Do we really have to keep buying useless junk to keep the economy going?

Warning: This one is nerdier than normal*.

This blog’s last post, “The happiness scam”, got an unusual amount of attention. I think the issues of materialism, consumerism, and greed and their toxic effects on our wellbeing must resonate with readers. If so, that’s something that needs to be celebrated. We may have a long way to go, but the spark of discussion seems to have been lit.

One of the most common responses I tend to receive after writing a post like that is: Isn’t our whole economy based on consumerism? Won’t the whole thing collapse like a house of cards if we all stop buying useless junk?

I’ve kinda broached this topic before, but I think it’s time it deserves it’s own post. Somehow it became a popular meme, especially within my generation, that the American economy (or maybe even the whole modern-day global economy? I dunno) is based on nothing of substance, and that rampant spending is the only thing holding up a giant economic pyramid scheme. But this is (mostly) wrong.

I say “mostly” because in some cases, the economy desperately needs people to spend. This is essentially what happened during our last economic crisis, and in many other recessions. When we started to figure out that the housing bubble was ready to burst in 2008, banks got scared that they wouldn’t get paid back on the money they’d lent, and pulled back on their loans and hoarded cash; businesses followed suit, canceling a lot of their investment projects and laying off staff; and consumers tightened up as well, all of a sudden becoming less likely to take out a mortgage, buy a dishwasher, or take the family out to dinner. Collectively, everyone slammed on the brakes simultaneously and as the natural flow of the economy was abruptly shut off, we got a crash.

Unless you’re a complete market purist who believes the best way forward in such a crisis is to do nothing and let the economy take its bitter medicine, then the government and central bank can and should step in to keep banks lending, businesses investing, and yes, consumers spending. So in really unique circumstances in the short-term, yes, having everyone stop buying stuff, even if it’s useless junk, is a bad idea. But that’s really the only way that the meme above makes any sense.

In the long-term, a “less consumerist” society simply means that we stop buying things that don’t tend to raise our wellbeing. Think, for instance, of the time you bought that ridiculous kitchen device while watching Home Shopping Network at 1am, the thing that was amazingly marked down from $500 to $19.95 plus shipping and handling. A heightened sense of perspective in life, a greater sense of moderation in all things, and an ability to control one’s natural impulsiveness would mean that the economy would in the aggregate produce fewer of these things that don’t add much to our lives. Collectively, more of the things that actually benefit us would end up getting produced and consumed.

What if less tangible stuff (by that I mean physical merchandise) ends up getting produced? Wouldn’t that mean that we’d all be poorer? Well, first of all, manufacturing isn’t the only thing that matters in an economy. Services matter too, in that people value them and they can improve people’s lives. Think of your computer at home or at work, and then think of all the software programming, distribution/sales (eg. your local Apple store), or technical support that’s needed for that particular item. If that’s still too materialistic an example, imagine these other valuable services: babysitting, retirement planning, weight-loss counseling, your kid’s pediatrician’s appointment, etc.

But what if people in a less materialistic society just simply spend less of their money because they’ve shifted their priorities? Once again, in certain short-term cases (a recession) this is bad, but in the long-term it just means that savings rates go up for the time being, and collectively we choose to spend more of what we’ve earned in the future. That’s certainly not such a bad thing if we can use those savings now to invest in things that will improve our lives later. Think about a family owning one car instead of two in order to have enough money left over for their kid’s college education, or a young man in a developing country saving up for a motorcycle in order to improve his small business.

This broad argument — that we would be better off consuming a different combination of things instead of what we consume now, if only we had the right priorities — is controversial among economists. That’s because, like I’ve mentioned before, economic theory relies on a handful of assumptions in order for it to produce neat and useful mathematical solutions. Among these assumptions is that we always perfectly choose the things we want to consume to maximize our own welfare; in other words, each of us is already consuming the perfect combination of this and that right now. Therefore, any deviation from our current choices can’t make us better off. This can be extrapolated to the level of the economy at large; in most macro models, society automatically strikes the perfect balance between consuming now and saving for the future.

Of course, behavioral economics tells us that real-life humans don’t tend to behave exactly as the economic models would dictate. That’s hardly an indictment of the models, which once again are intended to make general points about economic behavior and outcomes, not deep psychological or moral pronouncements about the human condition. But the point is this: Just because we tend to consume a certain combination of A and B, doesn’t necessarily mean that’s best for our wellbeing.

So no, there is no trade-off between upright spiritual conduct (that is, being detached from material things, being moderate, not acting selfishly or impulsively) and material wellbeing. Quite the contrary, in fact: We can easily make the case that these qualities would make us better off, both as individuals and as societies.

Please spread the word at your next cocktail party.


*A while back I wrote a post entitled “The over consumption debate, part I of III”. Subsequently I realized that no one would ever read blog posts whose titles sound like action movies for economics geeks, so I stopped after part I. But let’s just call this part II so I don’t completely feel like a quitter.


7 thoughts on “Do we really have to keep buying useless junk to keep the economy going?

  1. I’ve been poking around the edges of Modern Monetary Theory for a while, and ran across this working paper (PDF) written by Louisa Connors and William Mitchell at the Center of Full Employment and Equity:

    Click to access 13-06.pdf

    The paper reproduces a couple of diagrams from Anat Shenker-Osario’s book, “Don’t Buy It: The Trouble with Talking Nonsense about the Economy”. The first diagram depicts the economy as this external entity to which people and the planet are subservient. The second depicts the economy as something that’s subservient to people.

    To me, these diagrams echo Shoghi Effendi’s statement from Call to the Nations:

    “The call of Bahá’u’lláh is primarily directed against all forms of provincialism, all insularities and prejudices. If long-cherished ideals and time-honoured institutions, if certain social assumptions and religious formulae have ceased to promote the welfare of the generality of mankind, if they no longer minister to the needs of a continually evolving humanity, let them be swept away and relegated to the limbo of obsolescent and forgotten doctrines. Why should these, in a world subject to the immutable law of change and decay, be exempt from the deterioration that must needs overtake every human institution? For legal standards, political and economic theories are solely designed to safeguard the interests of humanity as a whole, and not humanity to be crucified for the preservation of the integrity of any particular law or doctrine.”

    The basic idea behind the Connors-Mitchell paper is to recast macroeconomic concepts using the ideas from Modern Monetary Theory in such a way as to change our vision of the economy to more closely match the second of Shenker-Osario’s diagrams. The paper itself is polemical in a way that, to a certain extent, detracts from the basic message. But it’s a starting point.

    One thing that always nagged me when I studied Economics (mumble-mumble) years ago is Baha’u’llah’s notion that work performed in the spirit of service is worship. While that’s an exhortation for personal life, I think it’s also a principle that comes into play when we think about economic models and policies. Any system that either deprives people of this important avenue of worship, or makes it exceedingly difficult for people to avail themselves of this avenue of worship, is deeply flawed at a fundamental, spiritual level.

    I’m still working my way through some of the implications of the ideas they espouse, but I think I’m on board with the idea that maximizing income is the wrong approach to macroeconomics. Rather, we should be thinking about maximizing employment.

    Are you familiar with what the proponents of Modern Monetary Theory have been saying, and do you have any misgivings about the ideas they espouse?

    • Rick, excellent comment and it looks like you put a lot of thought into way you wrote. Please keep commenting and spread the word about the blog.

      On MMT, I needed to refresh my memory and did some digging around on the web this morning about it. It seems like the technical conclusions of MMT are that governments who borrow in their own currency have tremendous leverage in terms of expanding the money supply in order to try and reach full employment. I really don’t quite get the difference between this and mainstream monetary economics, which asserts that central banks should control the money supply in order to strike a balance between growth/employment and inflation. For the technical side of the issue, I found this critique by Paul Krugman useful:

      The paper that you linked to aims to change the thinking on the economy. What purpose does an economic system serve? How should it operate? How do each of us relate to that system? These are basic questions that I think the Baha’i teachings can make a tremendous impact in helping answer.

      Note however that asking those questions and trying to shift our perceptions and mores about economics is different than changing the model. Like I’ve written on this blog many times (including this post), the basic foundations of economic theory assume a self-interested individual whose welfare increases with greater consumption. These types of assumptions are necessary for the models to arrive mathematically at useful approximations of reality. Extrapolating this to mean that human beings should be selfish and voracious consumers is a common mistake. But for now, this is the best model that we have, and to plug the gaps we have things like behavioral economics which can also tell us very useful things about the world.

      On employment: The system is not what causes unemployment, unless you’re taking issue with a market system instead of state planning (the latter is not really considered viable any longer). Assuming we’re keeping the debate within the framework of a market economy, then the issue of putting people to work becomes a matter of priorities. There is currently a debate going on as to the US’s current monetary policies, for instance. The Fed has been fairly aggressive in trying to promote employment, but some of its critics believe it has gone too far and is at risk of higher inflation or financial market instability.

      This is just a long winded way of saying that we should be careful to distinguish between the technical side of the issue (what works?) and the moral side (what are we trying to accomplish?).

      • Yeah, I left a lot out of that first post. It’s hard to know just how much to say in order to establish commonality. So, perhaps a bit more background is in order.

        First, I’m totally on board with the idea of model-building, and the need to separate out the models we use to think about how the economy works and the conclusions we reach about what we want from the economy (i.e. “normative” vs “positive” issues). Indeed, my biggest grip with the pedagogy of Economics is the failure to stress the process of model-building in introductory courses. Yes, we make ridiculous assumptions, assumptions that we absolutely know aren’t true, when we start building models. The point is to start with a simple model, think it through, and, then, start relaxing some of these assumptions to see where it leads us.

        This is how we do model-building in a field of study where we have significant measurement problems and we don’t have a laboratory in which we can conduct experiments. Though, with respect to experiments, I’m absolutely fascinated by the work that Esther Duflo has done using randomized controlled experiments to study the economics of poverty.

        Second, while I am totally on board with the distinction between normative and positive issues, I think it’s very worth-while for us to take a step back, and ask ourselves whether or not we’re actually modeling the right things. My favorite example is the IS-LM model. Aside from any of the normative issues with that model, it doesn’t capture employment. It tells us nothing about what the full employment level of income is. Indeed, all we really do have is Okun’s Law, and that law suggests that we can’t achieve full employment without income growth. Might there not be something wrong with this picture?

        Which brings me to my fascination with MMT. The paper that I linked to, combined with the extent to which the ideas it expounds conform to Baha’i principles, tells me that building models based on MMT principles might well be a better way to understand the things that ought to be most important to us. I linked to the paper for the sake of the diagrams, not for how well it explains MMT. The paper is about framing the discussion.

        In that sense, I think Krugman gets a few things wrong about MMT. I don’t know of any MMT advocate who thinks that unrestrained government spending is justified by the fact that the government cannot default on debt that’s issued in its own currency. Most of what I’ve read makes a very clear distinction between the accounting aspects of the monetary system and the real economy where goods and services are produced, and MMT, itself, is not at all incompatible with the notion that government spending beyond real productive capacity will lead to inflation.

        I am most intrigued by the idea of a jobs guarantee that’s espoused by a number of MMT advocates, though I haven’t fully made up my mind about it. The good thing about it is that it serves as an automatic fiscal stabilizer. What’s not all that clear about the idea are the implications of the fact that a jobs guarantee creates an effective minimum wage. What’s the crowding out effect of this de facto minimum wage? I don’t know. We might not be able to know without implementing the idea (if only we can get Esther Duflo to construct a randomized controlled experiment…).

        In any event, you’ve answered my original question as to how familiar you are with MMT. I’d recommend paying attention to Yves Smith’s blog, Naked Capitalism. She regularly features guest posts from people like Randy Wray and Bill Mitchell. If you get some time, poke around her blog and some of the other stuff written by Wray and Mitchell. Perhaps, after you feel comfortable understanding their ideas, you can share your thoughts in a top-level post.

        In any event, thank you for your blog. I’ve been a subscriber for quite some time (along with the 27 other Econ blogs that I read on a regular basis), and I’ve found your perspective to be insightful and refreshing. Keep it up.

  2. I agree maximizing income on a macro level, given an Earth of finite resources, should not be the case. This is why we’ve erred in creating a system of infinite growth and infinite money. However, there are good economic theories about optimizing utility, although they are mathematically poorly constructed on a few unrelated variables. Maximizing employment is great, but in such a way to optimize utility through ways which ensures a minimum income or minimum quality of life which satisfies our God-given rights.

    • Great comment and great to have you on this blog.

      I believe the system is (mostly) fine, and it’s the hearts of the people that carry it out that needs to change.

      We can “maximize consumption” and avoid environmental degradation and miserable materialism. The question is what we consume. Why not maximize education, art, charitable giving, leisure time, vacation trips, orphanages, medical care, etc? These are things that are good for us. Maximizing what we have and what we consume is great, assuming the combination shifts away from environmentally destructive things an things that don’t uplift our wellbeing.

    • Lastly… Amen to the idea of maximizing employment and ensuring a minimum quality of life. Our central bank aims for the former (while also trying to manage inflation), though the government sometimes appears less committed. As for the latter, this is a moral question and the debate is currently raging. (I’m sure you can deduce who side side I’m on.)

  3. My post got mangled, here it is again wiohtut the formatting that mangled it:One big problem with understanding MMT, that makes people uncertain of it, is inflation.I first attempted to read up on MMT half a year ago (while still learning economics in general), but I was unsure of it because of the problems of inflation, but since then I have gotten a good understanding of demand-pull inflation cost-push/supply-shock inflation, and built-in inflation.This time, when I read up on MMT, it clicked with me almost instantly, like it never clicked before, and my uncertainty regarding inflation is completely gone, and it all seems a hell of a lot more obvious and intuitive now.I think any introduction to MMT, should include a detailed description of inflation and its causes, as a subject in itself; this, in my opinion, is the most important hurdle to understanding MMT, because it is the first point of criticism that MMT receives whenever you discuss it anywhere, from people scaremongering about hyperinflation, and fallaciously equating increases in the money supply with hyperinflation (where if you understand how inflation actually >works<, you can see the false nature of this).Just my 2c here; I think addressing this problem, could greatly increase the penetration and acceptance of MMT-based views.

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