Growth and Consumerism: Nature or Nurture?

Is a desire to always have “more” a fundamental feature of human nature? In Mindful Economics, Joel Magnuson explains how consumerism was deliberately created to meet capitalism’s need for constant growth.

From Chapter 9 of Mindful Economics: How the U.S. Economy Works, Why It Matters, and How It Could Be Different, by Joel Magnuson. published by Seven Stories Press, New York.  Copyright © 2007, 2008 by Joel Magnuson. Reprinted by permission of the author and publisher.

The Growth Imperative: Prosperity or Poverty

Generating a measurable rate of return for investors is the core element of any capitalist economy. Investors derive their income from percentage returns on stocks, bonds, or other business investments. If investors do not get these expected returns, they will sell their investments and seek returns elsewhere. By disinvesting, or cashing out, investors can drive down the book value of a company, which can ultimately cause the business to fail. To prevent this outcome, the prime directive of a capitalist business is to sustain robust returns and growth of financial wealth for their investors. This is the paramount goal of capitalist enterprise.

To provide these returns for their investors, businesses essentially have three choices. One would be to pay investors with money held in their business bank accounts. This choice, however, would amount to self-impoverishment, as businesses would make themselves poorer by drawing down their bank account balances just as a person would become poorer by trying to live on a savings account. Another choice would be to generate profits from sales growth gained by taking market share away from competitors. Although the threat of losing market share in a competitive marketplace can force an individual business to be innovative and create new cost-saving technology, one business’s gain is another business’s loss in a zero-sum strategy. This would ultimately be self-destructive to the interest of the capitalist class as a whole. The third and only viable, long-term choice would be for each business to generate its returns by producing and selling more goods and services for profit.

In other words, driven by the financial necessity of providing investors with a robust rate of return, capitalist businesses must also sustain a robust rate of growth in the production and sale of goods and services. Financial growth is the taskmaster that drives growth in real production.

To sustain ongoing growth in production and sales, businesses must use a portion of their profits for reinvestment in capital stock (plant, equipment, inventory, etc.). With more capital stock, businesses can increase their production capacity to meet the demands of new growth in output and sales. As the funds for making these capital investments are mostly derived from profits on sales, sales growth and investment are locked into a dynamic relationship: profits from current sales provide financing for new investments, these new investments drive future production and future sales, and future sales and profits will finance yet more investments, and so on. Looking at the system in its entirety, keeping the engine of the economic machine running requires a steady flow in real investments that are derived from a steady rise in production and sales. In other words, the economy has to keep growing.

This growth imperative is systemic and extends beyond merely generating returns for investors. Not only are individual businesses driven to grow, but also the entire capitalist system depends on it. If the dynamic relationship between investment and growth were to break down, the economic system would break down as well. For example, if sales growth were to slow down; the source of funds for capital investment would begin to evaporate and new investments in capital stock would begin to fall. Falling investments would lead to an overall slowdown in production and sales. With falling sales. incomes would fall and a downward vicious circle of contraction would follow. Contraction or recession, if sustained over time can turn into a depression; and depression signifies systemic failure of the capitalist system.

As the capitalist machine speeds up or slows down, the changes are felt in every corner of the economy. Every institution within the U.S. economy is connected to every other institution as parts in the machine, and all have evolved to be dependent on the growth imperative. Therefore, if the economy grows, there is a chorus of cheers. Consumers look to growth because it means more goods and services available in markets; workers see growing job opportunities and rising incomes; public agencies receive more money from increased sales and income tax revenue to pay for police, schools, and roads; nonprofits receive more donations and grants from rising incomes; bank loans are repaid; and, most importantly, investors’ profits are realized.

When growth turns to contraction (recession), however, trepidation is felt by all. Workers experience layoffs and default on their bank loans; falling profits and share prices in the stock markets deplete the value of pension funds; bankruptcies soar along with government budget deficits and budget cuts. Growth is so centrally important that it has shaped the development of America’s most powerful institutions. Without steady growth, the economic system will proceed to wither away like a plant deprived of water and sunlight. For this reason, most observers are very hesitant to question this growth imperative of capitalism.

The acceptance of the growth imperative has become deeply infused in American culture and thought. Most Americans would rather ignore the inevitable environmental damage that ongoing growth causes than question it. As long as people are feeling benefits of growth, and that those benefits outweigh the damage it causes, people are likely to accept the idea that ongoing economic growth is benign. If this changes, however, and if it becomes clear that the damage outweighs the benefits, then a crisis in the perception of growth will emerge. This shift in perception is bound to occur at some point because of the scientific fact thatongoing growth is not possible. This is perhaps the single most deleterious consequence of the capitalist system. The system is based on a fundamental contradiction that, on the one hand, it must continue to grow, but on the other hand, it cannot. Many people seem to be more willing to accept even illusions of growth rather than directly face and reconcile this contradiction.

One such illusion of growth is a financial market “bubble.” Market bubbles occur when speculators inflate prices far above what would be considered reasonable. A steady rise in stock values or housing prices can make those who own these financial assets feel wealthier. If growth in the value of financial assets is not supported by growth in the real economy of goods and services, then it is growth on paper only and the feeling of greater wealth is merely an illusion. Such illusions can suddenly transform into a harsh reality when the bubbles inevitably burst, prices fall, and the paper wealth collapses. For the few who sell prior to the collapse — as top Enron executives did moments before the company famously plunged into bankruptcy — the growth in wealth is real, as they can take their profits and buy real goods or property. But for the majority who lose, their losses are also real as their life savings evaporate. With winners and losers offsetting each other, bubbles in stocks, bonds, gold, or real estate are typically zero-sum situations that do not represent real growth in wealth, but rather an upward redistribution of existing wealth. Some real growth can hitch a ride on bubbles such as a booming housing construction industry that rides along with a bubble in the housing market, but these industries also suffer tremendously when the market bubbles burst.

Bubbles aside, capitalism is a money-based system. Growth is tracked and measured in monetary or financial terms such as the dollar-value of GDP or securities. For economic growth to be real and not an illusion, increases in these monetary measurements must be anchored to real growth in production. If not, then there will be a fundamental disconnect between the financial and the real, and this disconnect will become a source of instability. In other words, if the stock market shows a steady increase in values of say 7 percent per year but real production of goods and services grows by only 3 percent, then the money wealth represented in stock prices begins to pull away from what one can buy with that money. Money begins to lose its real purchasing power and, as we saw in Chapter Five, a sustained decline in the value of money eventually leads to economic collapse. A key factor in maintaining economic stability is to maintain a stable proportion between monetary growth and growth in the goods that you can buy with that money.

The paramount purpose of capitalism is to provide steady returns to investors. These returns are measured by growth in the value of the financial instruments the investors own, and for this growth to be real and stable, it must be supported by real growth in the production and sales of goods and services in the economy overall. A common misconception about the growth imperative is that it is driven by American consumers who are driven by a deeper impulse to buy and have more things. The cultural phenomenon of consumerism does not push the capitalist economy to grow, but rather is a byproduct of the capitalist system’s growth imperative. Consumers do not push into the malls to buy things as much as they are pulled into the malls by the producers’ desperate need to sell more and more.

Consumerism: Nurture Not Nature

The term consumerism is used to describe a cultural norm that equates personal well-being with purchasing more and better material possessions. If this were a natural human impulse, then economic growth would naturally follow human nature. At some primal level, we can see that economic growth is in fact necessary for our survival and success as species. Economist Thorstein Veblen asserted that a deeply rooted tendency of human beings is to see that our offspring have a fair chance at a good life. Veblen referred to this tendency as a “parental instinct.” Driven by this instinct, Veblen argues, each generation seeks to make their material standard of living better than the last, causing the economy to grow to higher and higher levels of production. If what Veblen tells us is true, then at some level we are by our nature driven to achieve economic growth. This primal instinct, however, has very little to do with the systemic imperative to grow into what is now an already massive $11 trillion-dollar economy. In fact, the parental instinct to assure a good life for our offspring and ongoing growth are actually contradictory goals as endless growth promises to deplete available resources and undermine the welfare of future generations.

Ongoing growth entails using more and more inputs or resources. As these resources are depleted, the productive capacity of future generations is compromised, as will be their chance at a decent livelihood. Moreover, the things people really want for their children — good schools, clean and functional neighborhoods, healthy and vibrant natural environment, economic stability and security — are those that are least likely to be offered in the growth-driven capitalist system.

Veblen identified that alongside the parental instinct is a “predatory instinct,” which is also a deeply rooted human tendency toward certain behavior. Predatory behavior is not concerned with caring for future generations as much as with conquests and self-aggrandizement. Coining terms such as “pecuniary emulation” and “conspicuous consumption,” Veblen was one of the first economists to identify the predatory impulse to achieve social status through owning and consuming more and more goods. In Veblen’s view, bigger and better and more goods are consumerist trophies celebrating the prowess and skill of the predator like the taxidermy heads of animals displayed on the hunter’s game room walls. For Veblen, the simultaneous existence of these instincts — the parental instinct to care for our young and the predatory instincts of ostentatious consumption and competitive acquisition — stand in an antagonistic relationship and are emblematic of modern life.

Whether their primary impulse stems from a parental or a predatory instinct, the generally accepted view in American culture is that consumers are sovereign in the marketplace. Most proponents as well as critics of capitalism hold the belief that consumer demand is the prime mover in the basic economic processes. That is, consumers will express their demands in the markets and businesses dutifully follow. Proponents argue that growth serves to satisfy the demands of people, and critics argue that people are selfishly, or perhaps unwittingly, creating their own destruction with excessive demands. In either view, the line of causality begins with consumption and consumption drives production.

We challenge this viewpoint and argue that consumerism is a cultural phenomenon that was created as part of a broader systemic need of the capitalist economy to grow. Profits from sales are the source of returns to capitalist investors, and these returns cannot be sustained if people do not sustain high levels of consumption. The relentless drive for profits created the consumer culture that fuels the economic machine.

If consumerism did in fact stem from a natural instinct of the human species, it was not evident among most Americans in the nineteenth century. One of the problems facing capitalism throughout the nineteenth century was chronic overproduction. Businesses were producing goods for the market, but people tended to be frugal, self-sufficient, and were reluctant to spend their earnings on more and more consumer goods. More often than not, people tended to follow the ethic expressed in Christian Proverbs, “He that tilleth his land shall have plenty of bread: but he that followeth after vain persons shall have poverty enough … Remove far from me vanity and lies: give me neither poverty nor riches; feed me with food convenient for me.” For many Americans at that time, conspicuous consumption — overtly consuming and buying to display social status — was unseemly.

By the turn of the twentieth century, businesses began searching for new ways to get people to spend more of their earnings on consumer goods. In order to sell goods in volume, businesses began deploying revolutionary methods designed to entice people into consumer indulgences that were previously considered frivolous or unnecessary. In his description of America in the early twentieth century as “The Dawn of a Commercial Empire,” cultural historian and author, William Leach writes:

“After 1880, American commercial capitalism, in the interest of marketing goods and making money, started down the road of creating … a set of symbols, signs and enticements … From the 1880s onward, a commercial aesthetic of desire and longing took shape to meet the needs of business. And since that need was constantly growing and seeking expression in wider and wider markets, the aesthetic of longing and desire was everywhere and took many forms … this aesthetic appeared in shop windows, electrical signs, fashion shows, advertisements, and billboards.”

To satisfy the growth imperative of capitalism, the marketing and advertising industry was born. By the “roaring 1920s,” consumerism, molded by the nascent advertising industry, was in full swing and established itself not as a fad, but as a permanent and central feature of American culture. Today, advertising is a several hundred-billion-dollar industry, which is about ten times the entire GDP of the U.S. economy at the turn of the twentieth century when the industry began.

Capitalism has a systemic need to sell things. If people show no inclination to buy these things, then the capitalist machine will break down. To survive, capitalism must find ways — manipulation and seduction if necessary — to get people to buy more and more things that potentially have little or no relevance to their physical or spiritual well-being, or to that of their offspring. Consumerism is a product of modern marketing techniques that stimulate deep psychological impulses to consume, not because it makes them better off, as consumption may or may not make them better off, but because the growth imperative of the capitalist machine requires it.

Ongoing growth in production and consumption is not just some haphazard thing that people do by chance, it occurs deliberately in response to the capitalist system’s requirement to produce and sell ever-larger amounts of goods and services. The roots of this requirement run very deep and it is a requirement that has exceeded the planet’s ability to sustain it.

Joel Magnuson is  a professor of economics in Portland, Oregon, and a visiting fellow at the Ashcroft International Business School at Anglia Ruskin University in Cambridge, England. There’s a video interview with him here.

Posted in Consumers

7 Responses to Growth and Consumerism: Nature or Nurture?

  1. James April 11, 2010 at 4:33 am #

    What’s the solution?

  2. Jeff White March 5, 2010 at 12:05 am #

    Economist from Hungary:

    In your example, labour accounts for 95% of the value of the finished commodity; the other 5% comes from the consumption of constant capital (raw material, depreciation, and other fixed costs) in the production process. This is a highly labour-intensive operation.

    If the capitalist can reduce the amount of labour required to produce each commodity, he can lower his unit cost and thereby increase his profit margin, or lower his selling price, or both. If he does nothing to reduce his labour cost, his capitalist competitors will do so, and undercut his selling price. He will find that nobody wants to buy his product any more.

    And so, to stay competitive, he makes efforts to reduce the amount of labour required to produce each commodity. He does so by increasing the productivity of his employees’ labour – that is, by increasing the degree of mechanization in the productive process and applying advances in technology that enable the workers to produce more goods per hour of labour time than before. That mechanization and those technological improvements require the investment of more money into the fixed capital of the enterprise.

    In this way, the accumulation of capital increases. This is one form of growth that is inherent in capitalism. Another is the growth represented by increased commodity production due to increases in the productivity of labour; this in turn requires continued growth in sales volumes and expansion into new markets.

  3. Roger Brown March 4, 2010 at 9:06 pm #

    Economicst from Hungary,

    I am not sure what point you are trying make in talking about capital having a postive return without growth. In an economically viable enterprise capital must always do more than reproduce itself; It must also pay a living wage to the people who utilize the capital to produce economic output. In this sense capital must have a postive return. But paying productive workers and paying unproductive investors are entirely different things. Without growth investment income cannot grow without impoverishing workers. In an economy with zero growth the competition to find a resting place for savings drives interest rates to zero. Investment as a zero sum game to preserve wealth does not strike me as an effective strategy.

  4. Economist from Hungary March 3, 2010 at 3:52 am #

    I rephrase my example to show I did not mean growth.

    From the 100 GDP 15 is CONSUMED by the capitalist, 80 by the workers and 5 is spent as replacement of worn assets (depreciation). The capitalist does not leave the profits in the firm, therefore from an accounting point of view assets and capital remains unchanged yoy. What consumed does not add to assets, therefore cannot be accounted as growth. This repeats a zillion times. Then in real terms the annual output of this simple economy is not growing at all! This is why I am saying growth is not required to make return on capital. Best regards…

  5. Jeff White March 3, 2010 at 12:49 am #

    Capitalism’s drive to maximize profits leads inevitably to attempts to increase the productivity of labour, which is the source of those profits. Increasing the productivity of labour means that a worker can produce more commodities – and thus add more surplus value to the commodities she produces – in a given period of time. Capitalists like that idea.

    Marx demonstrated in Capital how the drive to increase the productivity of labour requires capitalists to increase their investment in the means of production; after all, to produce more commodities in the same amount of time, you need to have more raw materials, more equipment, and more of all the other material things that get used up in the making of the commodity. This causes an increase in what Marx called the “organic composition of capital” — that is, the ratio of the value of the materials and fixed costs (constant capital) embodied in production of a commodity to the value of the labour-power (variable capital) used in making it.

    As a result, the portion of the value of the finished commodities that represents surplus value becomes smaller. Since surplus value is the source of the capitalist’s profit, it means the rate of profit has fallen – even though in absolute terms the amount of profit may have increased, due to the increase in productivity.

    This built-in tendency for the rate of profit to fall causes the capitalist to compensate by trying to sell more commodities than before just to keep the same amount of profit. This feeds back into the drive to increase the productivity of labour, thus in turn feeding the vicious cycle of ever-greater accumulation of fixed capital (by reinvesting profits), the tendency towards overproduction and the tendency for the rate of profit to fall.

    This is why capitalism needs constant growth to survive.

  6. Economist from Hungary March 2, 2010 at 5:07 pm #

    I disagree with your view that returns to capitalist MUST come from growth. On a macro scale distribution of GDP to capitalist and workers is only the function of politics. Given 100 GDP produced with an asset base of 100 and 80% given to workers as salary and 20% to capitalists as profits requires no growth whatsoever while still providing a 20% ROE to capitalists… I agree with your view that current expectations rely heavily on GDP growth to provide substantial returns on capital…

    • Ian Angus March 2, 2010 at 5:54 pm #

      Economist from Hungary:

      If a corporation has an asset base (capital) of 100, and then generates 100 more in revenue for distribution as salary and profit, that’s growth in anyone’s terms. In your scenario, the shareholders start with 100, and at the end they still have 100 in capital assets, plus 20 more in profit, some of which they will likely add to the asset base. Even if they don’t, their holdings have grown from 100 to 120.

      The only way for a corporation to pay out profits without expanding is to reduce the assets — that can work for a short time, but eventually the assets are all gone and the corporation dies. The best-known variation of that is called a Ponzi scheme.