All Financial Wisdom

Capitalism and Consumerism: An Inverse Relationship

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Many people understand that the capitalist system is based on models of purely consumerist societies, in which the priority for its economic agents is none other than to consume.

If we use the term consumer societies, we tend to think about the US and/or Western society for the most part. And for good reason. Just look at the annual calendar, which is linked to the massive acquisition of consumer goods, with Christmas being the most important in terms of sales.

However, we tend to look at consumerism in absolute terms, when the logical thing would be to assess it in relative terms, that is, as a percentage of income.

Consumer societies and the capitalist process

If we think of the consumption factor, as a high percentage of income, consumer societies are those that are truly poor because practically all their income is used solely for the acquisition of low quality consumer goods that do not fully meet their needs.

To be more precise, the consumption of poor societies tends to focus, in the first instance, on so-called inferior goods, that is, those that consumers acquire to a lesser extent, while income increases because there are better consumption alternatives.

The process to get out of poverty is none other than saving, which means partially reducing the amount of immediate consumption (becoming less consumerist), a sacrifice in the short term with a final goal, the production of capital goods that allow for more efficiency in your productive tasks.

Imagine an assumption of radical poverty, that someone would eat only potatoes, and that their production was equal to consumption, that is, consumption represents 100% of their income. Then, he decides that to get out of that spiral of poverty he should, first of all, be more efficient in producing potatoes by making a hoe.

The first thing he does is sacrifice himself and reduce his consumption of potatoes, generating a sufficient stock that allows him to produce that tool for a certain time without spending his time on the production of potatoes.

Focusing his time on the production of a hoe (and consuming the potatoes saved for his subsistence) achieves that goal. Now his situation has changed slightly… With the same amount of time, he can produce a greater quantity of potatoes. With this time saving, and increase in productivity, one could use it to improve your home, thus generating a capitalist dynamic that will bring you an improvement in your welfare levels.

Capitalism in the United States

The previous theoretical example can be translated with the data provided by Human Progress. The United States, in 1929, devoted, as a percentage of income, 20.29% of total income for food expenditure.

By contrast, if we look at today, the percentage of income for spending on food is 5.48% for the average American, a difference close to 15 percentage points.

During all these years, the United States has carried out a savings process that has financed the production of capital goods that has led it to establish a large increase in its productivity levels. In the case of food, we have seen a process of agricultural revolution with specialized machinery, fertilizers, pesticides and other methods that has resulted in greater efficiency in cultivation and harvest.

With this, between 1961 and 2014, world cereal production increased by 280%. If we compare this increase with that of the total population 136% during the same period, we see that world cereal production has grown at a much faster rate than the population. Cereal production per person has increased despite population growth.

Global consequences of the accumulation of capital goods

In the period between 1960 and 2015, the world population increased by 142%, from 3 billion to 7.3 billion people. At the same time, the average per capita income adjusted for inflation increased by 177%, from $3,680 dollars to $10,194 dollars.

It was supposed that this should not have happened, according to the Malthusian Theory, the growth of the population should be an omen of poverty and famine. However, human beings, unlike other animals, innovate to get out of scarcity by increasing the supply of natural resources.

Humanity produced more economic production in the last two centuries than in all previous centuries combined. And this explosion of wealth-creation led to a massive decrease in the poverty rate.

In 1820, more than 90% of the world’s population lived on less than $2 a day and more than 80% lived on less than $1 a day (adjusted for inflation and differences in purchasing power). For 2015, less than 10% of people lived on less than $1.90 per day, the current official definition of the World Bank of extreme poverty.

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