Thursday, May 11, 2006

consumer frenzy

Every think about how is wealth created? I mean how it comes about that the overall stock of wealth is increased. A lot depends on what you mean by "wealth" of course. To me, it seems there's no wealth created when one entity -- a person, city, country, group of countries, etc. -- sees its measure of wealth increase at the expense of another (that's just a transfer). Similarly, there's no wealth created when I receive an increase in salary and the amount of that increase is offset by a decline in the purchasing power of the money I'm given (i.e., an inflationary offset).

If you think back, you may recall history texts telling you of Mercantilism, supplanted by Laissez Faire, supplanted by other theories up to the Keynesian era and today's mixed bag. Mercantilists were political economists. They saw the nations of their day competing something as businesses compete. Their policies fostered national strength as best they could given the limited data they could obtain and the limited ability of governments to enforce the laws and regulations they passed. (They also had to contend with competing political objectives -- meaning occasions when economic were at odds with other political objectives -- and corruption within government.) As everyone knows, they tended to associate wealth with accumulation of money and the gold and silver from which money was minted.

The next generation of economists, led by Adam Smith, saw that much of mercantilist regulation was self-defeating. They agreed that the state needed to make itself strong, but -- to be overly simplistic -- said also that states didn't compete with each other the way mercantilists thought. Where mercantilists said states competed the way businesses do -- each using the same raw materials and producing the same end products -- the laissez faire group said nations were blessed with different stocks of raw materials, different cultural strengths and weaknesses, different means of transportation and communication (etc.). These differences meant to them that states could, if they wished, mutually benefit from the trade that passed between them.

As is well known, the mercantilists tended to see the world as having a fixed amount of wealth, and to see it in the interests of nations to get as much of it as they could.

The laissez faire group said there was the potential for trade to create new wealth. A bold insight. This is generally what has been believed ever since. Though you must recall that the laissez faire group stressed the potential of wealth creation, but did not say that states should not regulate trade (or industry, or protect access to raw materials, etc). They recognized that state economies could rise and fall -- as they saw the Dutch economy fall and the British rise. They recognized that state intervention would be needed to prevent this occurring, if possible.

So what are the means by which the overall stock of wealth gets increased? Looking around the net, I'm surprised that I can't easily find an academic site that gives a checklist of the ways real wealth gets created. So Wikipedia to the rescue once again. The article on Wealth says that it's created by these means:
* Natural resources can be harvested and sold to those who want them.
* Material can be changed into something more valuable through proper application of knowledge, skill, labor and equipment.
* Better/smarter production methods also create additional wealth by allowing faster creation of wealth.
* Ideas create additional wealth by allowing it to be created faster or with new methods.

For example, consider our early ancestors. Building a house from trees created something of greater value for the builder. Hunting and firewood created food and fed a growing family. Agriculture converted labor into more food and resources. Continuing use of resources and effort has allowed many descendants to own much more than that first house.

This is still true today. It is more obvious to those working with physical material than to a service worker or knowledge worker. A cubicle worker may not be aware in how many ways their work is creating something which is of more value to their employer than the amount that employer paid to produce it. This profit creates wealth for the owners of the organization. The process also provides income for employees, and suppliers, and it makes the continued existence of the organization possible.
What strikes me as odd is that this little discussion does not mention the role of money and credit in wealth creation. Not just money and credit, but the system of trust, optimism, and greed that leverages money and credit into wealth. Not seeing this anywhere, I'm worried that my ideas on this subject are haywire. But it seems to me that wealth is created when people borrow money in order -- so they hope -- to make more money with it. When banks lend money, they make available funds -- as credit -- far in excess of the amounts they have received as deposits. If all goes well, they receive in interest payments far more than they pay out in interest to depositors. They're banking (forgive the pun) on the trust, optimism, and greed of their depositors. Most of the time the system works and both lenders and depositors are rewarded.

Borrowers, likewise, benefit. They pay a premium -- interest -- for the money and quite often hedge their bets by buying some kind of insurance to protect themselves against failure. These actions involve trust, optimism, and greed (along with knowledge, skill, and good ideas as mentioned in the Wikipedia article). The classic example out of history would be the merchant who undertakes the risky venture of importing luxury goods from the far east, or an industrialist who borrows to expand his manufacturing plant.

Quite often, it seems, these clusters of knowledge, skills, and ideas together with trust, optimism, and greed serve the end of supplying people with material goods that they want but don't really need. (I think of Imelda Marcos and all her shoes, but it goes back to the luxury goods imported for royals and aristocrats -- silks probably being the classic example.)

For a long time I've felt that the economy (and to some extent also the creation of wealth) is founded on people buying what they don't need -- what we used to call the disposable economy and now are more prone to think of as a system where we tend to give away or sell the things we no longer want so we can fill our lives with new ones. In many places, particularly the US, people trade up their possessions using credit. This doesn't automatically generate new wealth, but it can go hand in hand with wealth creation. (The consumers are in effect saying that they believe they will have greater wealth in the future than they have now.)

Also, it's the situation in the US that people are borrowing more than they're saving. This imbalance contributes to the status of the US as a debtor nation, but that's a topic for another post.

Earlier this week I posted an entry about how to buy nothing. At his wonderful 43 Folders, Merlin Mann has shared his technique for fending off mindless purchases.

I have a […] “buy me stuff” capture device, but more for the purpose of outgassing my brain’s frequently mindless consumer pollution. My file is called “crap I just don’t need.txt,” and I have fended off many ridiculous purchases just by parking the desired item there. Just viewing the long list of previous entries is an embarrassing exercise in aversion therapy. Not to say this always ensures a non-purchase — consumer lust has a permanent apartment in my heart — but at least it provides a satisfying speed bump on the race to the checkout screen.
We live in a consumer culture. We’re constantly bombarded by advertising, advertising that is cleverly designed to get us to buy the latest Thneed (or Zizzer-Zoof Seeds). It’s easy to become swept away by desire. We’re manipulated into desire by marketing. It’s not something to feel guilty about, but it is something to strive to overcome.

I have a long Amazon wishlist, but I rarely use it. In fact, several times a year I take great delight in purging the list of all of those items I once thought I must have, but which now seem like so much junk.

Do what works for you.

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