Posts Tagged ‘consumption’


Special mention

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It may have taken 167 years. But consider the irony of today’s celebration of Singles Day, when “Alibaba and other Chinese e-commerce companies hosted the world’s biggest one-day shopping spree,” which amounted to more than $14 billion in sales for Alibaba alone, in light of one of the claims made in what is now regarded as the second most important academic book:

The bourgeoisie, by the rapid improvement of all instruments of production, by the immensely facilitated means of communication, draws all, even the most barbarian, nations into civilisation. The cheap prices of commodities are the heavy artillery with which it batters down all Chinese walls, with which it forces the barbarians’ intensely obstinate hatred of foreigners to capitulate. It compels all nations, on pain of extinction, to adopt the bourgeois mode of production; it compels them to introduce what it calls civilisation into their midst, i.e., to become bourgeois themselves. In one word, it creates a world after its own image.


Today’s announcement that Angus Deaton was awarded the Nobel Prize in Economic Sciences was greeted in the usual fashion: plenty of versions of “a brilliant selection” (Tyler Cowen) and a few of the usual criticisms that economics is not really a science (Joris Luyendijk).

What I find interesting is that, like last year, the prize is given to a thoroughly mainstream economist—but Deaton’s work can be read as cutting against the grain of much of what has passed for mainstream economics over the years. Let me give a few examples:

First, Deaton spent a great deal of time trying to figure out how, at the microeconomic level, consumers distribute their spending among different goods. Basically, Deaton was telling his mainstream colleagues, “you just can’t assume demand curves are downward-sloping, for individuals and markets, and that actual consumer behavior is or is not consistent with the postulates of neoclassical utility-maximization, without actually measuring how consumers respond to changes in prices.”

Deaton’s work, at the macroeconomic level, was similar: he cast doubt on the existing mainstream theories concerning the relationship between consumption and income (based on representative-agent models) and suggested, once again, that it’s necessary to study how different consumers—some with falling incomes, others with rising incomes—actually respond to changes in incomes.

Third, Deaton used his work on demand and consumption to challenge facile models based on income per capita and exchange-rate-calculated comparisons of poverty across nations. He pioneered a consumption-based approach, based on cross-sectional surveys to determine actual consumption expenditures and levels of well-being, especially in Third World countries.

There’s no doubt that, in the end, Deaton’s work in challenging many of the existing theoretical and empirical models within mainstream economics—in the areas of microeconomics, macroeconomics, and development economics—were themselves firmly ensconced within and contributed to the further development of mainstream economics.

But the mainstream nature of that work has also permitted him to intervene in other debates, for example, concerning the effectivity of foreign aid (which, he argues, mostly helps keep nonpopular governments in power and does little to actually eliminate poverty), the role of poor health (which, as he sees it, is a result, not a cause, of poverty), and the current fascination with randomized trials (which fail to account for the causes of positive outcomes and, as a result, can’t be generalized to other problems and situations).

And, in the one previous mention of him on this blog, to sound a warning about growing inequality in the United States and other advanced countries:

The distribution of wealth is more unequal than the distribution of income, and very high incomes will eventually pupate into very large fortunes, ultimately leading to a hereditary dystopia of idle rich.


As the Wall Street Journal explains,

American spending patterns after the recession underscore why many U.S. businesses are reorienting to serve higher-income households, said Barry Cynamon, of the Federal Reserve Bank of St. Louis.

Since 2009, average per household spending among the top 5% of U.S. income earners—adjusting for inflation—climbed 12% through 2012, the most recent data available. Over the same period, spending by all others fell 1% per household, according to Mr. Cynamon, a visiting scholar at the bank’s Center for Household Financial Stability, and Steven Fazzari of Washington University in St. Louis, who published their research findings last year.

The spending rebound following the recession “appears to be largely driven by the consumption at the top,” Mr. Cynamon said. He and Mr. Fazzari found the wealthiest 5% of U.S. households accounted for around 30% of consumer spending in 2012, up from 23% in 1992.

Indeed, such midtier retailers as J.C. Penney , Sears and Target have slumped. “The consumer has not bounced back with the confidence we were all looking for,” Macy’s chief executive Terry Lundgren told investors last fall.

In luxury retail, meanwhile: “Our customers are confident, feel good about the economy in general and their personal balance sheets specifically,” said Karen Katz, chief executive of Neiman Marcus Group Ltd., last month. Reported 2014 revenues of $4.8 billion for the company are up from $3.6 billion in 2009.


I didn’t attend the most recent American Economic Association/Allied Social Sciences Association meetings in Boston. But, according to Chuck Collins, several sessions focused on the sensation of French economist Thomas Piketty and his 2014 book on inequality, Capital in the Twenty-First Century.

As an outsider to academic economics, I was struck by just how compartmentalized and smug the field appears. At one point, [Gregory] Mankiw even put up a slide, “Is Wealth Inequality a Problem?” Any economist who ventures across the disciplinary ramparts will, of course, find a veritable genre of research on the dangerous impacts of extreme inequality.

We now have over two decades of powerful evidence that details how these inequalities are making us sick, undermining our democracy, slowing traditional measures of economic growth, and turning our political system into a plutocracy.

Mankiw, at another point in his presentation, had still more embarrassing comments to make. Piketty, he intoned, must “hate the rich.” Piketty’s financial success with his best-selling book, Mankiw added, just might lead to self-loathing.

These clearly well-rehearsed quips, aimed at knee-capping the humble French economist, fell flat. Mankiw’s presentation, entitled “R > G, so what?,” came across as little more than an apologia for concentrated wealth.

And Piketty’s response?

Piketty’s one poke back at the nitpickers came in response to their unanimous support for a progressive consumption tax as an alternative to any other progressive income or wealth tax. “We know something about billionaire consumption,” Piketty observed, “but it is hard to measure some of it. Some billionaires are consuming politicians, others consume reporters, and some consume academics.”


As in the classic Prisoner’s Dilemma, retailers could “cooperate” with one another—paying higher wages and enjoying higher sales—but they don’t. Instead, they “defect”—and, as a result, pay low wages and undermine consumer spending for all retailers, including themselves.*

That’s one way of interpreting the new report by the Center for American Progress [pdf]:

While many of these companies’ lobbyists and trade associations continue to pro- mote a low-wage agenda, their 10-K statements reveal how low consumer spend- ing levels undermine their stock prices. In fact, 88 percent of top retailers explicitly cite weak consumer spending as a risk factor.

That retailers depend on consumer spending is not a revelation, but that many retailers see flat or declining incomes as a risk factor is: 68 percent of companies point to flat or falling disposable incomes as a risk. Sixty-four percent of these companies that filed 10-Ks in 2006 cited incomes as a risk factor in their most recent 10-K, compared to just 32 percent in 2006.

Joan Robinson—who should have won the Nobel Prize in Economics but didn’t (because, of course, she was a non-neoclassical, woman economist) and can’t (because she’s dead)—understood this “essential paradox of capitalism”:

Each entrepreneur individually gains from a low real wage in terms of his own product, but all suffer from the limited market for commodities which a low real-wage rate entails.

And, of course, Old Nick before her:

Every capitalist knows this about his worker, that he does not relate to him as producer to consumer, and [he therefore] wishes to restrict his consumption, i.e. his ability to exchange, his wage, as much as possible. Of course he would like the workers of other capitalists to be the greatest consumers possible of his own commodity. But the relation of every capitalist to his own workers is the relation as such of capital and labour, the essential relation. But this is just how the illusion arises — true for the individual capitalist as distinct from all the others — that apart from his workers the whole remaining working class confronts him as consumer and participant in exchange, as money-spender, and not as worker.


*In the old days, when I taught Principles of Economics, I used to illustrate the Prisoner’s Dilemma with Puccini’s opera Tosca. You know: Scarpia kills Cavaradossi, Tosca in turn kills Scarpia, and then Tosca kills herself.


The Wall Street Journal uses this chart to illustrate a story on a new report issued by Morgan Stanley on “Inequality and Consumption.”*

Morgan Stanley’s research suggests weaker-than-usual consumption at the lower end of the income ladder helps explain why this economic recovery has been particularly anemic.

“It has taken more than five years for U.S. households to ‘feel’ like they are in recovery,” write economists Ellen Zentner and Paula Campbell in the report, entitled “Inequality and Consumption.”

Before the recession, they say, “the expansion of credit simply delayed the day of reckoning from declining incomes and rising inequality.”

Apparently, economists at Standard & Poor’s and Morgan Stanley have begun to understand the macroeconomic effects of rising inequality, a problem that legions of mainstream academic economists have simply ignored.


*I haven’t yet been able to obtain a copy of the report itself. I will write about it as soon as I do.


Here are some other charts from the report (courtesy of Marketwatch):