Consumption as an Investment

Cosimo Perrotta

• Publisher: Routledge
• Year: 2004
• Topic: Business
• eBook ISBN:
  9781134402250
• Subtopic: Business General
• Index: Business

Perrotta explores and charts the changing place of consumption as a source of investment in production and growth within economic writings from ancient history to the present. This ambitious project is carried out with great skill, vigour and originality and will help to bring consumption studies into the mainstream of economic thought.

1 Introduction: The legacy of the past

Increase in consumption as a means of raising productivity

Enlightenment authors discovered that there are two basic ways of increasing social wealth. One is by keeping the production costs low through a low level of producers’ consumption. The other is based on the opposite approach: improving the quality of the production process thanks to increasing consumption by the producers. The first way produces high profits but keeps society poor and social relationships harsh and backward. The second way increases consumption, thus skill and education, then the productivity of all society. This is why Enlightenment authors established a positive connection between economic development, general welfare and civilization.

This approach is by no means obvious in the history of economic thought. It disappeared quite soon, and has never been revived by a common agreement of economic theories. The contrary attitude, which we can call the ‘fear of goods’ (according to Heckscher’s expression) not only prevailed in pre-modern times, but then reappeared time and again, up to the present day. This first book of two planned volumes examines the problem prior to the classical economics. It examines how and why all the attempts to overcome the ‘fear of goods’, from Hesiod up to the beginning of the eighteenth century, were defeated, and how this hindered the development of economy and of civilization. It concludes by examining the new Enlightenment approach.

We will consider the ancients’ contempt for wealth-getting and for labour; the Christian defiance towards riches, and the model of radical poverty, which rose as a reaction to the first constant increase in wealth; the humanist overlooking of economic development; the revival of the landlord’s hegemony, ruinous for development, in Spain; the mercantilist big push towards development and the slow, difficult raising of consciousness that development must be based on higher consumption.

The form in which we approached the above problem is the connection that the thought of the past established between an increase in human consumption and an increase in productivity. The present work tries to answer this question. Today, to say that an increase in human consumption increases productivity seems obvious. Often it is on this assumption that applied economists and policy makers work. On the other hand, it is hard to find a full theorization of this principle in the main streams of economic thought.

We suspect that this lack of theorization has contributed to the present difficulties of economic theory on a series of important problems such as the crisis of the Welfare State, unemployment and underdevelopment. Let’s mention just one example concerning the first of these problems. In the policies implementing the Welfare State, the increase in demand financed through public expenditure was not able to stimulate the increase in productivity above a certain level (as Keynes himself had foreseen). Actually the Welfare State was not based on a balanced growth both of social consumption and of social productivity. It was mainly based on the traditional separation between production (in which the State supports or supplies private enterprises) and distribution, regulated by social demand.

Our first question is: does this flaw in the present theory derive from some limits of the economic thought of the past? We think so. The secular development of capitalism, and indeed the general process of civilization, is based on the reciprocal causation of an increase in productivity and an increase in consumption. However, only some of the greatest authors paid attention to this relationship. It was described by Petty, Cantillon, and by many Enlightenment thinkers, Adam Smith included. Marx only reflected on it in a draft manuscript (Grundrisse). Marshall referred to it explicitly. Then in the twentieth century the theorists of human capital (Theodore Schultz in particular) and a few others – like Pasinetti and some neo-institutionalists – analysed the problem.

But it is only the Enlightenment thinkers – and perhaps Marshall too – that can be said to have assumed this relationship as the basis of a theory of economic development. Elsewhere, before the 1960s, it never became central to economic analyses. Even in the last few decades its acknowledgement has often just been lip-service to the increase of non-material production, with scarce effects on the theories’ framework. We can in this sense call that relationship the missing idea in the history of thought.¹

To be sure, all economic theories contain detailed examinations of consumption and of the consumption/production connection. But there are several ways of linking these two elements. The first way concerns the consumption of the production factors during the production process. This is what the classical school called productive consumption, which refers to raw materials, means of production and the wage-goods for the workers (called human capital). This aspect has been investigated by the analyses of production costs.

The second way concerns distribution. It sees consumption as the necessary outlet of production, thus as its prerequisite. In this sense the real connection is between production and the demand for goods. This aspect too – usually understood as demand analysis or the underconsumption problem – has been widely investigated, from Malthus and J. B. Say to Keynes.

Then there is a third way of connecting consumption and production, which is our subject: the positive relationship between an increase in consumption and an increase in productivity. In general, this feature has been confused either with the production cost problems (for instance, in the neo-classical analyses of efficiency wages) or with the demand problem (for example, in the Keynesian approach). Yet, although this third relationship has something in common with the other two, it constitutes an analytically independent problem.

Human capital and productive labour

In the production cost analyses human capital is considered as simply a part of the whole capital. Such a concept does not create any problem for economic theory, since economists consider the workers’ productive consumption as constant, at the different levels (independently from the wage level), with no influence on the productivity of the production process. That was, we can say, a static concept.

On the contrary, in our issue the concept of human capital refers to a dynamic view in which part of the investment is employed to increase the producer’s consumption in order to increase his skill, then his productivity.

The first meaning derives from the experience of industrial production. Here, for the vast majority of the workers, productivity increased mainly thanks to the increase in the speed of labour. For them, labour had become more and more elementary and repetitive, devoid of intellectual energy. The simpler labour became, the simpler became the consumption required by the labourer in order to perform his job. Thus, independently from other social causes which tended to increase wages, the wages strictly required for elementary work tended to lower.

But, when the increase in the speed and intensity of labour was no longer sustainable, another tendency – which was already present – became dominant: the gradual increase in the intellectual component of labour, even of the low level labour. This in turn led gradually to the prevalence of non-material production. In the second half of the twentieth century this process has led to an impressive revolution: the so-called post-industrial economy. The increase in productivity is now entrusted mainly to the increasing skill of producers. Consumption by producers takes the opposite direction from before: it needs to be constantly on the rise. It is made up of better and better food, clothes and housing, health, comforts, education, holidays and culture. The increase in producers’ consumption thus became – at least in part – an investment. That was when the concept of human capital acquired its present dynamic meaning.

Of course in the present economy, where non-material production prevails, the division of labour has not ceased. On the contrary, labour also becomes more and more elementary in non-material labour processes. However, an increasing number of labourers now perform jobs in which high skill, critical control, planning, or responsible decision-making are required. This in turn requires knowledge, information and continuous updating of one’s own intellectual equipment.

But the problem of a growing productive consumption does not apply only to our time. Past capitalism was not confined to industrial elementary labour. Technical progress in the past also created a growing amount of intellectual work, divergent from the most elementary applications. There were inventions, applications of inventions, upkeep of machines, the necessity to check and repair them. But there was also a continuous growth in the organization of labour, administration, marketing, etc., which required more and more skill. All these were skilled jobs, the number and the quality of which grew as the division of labour went on.

Thus higher labour also grew. This is the birth of what economists, in as early as the eighteenth century, called the middle classes. These classes were made up not only of traditional professions, like lawyers, doctors, bureaucrats, etc., but increasingly included new, mainly technical, professions.

Even more important is the fact that the tendency to make labour more elementary had not been prevalent until the industrial revolution. For seven centuries before that, the increase in productivity was based above all on the increase in skill of the artisans and of the merchants. This tendency also required, for a large section of the workers, a relatively high level of consumption in order to improve their productivity.

Past economic theories therefore seem to have failed to notice the ‘long run’ aspect of the accumulation process, i.e. the need to increase consumption in order to increase productivity. Thus our second question is: why has this negligence occurred? We can try to detect some main causes. First there has been the strong influence of ancient culture on early modern thought. That culture condemned the values of a merchant and entrepreneurial economy, particularly the idea of getting rich. It wanted to keep an immobile economy, which excluded growth.

However, old ideas cannot keep their hegemony in a new context for a long time, unless they are convenient for some key social interest. This is precisely what happened in the modern age. The privileged classes of the period first opposed development, then accepted it as an increase of production, but not as an increase of consumption for the majority of people. They were afraid to lose control of the low classes and of the workers. It was the same interest that in antiquity had pushed the dominant class of the time, the landowners, to refute any idea of development in trade.

During the Enlightenment this attitude changed, and the idea of development was now based on an increase in productivity via an increase in consumption. This approach first appeared as the question of productive and unproductive labour. For more than a century before Smith’s time, discussions about which types of work were wealth-producing and which were not went on in parallel with discussions about whether the increase in consumption was a positive or a negative phenomenon. In fact the two debates referred to the same problem: who consumed productively (that is, who were the producers of wealth) and who consumed unproductively (that is, who consumed part of the wealth without contributing to the production of it).

The distinction between productive and unproductive labour was momentous because, on the basis of it, the efficiency of the social organization for the production of wealth was judged to be efficient, and to what degree. However, when economic thought abandoned the generic idea of social wealth and adopted the concept of income, and especially of profit, as a measure of wealth itself, that distinction became analytically weaker and weaker. But nothing was put forward to replace it.

As a matter of fact, after the French revolution, and with the birth of industrial production, the new dominant classes again found it convenient to abandon the idea of development fostered by the workers’ consumption, and build up models in which the increase in productivity relied only on the growing mechanization of production.

On this basis, our research will try to explain the contradictory attitudes of the economic thought of the past towards development. After a survey of the pre-modern attitude to wealth, poverty and wealth-getting, we will examine some episodes, particularly meaningful for our subject, of modern economic thought.

Hunger for goods, fear of goods

The central point of our research refers to the time in which modern economics started. In the last centuries of the Middle Ages, in some European cities, wealth began to grow constantly from year to year. It was an event absolutely new in human history. It is therefore understandable that the consequent increase in consumption caused a veritable trauma in economic and social culture. It changed lifestyles and behavioural models; brought the social hierarchy and the scale of values into question; caused uncertainty, anguish and conflict. These destabilizing effects went on for centuries.

An illustrious historian of economic thought, Eli Heckscher, coined the expressions ‘hunger for goods’ and ‘fear of goods’ to describe the contradictory behaviour of the mercantilists in the centuries that followed.² As we shall see, the mercantilists’ contradiction was not great, compared with other times.

However, Heckscher’s apposite terms can be used to describe the contrasts and contradictions over the increase in commodities – and thus over the increase in consumption – that have run through all economic thought. The sixteenth and seventeenth centuries saw the definitive take-off of the new economy. Then, it seemed that the ‘hunger for goods’ – that is, the desire to get rich, for individuals and nations – would prevail and dictate the new social values. In actual fact, the distrust of the increase in consumption (that is, the ‘fear of goods’) had not been overcome. Indeed, the more wealth grew, the more bitter the conflict between advocates and opponents of the new consumption became. This conflict of values has had a profound influence on economic theory. It has ended up having a paralysing effect on theories of consumption; through the latter, it has created difficulties and contradictions in the theories of accumulation, capital, investment, and labour.

Finally, Enlightenment thinkers understood that a growing production of wealth was not only desirable but was also necessary to make the economy work. This awareness grew out of the experience of the constant increase in the goods that were available to society, as the famous statements by Locke and by Smith made clear.³ Thus Enlightenment thinkers grasped the essential connection between the increase in production and the increase in consumption, and were in favour of greater consumption by the productive classes, including wage-earners. They saw this increase as a basic factor for accumulation. In sum they saw consumption by the productive classes as an investment.

However, at the beginning of the nineteenth century, with the classical school, the ‘fear of goods’ once more gained the upper hand. The increase in wage-earners’ consumption lost its positive role in the process of accumulation. It was in fact considered damaging because it took resources away from investment. In the classical school, development was paradoxically based on the constant increase in production without a parallel increase in consumption.

Therefore in the three centuries from Starkey to Ricardo, there was a conflict of values on how to judge the increase in consumption. Eventually such a conflict led economic analyses to a dead-end.

The new goods

Hostility towards an increase in consumption has been expressed in different ways in different periods. But there is one point which is common to all periods: the distinction between consumption that satisfies necessary needs (defined as ‘natural’), and consumption that satisfies artificial needs (thought as harmful and in general called luxury consumption).

In the modern age hostility towards the new consumer goods was expressed as a criticism of ‘luxury’. The word ‘luxury’ could refer either to real luxury or to comfort. Consumer goods, in their turn, can be ‘new’ in two senses. Either they are new for everybody, or they are new only for the lower classes, who acquire the habit of consuming goods that were previously reserved for the higher classes. However, in the modern age the consumer goods that were new for everybody, such as goods imported from the New World, or goods created by technical progress, were criticized only when they were consumed by the middle to lower classes.

The authors hostile to increased consumption quite often conceal (or reveal) a social motive: they are opposed to the rise of the lower classes and fear that their subordination may come to an end. They appear to be concerned about the destiny of the world, but are often concerned merely about the loss of their own privileges. This explains why they so easily make a serious mistake in perspective. In fact in a dynamic economy almost all the new ‘luxury’ consumer goods of one phase are the ordinary consumer goods of the following phase. These goods gradually shift from being exclusively consumed by the richer classes to being widely consumed by the lower classes (the point on the social scale where the consumption of them stops depends on the type of commodities and on how developed the economy is).

Therefore criticism of the new consumption is quite divorced from any idea of development over time. These critics always refer only to the new consumption of that moment, which they consider unnecessary and unnatural. But they ignore the fact that the traditional commodities, which they themselves are used to consuming and which they find necessary, were in turn considered new, that is ‘unnecessary’ and ‘unnatural’, in the past.

This approach creates a curious paradox. On the one hand, it follows that even cooked meat or shoes are to be considered examples of unnatural consumption, since they were only introduced at a certain point in human evolution. On the other hand, jewellery and cosmetics – detested in all ages by the critics of ‘artificial needs’ – should be considered examples of natural consumption, satisfying essential needs. They are in fact among the most ancient findings related to human evolution.⁴ Indeed, luxury goods signal the birth of human culture no less than tools.

The theoretical naïvety of modern critics of increased consumption was undoubtedly encouraged by the early models, from which they took the distinction between natural and non-natural needs. There is, however, one basic difference. The ancient authors were reasoning in the context of a static economy, where new consumer goods did not regularly appear. Thus, when they criticized the increase in wealth and the attempt to get rich, they were actually referring to luxury, not to new consumer goods. These authors were at one with their economic system; indeed, they refused to come out of it. On the contrary, modern critics of increased consumption are, consciously or not, at odds with the economic system of their time. In this system the constant increase in wealth is expressed partly as an increase in scarce traditional products, but also as a differentiation of consumer goods. In other words, new products are created to satisfy new needs.

It is this difference that makes the attitude of the modern authors towards increased consumption so complex and dramatic. They used the ancient models, which however did not adapt to the new economy. The deeply rooted, thousand year old opposition to the pursuit of wealth and to the abundance of commodities was like a dead weight in the take-off of the new economy, and hindered the formation of new values.

The birth of agriculture: a new use of the surplus, new values

In pre-modern thought, hostility to increased consumption is nearly always linked to or confused with the condemnation of the desire to get rich. These two aspirations, which nowadays appear natural, seem to have aroused hostility right from the early times.

In the earliest texts there is considerable nostalgia for the solidarity of the frugal agricultural society, content with its poverty. This mythical model is contrasted with the society of the time, in which trade had introduced a love of easy riches and, along with it, selfishness and a disdain for moral values. Roll reminds us that the biblical prophets expressed this nostalgia because they were witnessing the decline of the tribal economy and the rise of priva...

Table of contents

• Cover Page
• Routledge studies in the history of economics
• Title Page
• Copyright Page
• Preface
• Acknowledgements
• 1 Introduction: The legacy of the past
• 2 The Ancients and inner wealth
• 3 Patristics: End of the contempt for wealth and labour
• 4 Medieval dualism: Poverty as an ideal; wealth as a practical goal
• 5 Italian humanism ignores economic development
• 6 From alms to human capital: The poor in sixteenth-century Spain and England
• 7 Spain’s unproductive consumption
• 8 Expanding production: A (fearful) hunger for goods
• 9 Productive and unproductive labour
• 10 Foreign trade: Fostering productive consumption/productive labour
• 11 The Enlightenment theory of development: Consumption as an investment
• Notes
• References