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The Origins and Evolution of Consumer Capitalism; A Veblenian-Keynesian
Perspective John P. Watkins
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Islamic Finance and Global Capitalism: An Alternative to the Market Economy 1st Edition James Simon Watkins
“John P. Watkins’ new book constructs a coherent historical narrative of the emergence of modern mass consumer capitalism out of late nineteenth-early twentieth century capitalism. It is masterfully written, and hopefully, will be read by many economists and, most importantly, by the next generation.”
William Waller, Hobart and William Smith College
“In his new book, John P. Watkins has utilized the insights of two of the greatest analysts of the paradoxical nature of American economic development, Thorstein Veblen and John Maynard Keynes, to interpret the key moments of the last one hundred and fifty years of American capitalism. Thus, this volume will be useful for those teaching or researching U.S. economic history as well as those seeking texts that present an alternative perspective to economic theory.”
Janet T. Knoedler, Bucknell University
The Origins and Evolution of Consumer Capitalism
Consumer capitalism arose with the second industrial revolution, the application of continuous-mass production to consumer goods during the late nineteenth and early twentieth centuries. This book adopts a Veblenian, Keynesian viewpoint, presenting an evolutionary view of consumption combined with the need to increase demand to match increases in production. The book traces the history of consumer capitalism, examining the paradox posed by applying continuous-mass production to produce armaments for dynastic ambitions versus consumer goods for the masses, manifesting itself in the world wars of the twentieth century. Multiple paradoxes at the heart of the story address booms leading to busts, over-producing countries in Asia relying on over-consuming countries in the West, and the expansion of demand depending on increasingly inventive ways of liquefying assets, in light of stagnant incomes. The book persuasively argues that these paradoxes result from capitalism’s incessant drive to accumulate capital, fostering conflict, crises, and depression. The latest paradox results from the impact of continuous-mass production on the environment, manifesting itself as the Darwinian dilemma. The dilemma stems from human beings largely winning the struggle for existence and, in the process, possibly making the earth uninhabitable, at least for humans.
John P. Watkins is Professor of Economics at Westminster College, Salt Lake City, Utah, and adjunct Professor of Economics at the University of Utah. He has taught economics for some 40 years, teaching the history of economic thought, macroeconomic theory, economic justice, and ecological economics. He is past president of the Association for Evolutionary Economics and the Association for Institutional Thought. He is winner of the Bill and Vieve Gore Excellence in Teaching Award, twice recipient of the Manford A. and June Shaw Faculty Publication Award, and voted six times Professor of the Year. His purpose in teaching is to raise the students’ level of confusion, a purpose which he is known to have accomplished with considerable success.
Economics as Social Theory
Series edited by Tony Lawson , University of Cambridge
Social Theory is experiencing something of a revival within economics. Critical analyses of the particular nature of the subject matter of social studies and of the types of method, categories, and modes of explanation that can legitimately be endorsed for the scientific study of social objects are reemerging. Economists are again addressing such issues as the relationship between agency and structure, between economy and the rest of society, and between the enquirer and the object of enquiry. There is a renewed interest in elaborating basic categories such as causation, competition, culture, discrimination, evolution, money, need, order, organization, power probability, process, rationality, technology, time, truth, uncertainty, and value.
The objective of this series is to facilitate this revival further. In contemporary economics, the label “theory” has been appropriated by a group that confines itself to a largely asocial, ahistorical, mathematical “modelling.” Economics as Social Theory thus reclaims the “theory” label, offering a platform for alternative rigorous, but broader and more critical conceptions of theorizing.
47. Markets Perspectives from economic and social theory
William A. Jackson
48. Key nes against Capitalism
His economic case for liberal socialism
James Crotty
49. The Nature of Social Reality Issues in social ontology
Tony Lawson
50. The Evolutionary Origins of Markets
How evolution, psychology and biology have shaped the economy
Rojhat Avsar
For more information about this series, please visit: https://www.routledge. com/Economics-as-Social-Theory/book-series/EAST
The right of John P. Watkins to be identified as author of this work has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers.
Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe.
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
ISBN: 978-1-138-33545-5 (hbk)
ISBN: 978-1-138-33546-2 (pbk)
ISBN: 978-0-429-44376-3 (ebk)
DOI: 10.4324/9780429443763
Typeset in Times New Roman by codeMantra
Dedicated to Sandra and Katie and to my readers struggling to understand and resolve the paradoxes posed by our current civilization.
5.1 Keynes’ Model of Effective Demand
7.1 Con sumer Credit as a Percentage of Disposable Income (1910–2000)
7.2 Revolving Credit as a Percentage of Disposable Income (1959–2000)
7.3 Per sonal Saving as a Percentage of Disposable Income (1059–2000)
7.4 Revolving, Non-Revolving, and Home Equity as a % of GDP (1959–2007)
8.1 US Cu rrent Account as a Percentage of GDP
8.2 US Gross Domestic Purchases as a Percentage of GDP and Consumption as a Percentage of GDP (1959–2009) Gross Domestic Purchases as a Percentage of GDP is Measured on the Left Axis, Consumption as a Percentage of GDP is Measured on the Right Axis
9.1 The D ynamic Stochastic General Equilibrium Model of the GFC
10.1 Rat io of Stock Market Capitalization to GDP (percent of GDP)
3.1
8.1
8.2
Preface
Capitalism is an inherently ambiguous concept. Like gazing at clouds on a summer’s day, one person sees a bear, another a bison. What one sees depends on one’s point of view. Capitalism is an interpretive concept, allowing us to organize the various events that ushered in the modern world. A significant event giving rise to consumer capitalism lay in the widespread adoption of continuous-mass production, initiating the second industrial revolution.
Consumer capitalism represents an evolution of capitalism generally, vastly expanding production for the masses, requiring an increase in demand. Its emergence in the late nineteenth and early twentieth centuries is reflected, in part, in two transformative books: Thorstein Veblen’s The Theory of the Leisure Class and John Maynard Keynes’ The General Theory of Employment, Interest and Money. The Theory of the Leisure Class introduced an evolutionary theory of consumption. Individuals emulate each other to achieve the pecuniary standard, a standard that advances as corporations apply continuous-mass production to new products. The General Theory reflects the increased importance of consumption in the theory of effective demand, foregoing the classical categories of wages, profits, and rents. The theory of effective demand, as taught throughout the world, depends on spending by consumers, entrepreneurs, government, and the foreign sector. Consumer spending, of course, forms the largest component.
Production for the masses required a sea-change in the institutions of capitalism: the rise of the modern corporation; a change in the laws allowing corporations to go beyond the scope of their charters; a change in the concept of property from use value to exchange value, from the replacement costs of a firm’s assets to the present value of its anticipated income stream; efforts to combine production with distribution; the rise of modern advertising to sell products; and the rise of consumer credit to supplement incomes enabling people to buy the products.
The ideas for this book came from various sources. The first source was an article I wrote titled “Corporate Power and the Evolution of Consumer Credit.” Viewing consumer credit from a historical perspective revealed increasing efforts to liquefy consumer assets and provide credit based on
t hose assets beginning with installment credit. Installment credit arose concomitantly with the durable-goods revolution. At the time of the article, I was unaware that the durable-goods revolution resulted from applying continuous-mass production to consumer goods. Continuous-mass production, along with numerous innovations, ushered in the second industrial revolution stemming from the application of science to production.
The second source stems from a personal aversion to debt. The aversion is part of the economist’s gestalt, reinforced by the idea of economic rationality, the tendency to weigh costs and benefits at the margin. Economic rationality forms the defining characteristic of the economist’s cultural orientation, the result of the socialization that occurs in graduate school. Most economists model the world as they see themselves: rational, informed, engaged in optimizing choices. The result is a caricature of people, not people as they are in their daily life. In the real world, people emulate each other, attempting to live at the conventional standard of living, an effort, as they say, “to keep up with the Jones.” Human choice is complex, subject to habit, emotion, emulation, guilt, in addition to economic rationality. Despite claims to the contrary, economic rationality often fails to reveal the best choice. It is generally invoked to justify the choice made. In addition, the real world is fraught with uncertainty and moral dilemmas. Uncertainty undermines our efforts to measure costs and benefits. Moral dilemmas prompt us to question the choice made.
Too often, economic rationality creates blinders, leading economists to mistake the model for the real world, failing to realize that models are metaphors, capturing some elements and omitting others. Most economists disregard the evolution of economic institutions, ideas, and material conditions. They take a static approach, observing the tree or perhaps a cluster of trees, unaware that the forest itself is evolving, incurious regarding the cause of that evolution or where it might lead.
The third and, perhaps, most important source is my dear friend, my love, and my fellow searcher, one who transcends rationality, generous to a fault, unconcerned with balancing costs and benefits, empathetic to the extreme. Her priority is caring for others, too kind to be among “wolves.” For the “wolves,” the point, as Veblen would say, is “to get something for nothing.”
People who care, who are empathetic, who are dedicated to service, who lack income or property beyond their labor power or lack understanding of how the system works, those people often become easy pickings.
Consumer capitalism represents the application of continuous-mass production to produce goods for the masses. The purpose, of course, is to earn profits. The assumption that wants are infinite justifies the system, an assumption taught in principles of economics classes throughout the world. When I ask students if wants are infinite, most agree. When I ask is this sustainable, most are silent. Their silence deafens, revealing the paradox we confront, the paradox that our civilization is unsustainable.
H ints of the paradox began at four or five. I would draw maps, marking a town as a dot on the riverbanks, lines representing roads connected to other dots. The town became a city, which became a metropolis. The dots grew ever larger filling the page. Then what? Of course, I had no understanding of relating the drawing to the problems at hand. The page was full, time to move on.
Continuous-mass production that ushered in consumer capitalism entails mass consumption. He who wins with the most toys wins the race. But what has he won? What have we won? A world in which a few have far more than they need while many need more than they have? A world void of the diversity of life? A world growing ever warmer? I am reminded of a quote by Kenneth Boulding, “Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist.” Perhaps we are all mad.
Acknowledgments
We are all influenced by the efforts of others. In this regard, I am indebted to the insights, writings, and conversations of many people. Glenn Atkinson and Steven Paschall alerted me to the legal changes making possible the emergence of the corporation. Anne Mayhew’s writings were particularly helpful in understanding cumulative causation. Jan Knoedler alerted me to Anne Mayhew’s work on continuous-mass production, after much of my research had been completed. Other conversations, writings, and insights came from Robert Scott, William Waller, John Henry, Charles Whalen, Tim Wunder, Eric Hake, Randall Wray, Christopher Brown, Zdravka Todorova, William Redmond, James Seidelman, Michael Popich, and Geoffrey Schneider, among others. My thanks to you all. No doubt, there were others who influenced me. My apologies for not acknowledging your contributions as well. As usual, despite the help of others, all errors and omissions reside with me.
1 The Origins and Paradoxes of Con sumer Capitalism
Continuous-mass production technology, widely adopted in the late nineteenth and early twentieth centuries, introduced what J. R. Commons and John Maynard Keynes called “the era of abundance.” Continuous-mass production enabled businesses to vastly increase output, thereby reducing per-unit costs, potentially increasing profitability. Thorstein Veblen was among the first to observe the business response, noting that continuous-mass production posed a problem: how to prevent production from exceeding what the market could profitably absorb? How to prevent losses? How to increase profits? Avoiding excessive production and increasing prices required the adoption of the corporate form of business enterprise, merging corporations to control output, and adopting various institutional innovations, particularly the holding company. Merging corporations and controlling prices further involved changing the concept of property itself and changing the laws, freeing corporations to engage in activities beyond the scope of their charter. Increasing sales and, hence, increasing demand required further institutional changes: the establishment of retail outlets in different regions of the country; systematic and rational advertising; financial innovations to extend credit to consumers; and most importantly, a change in culture from emphasizing the virtues of thrift to the pleasures of gratification.
Continuous-mass production introduced consumer capitalism, applying the technology to consumer goods and creating the necessity of increasing consumer demand to keep pace with increased production. Expanding both the production and consumption of goods fuels the accumulation of capital, creating a continuous feedback loop, a circular causation. Increased production necessitates more consumption, which, in turn, necessitates more production.
Continuous-mass production has accentuated a number of paradoxes: the prospect of depression or, as Keynes put it, the “paradox of poverty in the midst of plenty;” the rise of dynastic ambitions channeling the increased output into militarism; financial innovations involving identifying and liquefying consumers assets to provide consumers credit, expanding demand, and laying the foundation for the financialization of the economy toward the end of the twentieth century and the beginning of the twenty-first century.
Fi nancialization culminated in the Great Financial Crisis (GFC), requiring massive government intervention on behalf of financial institutions to avoid an economic meltdown. The GFC gave rise to the Modern Monetary Theory as a means of dealing with the GFC and, particularly, the Cov id-19-induced recession, overcoming the limits of the market economy. And the environmental crisis resulting from the commodification of the natural world, accentuated by applying continuous-mass production to the extraction and burning of fossil fuels combined with a belief in infinite growth.
Consumer capitalism originated in the late nineteenth and early twentieth centuries with the creation of a national market and the introduction of continuous-mass production technology, initiating what Alfred Chandler called “the second industrial revolution.”1 Chandler continues:
In the 1880s and 1890s new mass-production technologies—those of the Second Industrial Revolution—brought a sharp reduction in costs as plants reached minimum efficient scale. In many industries the throughput of plants of that scale was so high that a small number of them could meet the existing national and even global demand.
(Chandler and Hikino 1990, 26)
The economies of scale and scope associated with continuous-mass production changed the nature of production itself.
Railroads and telegraph spanned the continent overcoming local markets, establishing the first national market. Farmers could send their wheat, corn, and barley at reduced cost to markets back east, ranchers their cattle. New England millers sent their lumber to the Midwest. Manufacturers sent their goods from the cities on the east coast Westward. The railroads opened the West to homesteading. To foster the settlement of the West, the government forcibly removed the indigenous peoples from their traditional lands. Advances in transportation and communication initiated a manner of economic development described by Adam Smith in The Wealth of Nations. By extending the market, the railroads expanded the division of labor, thereby increasing productivity and output (see Smith [1776] 1937, Chapter 2).2
The creation of a national market proved propitious for businesses using continuous-mass production. The technology increased the speed with which goods could be produced, providing a cost advantage. The advantage enabled businesses to produce goods previously produced within the home. Attracted by lower prices and easier access, consumers began purchasing mass-produced goods instead of producing household goods. Electrification brought new products in its wake—radios, electric lighting, washing machines further attracting consumers. Henry Ford introduced the moving assembly line, the classic example of continuous-mass production, greatly reducing the price of automobiles. From 1909 to 1910, the price of a model T was $950, with 18,664 cars produced. By 1916–1917, the price had fallen to $360 with 785,432 cars produced (Ford and Crowther 1922, 145). Initially,
the demand for autos exceeded supply. Ford and his associates looked to speed up production. The moving assembly line enabled them to produce over 1,200 automobiles per day (Chandler 1964, 12).
The industry’s output rose from 1.5 million cars in 1921 to 2.5 million in 1922 and 4.3 million in 1923. But from 1923 until 1929 the market leveled off, taking an average of a little under 4 million cars a year. As had happened or would happen in so many American industries, the initial demand for the new product had reached the level permitted by the existing national income. Moreover, as has also usually been the case, production potential exceeded demand. By the mid-1920s the country’s automobile plants had a productive capacity of over 6 million vehicles. (Chandler 1964, 13)
A national market combined with continuous-mass production technology led to a sea-change in the institutions of late nineteenth- and early twe ntieth-centuries capitalism, changes that helped foster the subsequent development of the US economy. First, the modern corporation emerged in response to the need to manage railroads in the 1870s and 1880s. The corporate form, with its hierarchical form of management, was soon adopted by other businesses, allowing them to combine mass production with mass distribution. Establishing retail outlets enabled corporations to distribute goods in different geographical locations.3
Second, continuous-mass production technology led to cutthroat competition as businesses cut prices to gain market share. Increased production exceeded what the market could profitably absorb, precipitating the depression of 1894 (see Veblen [1904] 1975). Ruinous competition created losses. Unable to pay for the high fixed costs of machinery, many businesses went into bankruptcy, leading to the merger movement of the 1890s and later in the 1900s. The banks merged the businesses to control output using any number of devices: outright purchase, lease, holding companies, and a representation by a minority in the directorate (see Commission 1900, 310). In many cases, the courts voided the mergers, claiming mergers exceeded the conditions of the charter.4 Among efforts to restrict output, the most successful was the holding company, an institutional device in which one firm held the stock of other firms. While the Sherman Antitrust Act outlawed monopolies, the holding company enabled banks to circumvent the Act by purchasing stock in companies to gain control. In some cases, businesses themselves emerged to dominate the industry. South Improvement Corporation, for example, which later become Standard Oil, used economies of scale to undercut the prices of its competitors, forcing them into bankruptcy (See Tarbell 1966).5
Third, changes in business practices spurred on by the merger movement led to change in the definition of property. Holding companies holding the stock of individual companies, in turn, issued their own stocks, attributing
The Origins and Paradoxes of
their value to good will, the result of higher prices from restricting output. In the past, businesses were valued based on the cost or replacement cost of their assets. By the late nineteenth century, property came to mean the discounted present value of an anticipated income stream. The change from property conceived as a physical thing to present value, from use value to exchange value, from corporeal to intangible property, laid the basis for financing corporations and extending credit to consumers. Stock prices came to reflect the present value of a firm’s future earnings.
Consumer credit enabled corporations to circumvent the limited income of consumers, extending consumers credit based on the value of consumer assets. Sales finance companies provided installment credit, using the goods sold as collateral. The evolution of consumer capitalism reveals efforts to identify consumer assets, liquefy those assets, and encourage consumers to incur debt based on those assets.
The fourth strategy involved efforts to increase demand through advertising. Advertising had existed for years. But under corporate influence, advertising agencies appeared, undertaking systematic efforts to increase sales by establishing national brands, providing quality assurance to consumers, and providing producers a measure of certainty regarding sales.
Cumulative Causation and Consumer Culture
The rise of consumer capitalism illustrates the idea of cumulative causation. Applied to the evolution of consumer capitalism, cumulative causation refers to changes in technology creating new possibilities. Differences in culture, institutions, and habits reveal to people what’s available. As Anne Mayhew put it, “Active individuals inherit a set of ideas and symbols that are used to understand a world of many options” (2001, 243). Continuous-mass production created an outpouring of new consumer goods, expanding the opportunities available. For business, new opportunities to profit required both controlling output and increasing sales. For consumers, more output and new products offered the opportunity to consume at a higher standard of living.
The predisposition toward increasing consumption, however, had already been laid earlier. In the eighteenth century, rising wealth made consumer purchases possible. “Encouraged by new methods of marketing and sustained by an expansion in the purchasing power of households, consumers launched a buying spree of historic dimensions, purchasing unprecedented quantities of household furnishings, clothes, and personal accessories” (Kwass 2003, 87).6 Despite the buying spree, it would be a mistake to interpret the eighteenth century as representing the full emergence of a consumer society:
But to claim that the eighteenth century saw the birth of a consumer society or that many aspects of that society were imbued with a new
com mercial attitude should not be misinterpreted as a belief that by 1800 England had achieved all the features of modern consumer society. Nor should it be assumed that the birth occurred without a long period of gestation.
(McKendrick, Brewer, and Plumb 1985, 13)
Many consumer goods continued to be produced in the home, particularly in rural areas. Self-sufficiency among families varied depending on the region of the country and the dependency on the market. In urban areas, households were more integrated in the market economy. “Rural families usually produced their own food, clothing, and tools, while urban families bought them at the market” (Tilly and Scott 1978, 22). In colonial America, families in the south raised cash crops, and in the North and on the frontier families, by necessity, were self-sufficient (Matthaei 1982). In 1750, about 65% of English were involved in agriculture; in France, it was about 75% (Tilly and Scott 1978, 12); in the United States in 1790, it was 90%. Many households had one foot in the market and the other foot in the traditional economy of home production. “In general, husbands took up commodity production, while wives centered on self-sufficient production, given that the former was production of wealth, oriented toward the market, while the latter was production to directly fill the needs of the family” (Matthaei 1982, 31). Household production reduced the need to spend money on goods that a woman could produce. “Her work could include the home production of goods, clothing, candles, soap, household furnishings, and drink” (Matthaei 1982, 31).
The decline in home production both in the US and in England largely stemmed from technological changes.
Industrialization involved the movement of labor and resources away from primary production (agriculture, fishing, forestry) toward manufacturing and commercial and service activities. The scale of production increased and the factory replaced the household as the center of productive activity. In the terms we have been using, the industrial mode of production replaced the domestic mode of production.
(Tilly and Scott 1978, 63).
Food represented the single largest expense in the first half of the nineteenth century. Changes in living costs often change behavior. The increased scarcity of firewood made home cooking more expensive, while advances in transportation reduced the costs of basic foods. Changes in the cost of preparing household items led to the decline in household production.
In the new urban environment, traditional rural skills, of which domestic baking and brewing were economically the most important, gradually decayed and ultimately disappeared over wide areas of the country. …
The Origins and Paradoxes of Consumer Capitalism
Th is was, no doubt, an inevitable consequence of industrialization and the division of labour. Baking and brewing were long, tedious operations, the materials sometimes hard to come by in small quantities and the results often uncertain.
(Burnett 1968, 3).
Continuous-mass production technology allowed an outpouring of consumer goods: matches, cigarettes, soap, canned goods, photography and so on directed at the mass market. Henry Ford applied the principle of continuous-mass production technology to automobiles, greatly reducing the price of the Model T. Initially, the market absorbed the increased output. Enabling automakers to increase production for a ready market. By the mid-1920s, however, Ford and General Motors made plans to increase sales. It became apparent that producing automobiles for the mass market made consumer credit necessary.
The evolution of consumer capitalism reveals corporate efforts to increase consumer spending. Corporations engage not only in product innovation, but innovations in advertising and finance to increase consumer demand. In advertising, the purpose was to influence consumer tastes and selectively provide information. In finance, innovation assumed the form of discovering and liquefying consumer assets to circumvent limited income. Credit cards appeared in the early twentieth century, and the universal credit card was not introduced until the 1960s. The purpose, of course, is to increase consumer spending to increase profits. By the late twentieth century, consumer debt became a major contributor to economic insecurity motivating people to work longer and harder.
The book takes a cultural approach, synthesizing Thorstein Veblen’s concept of pecuniary emulation with John Maynard Keynes theory of effective demand. Keynes did not include Veblen among the so-called heretics who anticipated the principle of effective demand. Nevertheless, their views are more compatible than generally considered.7 Veblen’s evolutionary, cultural approach complements Keynes’ short-run approach to understand the cause of depression. Veblen provided a cultural theory of consumption, again complementing Keynes. For Veblen, consumers are motivated by status. This, in turn, led Veblen to emphasize the role of pecuniary emulation, copying the money habits of others. Pecuniary emulation leads to competitive spending, increasing the demand for new products, which in turn raises the standard of living.
Keynes asserted that effective demand determines the level of employment in the short run. Keynes, however, emphasized the instability of investment as the source of instability of the economy. Keynes and Veblen’s ideas, however, tend to parallel each other. Both emphasized the instability of capitalism; both asserted that preferences are culturally determined, although more so by Veblen. Both agree that the value of corporate assets stems from the present value of the discounted future income stream. Where Keynes
fai led to develop a theory of finance, Veblen anticipated Hyman Minsky in emphasizing the difficulty of repaying debts in precipitating crises.
Veblen’s view of consumption provides a more comprehensive interpretation of the rise and evolution of consumer capitalism. Further, combining the theories provides an understanding of the paradoxes that confront consumer capitalism. Keynes’ and Veblen’s ideas help explain the unique characteristic of capitalism generally, the growth imperative. Capitalism must grow. Consumer capitalism is the latest version of the growth imperative.
The Story as an Informal Test
Explaining economics involves telling stories, a mapping of sorts between theory and the real world. Constructing theories begin with forming a vision, a “preanalytic cognitive act” that “embodies the picture of things as we see them” (Schumpeter 1954, 43). Theories are comprised of models having similar assumptions, generating coherent conclusions. The formal tests of a model are well known: deductions consistent with the assumptions and the ability to generate potentially falsifiable hypotheses. Realistic assumptions are less important. In fact, Milton Friedman posited the irrelevance of relevant assumptions.
A hypothesis is important if it “explains” much by little, that is, if it abstracts the common and crucial elements from the mass of complex and detailed circumstances surrounding the phenomena to be explained and permits valid predictions on the basis of them alone. To be important, therefore a hypothesis must be descriptively false in its assumptions. (1953, 14)
Friedman’s position serves to shield mainstream economics from critics since the lack of realism is irrelevant. Nevertheless, the lack of realism means that mainstream economics often fails the informal test of a model, failures revealed by the GFC and the Covid-19-induced recession.
To reiterate, informal tests assume the form of a story, a mapping between theory and experience. Does the model make sense? Does it cohere with experience? Telling a story involves treating models as metaphors. A metaphor juxtaposes two unrelated things to say that the qualities of one resemble those of another. We use the better known to understand the less well known. Examples abound. In the sixteenth century, philosophers compared the cosmos to a clock and God to the clock maker. More recently, Richard Dawkins refers to nature as the blind watchmaker, underscoring the randomness of natural selection. A student refers to a certain professor he dislikes by part of the human anatomy. The same professor uses the supply and demand for labor concluding that minimum-wage laws cause unemployment. Never mind that labor markets never clear; never mind that labor is not homogenous; never mind that the model depicts a point-in-time analysis, not a process over time.
8 The Origins and Paradoxes of Consumer Capitalism
Metaphors shape our stories. As metaphors, economic models are “pictures” of the economic process. Models isolate those variables and relationships considered important. Models help clarify thoughts by eliminating “extraneous and irrelevant” influences. Marshaling the “facts” to adhere to the model makes the underlying story an “informal test.” A successful story offers a reasonably coherent explanation of events, confirming our beliefs and justifying our actions. Often those “extraneous and irrelevant” influences prove important.
Ignoring those influences, however, can blind theorists, resulting in misleading stories. Stories mislead when people mistake the metaphor for reality, committing what Alfred North Whitehead called the fallacy of misplaced concreteness ([1925] 1967, 51). Mistaking the metaphor for reality leads people to deny or filter potentially important information. Metaphors are imperfect representations leading to imperfect stories, often prompting the search for a more appropriate metaphor.8
Ignoring those “extraneous and irrelevant” influences reveal themselves in both the classical and mainstream view of consumer behavior. The mainstream assumes that individuals maximize utility. The consumer is sovereign, implying that consumers determine what, how, and for whom goods are produced. Preferences are taken as given, ruling out the influences of culture, advertisers, family and friends. Financers merely provide purchasing power, allowing individuals to rationally trade off future consumption for present consumption. Advertisers merely provide information to consumers, informing them which commodities will best maximize their satisfaction. This concept of rational economic man, of course, had its origins in classical economics.
Classical View of Consumption
The vision with which theorists begin tend to mirror the social and economic relations of their times. In the late eighteenth and early nineteenth centuries, the classical economists—Adam Smith, David Ricardo, and John Stuart Mill, among others—envisioned society as comprised of capitalists, landowners, and workers. Despite positing that “labour was the original purchase price paid for all things,” the classical economists attributed income to the ownership of property, to the ownership of land, labor, and capital. Rents are the remuneration for owning land; wages for labor; and profits are the residual remaining after paying rents and wages.
The classical economists focused on economic growth, reflected in the title of Adam Smith’s book, An Inquiry into the Nature and Causes of the Wealth of Nations. Smith envisioned the economy working according to an invisible hand. Each individual pursuing his or her self-interest unintentionally promotes the interest of all.
By preferring the support of domestic industry to that of foreign industry, he intends only his own security; and by directing that industry in
such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of this intention.
(Smith [1776] 1937, 423)
Although “to feed and clothe the community” comprised the purpose of growth, the classical economists discouraged feeding and clothing the people. Feeding and clothing the people meant less saving, which meant less wealth. For the classical economics, saving is the key. “Parsimony, and not industry, is the immediate cause of the increase in wealth” (Smith [1776] 1937, 321).
The classical economists offered little hope for the working poor. Malthus’s theory of population, the cornerstone of the classical view of wages, implied that wages tend to subsistence. The moral failings of workers cause their numbers to rise beyond the available food supply. Uneducated and unable to stifle their passions, providing assistance merely creates more poor people. The policy implication: laissez faire. Let the poor fend for themselves.
With the emergence of consumer capitalism, changes in society changed the vision with which some economists began. Veblen and Keynes rejected Malthus’ theory of population and the assumption of Say’s law, returning to the problem of social provisioning, the problem of clothing, feeding, and sustaining the people.
Veblen’s and Keynes’ Critiques of Economic Rationality
Mainstream economics is defined as the allocation of scarce resources to satisfy unlimited wants. It assumes consumers maximize utility using marginal analysis, weighing the benefits of spending one more dollar on one good versus the benefits of spending one more dollar on another good. A balance between them maximizes net satisfaction (consumers’ surplus) accruing to consumers. Marginal analysis is central to economic rationality, purporting to explain how individuals and firms choose in all times and places. In Veblen’s view, it characterizes a human being as a “lightning calculator of pleasure and pain, who oscillates like a homogenous globule of desire of happiness under the impulse of a stimuli that shift him about the axis, but leave him intact” (Veblen [1919] 1961, 73). By the time Veblen was writing, marginal analysis had already become habitual among the business community. It represents “the principles of action which underlie the current, business-like scheme of economic life, and as such, as practical grounds of conduct, they are not to be called in question without questioning the existing law and order” (Veblen [1919] 1961, 239).
There are, however, difficulties. Marginal analysis is static. It assumes a degree of finality, and it presumes that everyone everywhere uses marginal analysis in making choices. In ignoring the institutional setting, it renders the existing institutional setting as irrelevant. Second, marginal analysis
