Resist the consumption fetish

One of the most pervasive and damaging misconceptions in public debate is that economics can be understood from the perspective of the consumer. The acceptance of this blinkered worldview makes a balanced understanding of the economy impossible.

Take the idea that the economy is suffering from a lack of confidence or “animal spirits” as the most obvious example. This is an all too common explanation for the West’s economic plight.

The implication is that the reason for the mess we are in is essentially psychological. If only we would buck up and, Nike-style, “just do it” everything would be OK. Consumers would start consuming again and businesses would quickly return to normal.

Such an approach ignores the economy’s structural weaknesses. For example, it fails to consider the lack of investment in productive activity. It also confuses “confidence”, seen as a loss of nerve, with the culture of caution that has enveloped contemporary society. The latter has itself to be explained since it is a relatively new phenomenon.

A more sophisticated version of the consumerist viewpoint is the idea that the economy is essentially suffering from a lack of aggregate demand. This argument was on show in a particularly polished form when Robert Reich, the American labour secretary under president Bill Clinton, spoke at the TUC in London recently.

Reich argued rightly that high deficits and the burgeoning levels of public debt are not problems in themselves. They are instead symptoms of a more fundamental weakness.

The Berkeley professor pointed to falling wages and unemployment as the underlying causes of high public debt. This ugly duo means that there is a lack of demand.

However, he failed to address the possibility that weak demand is itself a symptom of problems on what economists sometimes call the supply side. From this perspective the financial bubble did not simply burst in about 2008 with a resultant hit to demand. It is first necessary to work out why the bubble inflated.

In both America and Britain the authorities maintained relatively high public spending and loose monetary policy from the 1980s onwards. This approach was itself an attempt to offset the effects of a weakening economy. Rather than promote a new round of productive investment the authorities preferred to make easy credit available.

This was not just a case of government being misguided or cowardly. It essentially decided it was easier to muddle through than to tackle underlying economic weaknesses in a decisive way.

None of this is meant suggest that mainstream economic thinking does not consider the productive economy at all. But when it does it tends to be from the perspective of consumption.

Productive economic activity is too often see as squandering scarce resources, generating waste and even threatening the planet. The role that productive activity plays in generating more resources, innovation and raising living standards is downplayed or forgotten completely.

The economy can only be understood properly in the round. There can be no consumption without production.

This blog post first appeared yesterday on Fundweb.