by Mario Fabbri
In this regard, the main driver – on his radar – of the European economic post-war miracles was the demand for greater consumption evoked by close contact with US culture and its more affluent lifestyles, clearly visible to all at the cinema and then on television.
In the defeated countries a major contribution came from the break with the previous, discredited pre-war models and values, with their old prescriptions on ways of living, working and even – here Olson must be credited – of producing and marketing goods.
This crisis in traditional ways of doing things gave way to a brief renaissance phase, which opened the door to the creativity and spirit of enterprise of the most active and ambitious: in Italy suffice it to think of the number of medium and large businesses which started from scratch or took off in the entrepreneurial explosion of the 1950s.
Then the aspiration to change lifestyles declined – an American-like well-being had been widely achieved – new habits became stabilised and, in a progressively calmer climate, the networks of “regulations…understandings… cooperative agreements” outlined by Olson also gathered strength again.
When renaissance periods end, normality returns and an authoritative public opinion starts once again to dictate ideas and behaviours to the members of society who adhere to them more or less rigidly depending on how conformist they are.
And that other people’s opinions can count even more than income in determining an individual’s consumption is corroborated by cases like this:
… [in 1899] a white Philadelphian with $1500 a year can call himself poor and live simply. A Negro with $1500 a year ranks with the richest of his race and must usually spend more in proportion than his white neighbour in rent, dress and entertainment.4
By directing people toward forms of consumption that are suited to their social status,5 public opinion strengthens that persistence of habits noted by Malthus, even when the speed of change is still far from penible stress levels.
Here is a penetrating description of these dynamics prescriptive for social status in a splendid piece by the French sociologist Emile Durkheim. Italics added:
… at every moment of history there is a dim perception, in the moral consciousness of societies, of the respective value of the different social services, the relative reward due to each, and the consequent degree of comfort appropriate for the average worker in each occupation.
The different functions are graded in public opinion and a certain coefficient of well-being is assigned to each one, according to its place in the hierarchy.
According to accepted ideas, for example, there is a certain lifestyle which is considered the upper limit to which a worker may aspire in his efforts to improve his existence, and a lower limit below which he is not willing permitted to fall unless he has committed gross negligence.
Both limits differ for city and country workers, for the domestic servant and the day-labourer, for clerical worker and the officer…
Likewise a rich man is criticised if he lives as a poor man, but he is also criticised if he strives excessively for the refinements of luxury.
Economists protest in vain; public feeling will always be scandalised if an individual spends too much wealth on wholly superfluous consumption, and it appears that this intolerance is only relaxed in times of moral disturbance.6
A veritable regulation thus exists, although not always legally formulated, which fixes with relative precision the level of well-being that each social class may legitimately aspire to. However, there is nothing unchangeable about such a scale.
It changes if the collective income increases or decreases and according to the changes occurring in the moral ideas of society.
Thus what is luxury to one period no longer does so for another; and the well-being, which for a long time was granted to a particular class as an exception and supererogation, eventually appears strictly necessary and equitable.
Under this pressure, each one in his own sphere vaguely realises the extreme limit his ambitions can reach and aspires to nothing beyond.7
Even if standards may gradually rise, these social rules still create an inertia which slows down economic development.
So, in the socially most deferent cultures, one social stratum will access en masse the prestigious forms of consumption enjoyed by the stratum above it only when this frees up the space by migrating towards higher forms of consumption.
That is, the respectful employee will start frequenting the tennis club only when his boss has moved on to the more exclusive golf club.
Social rules are felt more strongly in Europe than in the United States, where the generally more individualistic nature of the people translates into greater freedom and originality in choices.
But in the USA too, the social environment imposes consumption limits on individuals based on their social position. In the 1950s…
if the chairman of the board of a corporation drives a Cadillac, no one else in the corporation may own or drive a Cadillac.
An unmarried professor at a small college in a small community created a furore when he purchased a Cadillac.
Townspeople talked; fellow faculty members were critical; and trustees objected to salary increases for a faculty whose members could afford Cadillacs! The professor soon sold his prestige car, even though he could well afford to own it.8
Let’s construct a hypothetical case along these lines:
Imagine a big company in the Europe of the 1980s where cars are not given as fringe benefits, so that even members of the top management have to buy their cars with their own money.
The proprietor-chairman is a fan of Mercedes and has procured the most expensive model in production.
Most of his top managers-executives also have Mercedes, but more modest models.
Their salaries are high and they could easily buy a car like the chairman’s. And some would like to do so, but refrain out of respect for the hierarchy.
For the same reason their collaborators all drive cars whose type and cost stay below that of their own boss.
At a certain point – something like this really happened in those years – a luxury car coachbuilder starts offering a model that is based on the most expensive Mercedes model.
He does not touch the technical components, which he cannot improve, but modifies the finish and creates an extremely lavish model using very luxurious materials, and puts the car on sale at a price twice the original model.
The proprietor-chairman immediately buys the new super deluxe car, and with this enables his top managers to buy the normal version.
And this in turn frees up the choices available to staff immediately below them…
In this example a social constraint has limited economic growth: for some time several people were ready to purchase more opulent cars, but were forced to wait for a rise in the consumption standard of the corporate level immediately above their own.
So, the rise of consumption levels – i.e. of production/income – of a society can be slowed down by the rules of social comparison, namely by the need for the whole social pyramid to move upward in an orderly manner.
1 In fact about ten years before, an original satirist wrote a short book about how to involve the country in a war in order to advantageously lose it: TZABAR, The White Flag Principle, How to Lose a War and Why.
2 OLSON, The Rise and Decline of Nations, p. 87.
3 Ibid., pp. 98, 72. Today in Europe the countries where it is easiest to produce are the ‘younger’ nations of the East, and not only because the cost of labour is lower but also because regulations and ‘understandings’ are still limited.
4 DUBOIS, The Philadelphia Negro: a Social Study, p. 178.
5 Whoever does not respect this ‘necessary’ level suffers discredit or is pitied, and generally does what he can to remedy his situation, often helped by other people. Those w
ho are able to respect the standards set them make less of an effort, unless they are ambitious or want to climb up to a higher level of consumption, in which case they can enjoy what is ‘superfluous’ but may be the subject of the disapproval of moralists.
6 These times of moral disturbance basically correspond to our renaissance phases.
7 DURKHEIM, Le suicide, pp. 275-277.
8 GORDON, Economics for Consumers, p. 73.
4. An alternative hypothesis
We will now examine a different idea to the one proposed thus far: should not the technical time needed to invent and develop new forms of consumption also be significant in the appearance of new forms of consumption?
And should we not also take account of the dependency between them? Because, only after one form of consumption has taken hold can other forms logically subsequent to it be invented.
Take the case of the car:
When the car first appeared it was faced with a perfectly functioning world that did not take cars into account or feel the need for them. In that world boats, trains and animal transport duly performed their task of taking men and goods to their destination according to the needs and habits of that time.
Everything was a function of what transport was available: the inhabitants of that world travelled less, walked more, tried to live close to their work, set aside days or weeks for journeys that now take hours. Their lives were more locally centred.
And they found their way of living natural and satisfactory.
The first cars were a bizarre and impractical addition to a world whose narrow, rough roads were suited to the traffic of people on foot, carriages and stagecoaches. In it the new arrival could only travel short distances, because of the difficulty of finding fuel and the danger that one of its frequent breakdowns might occur far from a place where someone could fix it.
Since that time a whole series of consequential transformations have taken place in the gradual, unpredictable adaptation of Western civilisation to the possibilities created by the car.
So, main roads begin to get wider, stones give way to asphalt and fuel stations and car repair garages spring up on roadsides. As traffic increases, traffic lights start to appear, as well as road signs and other directions for people who have ventured so far from home that they do not know where they are.
In many towns residential districts are separate from industrial areas. Elsewhere the arrival of trucks means that manufacturing activities can be distributed around the country.
New skills emerge while others are transformed: mechanics, tyre specialists, taxi drivers, chauffeurs, car designers, test drivers, stylists, racing drivers, automotive journalists, representatives, travelling salesmen, couriers-hauliers, tour operators, manufacturers of car anti-theft devices, window washers…
During weekend outings or vacations cars begin taking their occupants far from home: motels, restaurants and hotels sprout up to await them. And in formerly inaccessible panoramic spots, the flow of tourists from distant places leads to the explosion of the new leisure time industry: skiing, swimming, excursions, sailing…
Individuals free themselves from their local environment and are able to associate more selectively with people who live far away but share their tastes and interests: time spent at home decreases while more time is dedicated to sporting events and entertainment; cultural associations, clubs, political movements and events all flourish in a way that was not possible before.
This could not have been predicted when, more than a century ago, the car began its career on the roads of the world: a noisy and unreliable replacement for the carriage. The new forms of consumption that appeared because of it have been much more than spare parts and fuel.
Returning to our initial question: how is it possible that the process we have just described was not affected by the fact that only after a certain number of opportunities had materialised, did the way open up for subsequent developments?
It is possible, indeed practically certain, because the idea that the development of the American economy was curtailed by the technical time needed to develop new forms of consumption that fitted in with those already in being, does not agree with the extraordinarily steady annual growth that in fact took place.
Such impressive regularity indicates that the flow of new ideas and inventions, albeit partly random, was superabundant, and that the growth rate was limited to just 1.9% by some less random and more stringent factor.
The above description remains useful, however, to illustrate the difference between the slow enrichment of a society as a whole and the enrichment of an individual within the society, which can be much faster and could correspond, say, to the case of a man who goes from riding a bicycle to owning a car.
Later on, when speaking of the micro-macro fallacy, we will see that confusion between the two types of enrichment is possible and even habitual among economists.
5. Keynes: half under-consumptionist, half orthodox economist
We have seen several factors that can curb growth in standards of living: stress from change, force of habit, social constraints…
As a result, even if production ‘technically’ can rise very rapidly, a society’s ways of life have a kind of inertia that does not stop consumption from increasing, but slows it down.
Keynes, who knew his Malthus, reports this inertia at the beginning of the General Theory, where he says that an increase in employment – which he believes corresponds to the size of production – raises the income of the community but, precisely for the just mentioned inertia, the higher production is not absorbed by an equal rise in consumption.
Here is the crucial and, in the short run, absolutely correct point:
The psychology of the community is such that when aggregate real income is increased aggregate consumption is increased, but not so much as income.1
But the argument he develops from this is flawed because he concludes that part of this production should be directed towards goods that are not consumer goods but investment goods.
But here he has already forgotten Malthus and the scenario of consumption that is systematically unable to keep up with production, and returns to being a faithful disciple of Smith and Ricardo and the idea that all we need to worry about is expanding the production apparatus.
The most logical outcome of an increase in investments is that, when the new resources thus created become operational, production will expand further. And the original problem will reappear, but with a vengeance!
But when inconsistencies populate an authoritative text, they do not disqualify it but create an evocative aura of profundity, inducing the reader to ‘project’2 his thoughts into the ‘apparent difficulty’ before him.
His neoclassical opponents, all fascinated by the myth of insatiable human desires, could not see the difficulty but, thanks to his Malthusian training, Keynes himself noticed it.
And he eased his conscience by submitting this incidental observation to the inattentiveness of readers:
[Investment can increase] only if a higher propensity to consume is expected to develop tomorrow. Each time we secure to-day’s equilibrium by increased investment we are aggravating the difficulty of securing equilibrium to-morrow. A diminished propensity to consume to-day can only be accommodated to the public advantage if an increased propensity to consume is expected to exist some day. We are reminded of [Mandeville’s] The Fable of the Bees — the gay of to-morrow are absolutely indispensable to provide a raison d’être for the grave of to-day.3
This problem, which might easily be unsolvable, was not taken into consideration by anybody. Instead of looking into it, some Keynesian disciples invented a different, artificial concern, useful only as confirmation of their incurable misunderstanding of the crucial dynamics of consumption.
Taking inspiration from the common observation that usually the wealthy save more and, i
n proportion, consume less than the poor, Keynes had extrapolated…
… the richer the community, the wider will tend to be the gap between its actual and its potential production… a poor community will be prone to consume by far the greater part of its output.4
Some Keynesian economists imagined that similar considerations could provide indications on the future of increasingly wealthy modern societies, and worried that a progressive increase in savings might lead to a ‘secular stagnation’, with effects similar to the ones Keynes attributed to it for the Great Depression of the 1930s.
But Keynes’ theory is not conceived for the long term: it deals with rapid increases in production/income when a consumption delay engendered by ways-of-life inertia, logically produces, in the short term, an increase in saving.
In fact, in his General Theory Keynes expressly states he is not talking about long-term progress gradually increasing the income and consumption of society as a whole:
In this book… we will not consider… the slow effects of secular progress.5
To reason about the long term, account must indeed be taken of consumption comparisons among members of a rising social pyramid, as the American economist James Duesenberry rightly highlighted in 1949:
The poor save at lower rates, he argued, because the higher spending of others kindles aspirations they find difficult to meet. This difficulty persists no matter how much national income grows, and hence the failure of national savings rates to rise over time.6
But this approach relies on a certain sociological sensitivity, and in a few years the good Duesenberry’s ideas ended up in the long grass.
1 KEYNES, General Theory, p. 27.
2 On this important psychological device cf. La fabbrica delle illusioni, pp. 86, 171, 223, 251.