***This is brilliant!***
What’s the first picture that comes into your head when you hear the word “capitalism”? For a lot of people, it probably has something to do with money or shopping malls or piles of stuff. In fact, there seems to be a general consensus that capitalism is all about acquiring material possessions. We take it as a given that the system is designed to foster a relentless pursuit of bigger, better, and more.
But while this portrayal of capitalism is certainly popular, I think it needs to be challenged. Consumption certainly plays a role in the economy, but that doesn’t mean that materialism is the epitome of the free market.
If anything, the wanton accumulation of possessions is actually discouraged by the very mechanisms that make the system tick.
The Price Mechanism
Let’s say you’re exploring a shopping mall with some friends in search of a new winter coat. After doing some casual window shopping, you spot a really nice coat in your favorite store and decide to try it on. It fits perfectly. What’s more, the design is in style and the color matches your wardrobe. But just when you start to get your hopes up, you look at the price tag. It’s $500! Dissuaded by the high price, you put the coat back on the rack and resolve to look for a cheaper one in a different store.
Now, it might be tempting to blame the high price on corporate greed, but this is simply misguided. In a free market, prices are determined by supply and demand. If high quality coats become more abundant, prices will drop until the amount being supplied equals the demand (this is known as the point where the market clears, hence the term “clearance sale”). Similarly, if coats become more scarce, prices will rise until equilibrium is once again established. Thus, prices are constantly adjusting to reflect the relative scarcity of resources in the economy.
But aside from giving us information about scarcity, another key feature of prices is that they change our consumption habits. For example, think about how you buy gas for your car. When gas is abundant, the price is lower, and the result is that you consume more of it. Likewise, when gas becomes more scarce, the price goes up, and you consume less.
In effect, prices facilitate a market-wide coordination of resource use. More specifically, they give us an incentive to economize resources in accordance with their relative scarcity.
With this in mind, let’s go back to the winter coat. When you opted to refrain from buying the expensive coat, you were responding to a price signal created by the market. It was capitalism, to put it bluntly, that discouraged your consumption. Even if you bought a cheaper coat later on, the fact that it was cheaper means that it took fewer resources to make, which means you technically “consumed” less. Indeed, every time you opt for a cheaper product, you are being guided by the price mechanism to lower your consumption.
So when something has a high price, it’s not because the seller is especially greedy. It’s simply because the resource is especially scarce. And in light of that scarcity, the market is prompting you to consume less of it.
The Accumulation of Capital
Another way capitalism discourages excessive consumption is by providing opportunities to earn money by saving and investing. Think about it this way. Every time you get a paycheck, you have to split the money into two categories, consumption and savings. Since the money is finite, there is an inherent trade off here. The more you spend on products and services, the less you can save and invest. The more you save and invest, the less you can spend on consumption.
Drawing on this dichotomy, there are two kinds of things you can accumulate. If you choose to spend most of your money, you can accumulate cars, clothing, toys, appliances, or devices, which are known as consumer’s goods. However, if you choose to save and invest most of your money instead, you can accumulate assets such as stocks or bonds, collectively referred to as capital. The businesses you invest in will then use the money to acquire tools, machinery, and buildings, which are known as capital goods. Unlike consumer’s goods, capital goods are used to create new resources, which boosts the economy. And since capital goods contribute to the economy, the owners (that is, the investors) are compensated with profits corresponding to the amount that they contributed.
Now here’s the point. Capitalism, as its name implies, is largely aimed at the accumulation of capital. But notably, the way you accumulate capital is by saving and investing, that is, by foregoing consumption.
So by promoting the accumulation of wealth, capitalism necessarily discourages the consumption of wealth. While consumerism would have us use up resources, capitalism is specifically designed to conserve and create resources. Thus, a true capitalist resists the urge to go on a shopping spree, because they understand that spending money on consumer’s goods hampers their ability to accumulate as much capital as possible.
How Governments Encourage Consumerism
So if capitalism encourages saving and discourages consumption, why do we still consume so much? Well, part of it is that people just like having material possessions, perhaps because it gives them a sense of status or comfort. It could also be that people don’t have enough financial literacy to understand the importance of saving money and of living within their means. But governments also play a significant role in this trend, primarily by undermining the market-based incentives discussed above.
For example, think back to the price mechanism that was keeping people from consuming excessive amounts of resources. Though a good economist will recognize that high prices put an important check on consumption, many consumers see high prices as a problem, and they see the government as the solution. Thus, when the political pressure is fierce enough, governments inevitably interfere, often by outsourcing a portion of the cost to taxpayers. Then, since the cost is lower for the consumer, people buy more of the product.
For example, if the government promised to bring the price of that winter coat down from $500 to $400 by making taxpayers pay the difference, people would buy more of those coats. However, it’s not like each individual coat takes any less resources to produce. All that’s happened is that more of society’s resources are being put toward fancy winter coats and thus less resources are being put toward other things such as capital investment.
In the real world, this practice takes many forms. Sometimes, it looks like tax credits for fancy electric vehicles or solar roofs. In other cases, it takes the form of government subsidies and grants for luxurious post-secondary degrees. But if we think about it, the voracity that ensues in the wake of these interventions shouldn’t be all that surprising. People will always be eager to splurge when they don’t have to pay the full cost for their indulgence.
Aside from undermining the price mechanism, governments also encourage consumerism by punishing savers and investors. In the same way that taxes on cigarettes cause people to buy fewer cigarettes, taxes on savings such as capital gains taxes, inheritance taxes, and inflation cause people to save less, leading to relatively higher rates of consumption.
Of course, this is not to say that capitalism leads to lower consumption overall. The higher productivity made possible by private property and free trade allows us to consume more than we otherwise would, which is how we improve our standard of living. So capitalism is not against consumption as such. Rather, it expands our ability to consume, while simultaneously providing incentives to keep our consumption levels moderate relative to the amount being produced.
Adopting a New Paradigm
Though discussing economic theory and describing how markets work is certainly valuable, perhaps what’s most important is that we paint a new, more accurate picture of capitalism, one that challenges the misguided notion that it promotes consumerism. Maybe that picture could be a factory, with people hard at work creating affordable products for the masses. Maybe it’s a small business that stewards its resources carefully and makes its customers feel welcome.
Or maybe we can even redeem the shopping mall. Maybe, beyond all the clothing, toys, and gadgets, we can picture thousands of little price tags, silently encouraging us to consume less and save more.
Consumerism Is Keynesianism by Steven Horwitz
Consumer Spending Doesn’t Drive the Economy by Mark Skousen
The Truth about Savings and Consumption by Steve Patterson
Patrick Carroll has a degree in Chemical Engineering from the University of Waterloo and is an Editorial Fellow at the Foundation for Economic Education.