By Dr. Mike Walden North Carolina Cooperative Extension
September 2, 2013
Around this time of year, I always re-think some of the central assumptions of economics.
This is because I have to explain them to new undergraduates, most of whom have no background in economics. This is actually good because they’re coming to me with a clean slate and few pre-conceived notions of my discipline. If I’m to be successful in teaching them some economics, I have to make sure it makes sense at a very intuitive level. At least, this is what I try to do.
If you pick up any standard economics textbook, you’ll find that one of the underlying assumptions on which all economic concepts are built is non-satiability, which simply means that people always want more of things they like. People want more square footage of living space, more clothes, more tech gadgets and more food. Indeed, perhaps the most famous economic idea — the “demand curve” — is built around the premise that as the price of something falls, people buy more, because more is better.
Of course, I’m talking on average. Certainly there are people who find less is better, but theories — like those in economics — are built around generalizations, and the general idea is that, given a choice, most people will take more over less. Sellers certainly think so.
But the concept of more is better — or stated another way, someone can never have enough — has been questioned in recent years. A big reason is the growing gap between the richest households and everyone else, made famous a couple of years ago by the protests against the “1 percent.” Statistics do show that both the incomes of the richest as well the percent of all income going to the richest have increased in recent years. Many criticize the lifestyles of those with the most money and question the worth of their spending on material items.
Certainly not all of the richest only spend on themselves. Bill Gates — who, of course, made his money in the computer world — is famous for establishing a foundation that has funded charitable activities to the total of billions of dollars. Gates is just one example; there are many, many very charitable and giving rich individuals.
Interestingly, the debate over spending and whether there is ever a point where enough is enough is not a new one. Indeed, it goes back to the Greek philosopher Aristotle. More recently, the 20th century economist John Maynard Keynes, famous for being the father of government stimulus plans to fight recessions, argued that people would reach a saturation point in their consumption of material goods. That is, he predicted we would eventually attain a point of enough, after which people would work less and enjoy themselves more.
However, Keynes’ prediction appears to have been wrong. Average work hours per person have fallen slightly but nothing like Keynes anticipated. Many higher-income people actually work more than those lower on the income scale. And clearly our spending hasn’t abated.
Why was Keynes wrong? Scholars think he missed a couple of key insights. He didn’t anticipate the increasing variety of consumer products and services or even the introduction of totally new products, both of which would drive increased spending. I may not want to have more than one vehicle, but I could desire a different vehicle with more comfort, better fuel efficiency and more tech options like Bluetooth and voice command. Thirty years ago, my monthly cell phone bill was zero because cell phones didn’t exist. Now they do, and I am spending more monthly on my cell phone service than I do on clothes!
Keynes also missed the notion of what I will call keeping up with the Joneses. It appears that what matters to people is not just their individual living conditions but also their living conditions relative to the conditions of other households, and importantly relative to those above them on the income ladder. So as the rich spend more and accumulate more, other folks are motivated to increase spending to keep up.
There are two reactions to this discussion. One is, So what? People will make their own decisions about how much they want to spend and consume, and it is their right to do so as long as they don’t hurt others in the process and pay for all the resources they use. Any attempt to alter this would simply be meddling into other people’s tastes and preferences.
The other reaction is 180 degrees different. Some question the worth of more material consumption and the implications for scarce natural resources. This viewpoint says tax policy should be used to moderate spending and consumption, especially of the rich, perhaps by applying a new national consumption tax that rises with income.
In my six-plus decades of living, I’ve often found it beneficial to periodically get back to basics and sometimes question — or at least review — key assumptions and principles. One of the most basic of economic assumptions is that most of us are better off when we have more. You decide if you agree, and if not, what should — or can — be done to change this idea.
Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The College of Agriculture and Life Sciences communications unit provides his You Decide column every two weeks. Previous columns are available at http://www.cals.ncsu.edu/agcomm/news-center/tag/you-decide