The interest rate should be coordinating resource allocation over time, but since they are distorted, the mechanism for coordinating also becomes distorted. Entrepreneurs, especially those that are engaged in longer-term return on investment types of businesses, will be incentivized to take advantage of this drop in interest rates because it will increase further their profits in the future. As for the consumers who want to consume more now? They will also take advantage of the lowered interest rates by also borrowing money to finance their spending.

In this scenario, an artificially lowered interest rate will then cause everyone to consume more. The more this goes on, the citizenry will continue to consume more now than later because the cost of borrowing money is low. In this regard, the population gets incentivized to consume more, not necessarily by capitalism, but by the State.

Conclusion

The State is a dangerous institution that holds plenty of monopoly privileges. Furthermore, it is also exempt from a lot of the rules it even sets itself, most notably, property laws, with its continued practice of wealth appropriation.

Is capitalism the sole blame for consumerism? Not necessarily, as has been argued above. Capitalism may have its faults, but it does not necessarily promote this culture of an ever-increasing mode of consumption over time. Consumerism is dangerous in that it promotes shortsightedness rather than farsightedness. Resources are scarce, and people over time realize that.

Given all that has been discussed, one can only imagine the incentive to consume now more than later in a more socialist society. But that, my dear reader, is a topic for another time.