Thursday, October 30, 2014

Consumerism, Interventionism, and the Money Supply

Living in an anti-capitalistic era, it is common to hear even religious leaders who speak Marxist language. But of course they do it in a creative way for they don't want to be branded as leftists. In the US, they have left-wing religious leaders like Ronald Sider, Jim Wallis, and Jeremiah Wright. These men have many duplicates here in the Philippines. Even without understanding the basic principles of economics, these local counterparts are so vocal in their hostility and opposition against the free market. In fact, this first week of November, they will hold a seminar to attack consumerism, which in their mind is an offshoot of capitalism. 

Instead of being grateful for the development they see around them like the construction of big malls and the privilege of enjoying to dine in an eat all you can restaurant, they see going to malls as an escapade and consumption as materialism. Though they accept that capitalism has improved the material well-being of mankind, they complain that the minds of men were diverted from superior pursuits in life to inferior ones. They say that both consumerism and materialism tend to give attention only on the needs of the body, and neglect the needs of the soul and of the mind. And so people are deceived by the lure of consumerism. They echo the voice of Bernard Baruch: "The main purpose of the market is to make fools of as many men as possible."

David M. Walker, the US Comptroller General from 1998 to 2008 has something to say about "consumerism", or to be exact about the need to overcome the "consumption mind set." He said: 

"The individual must get over the CONSUMPTION MIND SET. The consequences are important and it is important that we reevaluate our values. That long standing tradition of children living better than their parents is in serious danger. We will have to reform all of our health care systems, our tax policy and social security. Over time we must restructure cutting spending, entitlements and enhancing revenues."

However, when David M. Walker said these words, he has basis. He is aware about the gross national debt and the unfunded liabilities of the US. He did not say those words in abstract or simply pointing the blame to the market. 

Blaming the market for consumerism is not based on economic analysis. It is more of a political propaganda to promote a statist ideology. defines consumerism in three ways: 

1. "a modern movement for the protection of the consumer against useless, inferior, or dangerous products, misleading advertising, unfair pricing, etc."

2. "the concept that an ever-expanding consumption of goods is advantageous to the economy."

3. "the fact or practice of an increasing consumption of goods."

In this article, I am using the term with its 2nd and 3rd definitions.

If consumerism is not the fault of the market, then whose fault is it? I think at this point the article written by Steven Horwitz at Foundation of Economic Education will help us. He said that it is erroneous to equate consumerism with capitalism simply because for economists consumption does not drive economic growth and prosperity, but production. For him, Keynesian economic policies are the primary roots of consumerism. Keynesianism manipulates "the elements of total income (consumption, investment, and government spending)" and they "became the focus of macroeconomic policy and economic development." And so his challenge for the Marxist critics of capitalism is that in their attack against consumerism, they should focus instead their attention on Keynesian interventionism.

Another economist confirms this observation. He provides a brief explanation how the increase in money supply affects consumption: 

"So here we see why an increase in the money supply leads to LOWER INTEREST RATES. With greater excess reserves, banks must lower the rate they charge each other . . . . in order to attract new borrowers and get their idle reserves out there earning interest for the bank." 

"LOWER INTEREST RATES create an incentive for firms TO INVEST IN NEW CAPITAL since now more investment projects have an expected rate of return equal to or greater than the new lower interest rate. Additionally, the LOWER RATES ON SAVINGS DISCOURAGES SAVINGS by households and thereby INCREASES THE LEVEL OF HOUSEHOLD CONSUMPTION. Households find it cheaper to borrow money to purchase durable goods like CARS and it also becomes cheaper to buy NEW HOMES or undertake costly HOME IMPROVEMENTS. So we begin to see INVESTMENT and CONSUMPTION rise across the economy as the increase in the money supply reduces borrowing costs and decreases the incentive to save. Aggregate demand has started to rise."
"Increasing the money supply . . . . leads to INCREASED CONSUMPTION, INVESTMENT, and NET EXPORTS, and therefore aggregate demand in the economy. The RISING DEMAND among DOMESTIC CONSUMERS, FOREIGN CONSUMERS, AND DOMESTIC PRODUCERS for the nation’s output puts UPWARD PRESSURE ON PRICES as the nation’s producers find it hard to keep up with the rising demand. Once consumers START TO SEE PRICES RISING, inflationary expectations will further increase the incentive TO BUY MORE NOW AND SAVE LESS, leading to even MORE HOUSEHOLD CONSUMPTION."

Based on the above quotations, since from an economic point of view, consumerism is an inevitable response of both the producers and consumers resulting from the increase in money supply, it is therefore fallacious to blame the free market for consumerism. Instead, blame those who are responsible for the increase of the money supply.

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