Should public policy favor producers at the expense of consumers? A few days ago, I was involved in a short Twitter conversion with Greg Autry that touched on this subject. Professor Autry is the co-author, with Peter Navarro, of Death by China (2011). (A recent article of mine in Regulation says more about this book.)
I had mentioned that tariffs hurt the consumers of the country in which they are imposed. The essence of Autry’s response was:
You also continue the Keynesian religion of consumption worship. The meaning of life is not getting more cheap stuff.
Producers matter at least as much & are screwed out of revenues & value …
An economist will find many problems with such statements.
First, it is not clear what is “the Keynesian religion of consumption worship.” Keynes did not worry about consumption as such, but about aggregate demand. Aggregate demand also includes exports, investment expenditures, and government expenditures. Keynes’s point was that government expenditures have to substitute for consumption expenditures (and investment expenditures) when the latter are not sufficient to purchase all production at the aggregate level. At any rate, Keynes was not as interested in consumption in the way preceding economists (whether classical, neoclassical or Austrian) had been.
Secondly, there are good reasons why economists at least since Adam Smith have generally seen consumption as the goal of economic life. This is how, with few exceptions like the ascetic, individuals see it: they do not consume in order to work, but work in order to consume. That’s a positive observation. Let individuals free, and they will try to work as little as possible for a given level of consumption, or work more only if necessary to maintain or increase their standard of living. As the division of labor and exchange develop, the individual produces what others want. Producers compete to serve consumers; consumers don’t compete in order to please producers. To the extent that he is free, an individual is sovereign in his capacity as a consumer; as a producer, he endeavors to serve consumers (or other producers who serve consumers). We thus obtain the positive notion of “consumer sovereignty,” familiar to economists: consumers govern the allocation of resources.
“Consumer sovereignty” often assumes a second, normative sense when the economist leaves the field of positive science and wanders into normative (moral) issues, which he cannot avoid doing if he gives any policy advice. It is desirable that consumers run the economy because it is the only way to have a prosperous society. Visiting in a shop in a socialist country rapidly teaches the lesson. Please allow me to quote a few lines from my book Who Needs Jobs (Palgrave Macmillan, 2014):
In an interesting book titled In Praise of the Consumer Society and published at a time when a non-socialist French intellectual was considered an oxymoron, philosopher Raymond Ruyer wrote:
“In a market economy, demand is commanding and supply is begging . . . In a planned economy, supply is commanding and demand is begging.”
In a market economy, suppliers beg to sell, while in a socialist economy, customers beg to buy. The real boss in a market economy is the consumer; in a socialist economy, it is the supplier.
This brings me to a third point: Who decides what is “the meaning of life”? Autry’s statement that “The meaning of life is not getting more cheap stuff” is puzzling and, to say the truth, a cliché. It sounds like what socialists have said for a long time—at least if we consider the more authoritarian strands of socialism. Except in the last phase of communism, when scarcity has been vanquished, Marxists might also agree with Mr. Autry. And note that “producers … are screwed out of revenues & value” each time competition obliges them to accept lower prices to attract customers.
Standard normative economics would claim, on the contrary, that the meaning of life is what every individual wants it to be. It may be to consume goods and services, or to enjoy leisure, or to study philosophy, or to worship God or somebody else. But philosophy is difficult without a minimum quantity of goods, as is most leisure and probably also most religious activities.
Of course, producers are humans too. Indeed, in a free society, they have the choice of where and how to exert their productive activities. In this sense, the contribute, from the supply side, to giving things their value. If Renoir had made fewer paintings, they would be worth more.
One might object that most individuals are both consumers and producers. Most consumers are also producers, the exceptions being non-working children as well as adults who live off government transfers or private charity. And all producers are consumers; otherwise, they would not survive. A slave is as much of a non-consuming producer as one can think of, but even he has to consume something. So why consider the consumer part of one’s personality as “sovereign” instead of the producer part?
We have already met the counter-arguments. Positively, an individual tries to work as little as he can, given what he wants to consume; and the part of work he likes may be considered a consumption good. Normatively, to say that consumption comes first means that each individual should be free to give to his life the meaning he wants; in other words, consumer sovereignty affirms the value of individual liberty. To say that an individual is first and foremost a producer ultimately amounts to an argument for slavery: if he is not working to consume, somebody else owns his labor and decides what he does with his life.
The opinion of George Fitzhugh, a 19th–century defender of slavery is worth recalling here—even if he was not exactly a high-level theorist. I am of course not implying that Greg Autry would follow Fitzhugh. But there is a deep and troubling consistency in Fitzhugh’s argument in favor of slavery, against liberty and free exchange. He wrote:
Admit liberty to be a good, and you leave no room to argue that free trade is an evil—because liberty is free trade.
In an unfree society—whether it is corporatist, socialist, crony-capitalist, state capitalist, slave-owner governed, or otherwise collectivist—the producers call the shots and exploit consumers. There are good economic and moral arguments against this kind of regime.
READER COMMENTS
Mike Hammock
Dec 6 2018 at 12:17pm
I think we can dispense with this argument by asking the following: If consumption does not matter, what is the benefit of increased revenue and “value” earned by firms?Why does it matter if this number goes up? That is, who will get this increased revenue, and why is important that they get more of it?
Of course, the reason why this increase in revenue might be beneficial is that someone might earn it as income, and that might allow them to consume more. Income without the ability to purchase goods and services is pointless.
Oleg
Dec 7 2018 at 3:16pm
How about, because when producers compete for the custom of consumers, the outcome is efficient. When producers don’t have to compete because they are protected, the outcome is inefficient. In other words, there is much more “stuff” (a.k.a. “wealth”) around in the former scenario. Only someone who sees virtue in poverty would prefer the latter scenario.
Robert EV
Dec 8 2018 at 10:07pm
Oh it has a psychological point.
https://www.theatlantic.com/family/archive/2018/12/rich-people-happy-money/577231/
The wealth equivalent of hoarders.
Benjamin Cole
Dec 6 2018 at 11:06pm
Pierre Lemieux is a smart guy. But somehow I get the feeling he is not a gimlet-eyed purveyor of free trade, aware of earthly compromises, but rather a proselytizer of free-trade theology.
Let us take Singapore, a city-state that has long prioritized production vs. consumption. Indeed, to enhance production, the government of Singapore built an entire island (Jurong) to house petrochemical and oil refineries, in which it owns 49% stakes. In short, Singapore gave free land, infrastructure and capital to producers, to get them to locate to Singapore, and bring income to Singaporeans.
Dyson recently announced it would build a $2 billion battery-car plant…in Singapore. No one has ever built cars in Singapore before. What are the comparative advantages, the skill-sets that Singapore offers?
Singapore is often lionized for it open-arms reception of businesses, a stance I admire. To be pro-business is to be pro-producer, even within the context of a dirigiste economy.
Singapore has a per capita GDP PPP 50% above that of the US.
So, the Singapore strategy works.
The Communist Party of China exhibits overt contempt for some Western economic principles, such as intellectual property, the price signal, and moral hazard (well, and all civil or human rights). The CPC heavily subsidize exports, to win global markets and gain income. They just about sailed through the Global Financial Crisis of 2008. But they put production first. They have gone 40 years without a recession, and moved more people out of poverty than any nation ever has, in the same time frame. Perhaps they too will obtain higher per capita GDP PP figures than the US. Too soon to tell.
In the end, there is no such thing as free trade or a free lunch. If you wanna consume, you gotta produce.
Some in the US think it is fine and dandy if we offshore all production, and just sell assets or go into debt to pay for imports.
That is free-trade theory.
Pierre Lemieux
Dec 7 2018 at 10:20pm
You’re right that ideology (defined as an unexamined set of normative ideas) is dangerous. But remind me: Who are “we” (in “we offshore all production”)? On trade theory in general, my recent little book, What’s Wrong with Protectionism, provides an introduction. But there is nothing like reading a textbook: I recommend Krugman et al., International Trade: Theory & Policy.
Benjamin Cole
Dec 9 2018 at 12:53am
Pierre Lemieux:
Thanks for your reply.
If I ever get a copy, I will try to wade through Krugman’s book. But rest assured I am fully versed with international trade theories. Perhaps I fall a bit into the Dani Rodrik crowd, but I would have to read more of him to know.
Back in the gas-lamp era, when I was in college, serious “mainstream” economists still worried about the “balance of payments” and academics suggested a depreciating dollar would probably “correct” trade imbalances. In later years, there was a lot of talk of recycling petro-dollars.
To pay more for imported oil was a boon to the US economy! The money spent on oil (to a cartel) was invested back in the US!
That was when the narrative on national discussions regarding international trade still reflected large US-market-oriented corporations, or oil giants.
In the intervening decades the most powerful voices on global trade issues has morphed along with the economy, and now multinationals define the conversation.
Libertarians are a curious bunch. The present cozy alliance between amoral multinationals and the Communist Party of China—-a powerful entity that exhibits overt hostility to intellectual property rights (well, and any other kind of rights), moral hazard and the price signal—-is all but lionized in “libertarian” circles. Even unilateral free trade is a sacralized ideal.
But let is examine the facts. A huge 1.4 billion residents) dirigiste economy plans to become the manufacturing platform for the world, in large part by offering free land and capital to manufacturers, but also stolen IP and repressed labor.
To engage in mild hyperbole, US libertarians say this arrangement is great, as the exalted consumer will get better deals.
Of course, the “free traders” also say it is axiomatic that even $800 billion a year current-account trade deficits come back to the US as capital inflows. Axiomatic! That is, US residents sell land, equities, or bonds to finance the artificial trade deficit (“artificial,” as the Communist Party of China operates an artificial economy).
The IMF says this leads to asset bubbles in the US (artificial asset bubbles, btw) which threaten to pop. Oh, maybe like 2008. (Who is blowing asset bubbles–huge capital inflows, or the Fed?).
Free-trade theories wear thin when the real world is defined by a gigantic dirigiste economies seeking to become global manufacturing bases, amid many other structural impediments (including property zoning in the US, which creates artificial scarcities, and a house-of-cards banking system heavily exposed to real estate).
I think unadorned free trade theories are a worthy topic—but they need a lot of seasoning in terms of applicability in the real world.
It is like libertarians who call for completely open US borders for immigrants. But the US can’t build much housing (due to property zoning) or infrastructure (due to property rights and democracy and corruption). Scott Sumner says the US should not even try to build infrastructure.
So—where to put all the immigrants? In more-crowded and aging housing alongside a more-crowded and crumbling infrastructure? As a practical matter, not as a divine ideology, would open borders work?
In free trade theory, they do!
Pierre Lemieux
Dec 11 2018 at 2:26pm
I respond to many of your arguments in my What’s Wrong with Protectionism? Answering Common Objections to Free Trade (Rowman and Littlefield, 2018), and some more in my current Regulation piece about Peter Navarro’s “arguments.” You might have to modify your description of the arguments for free trade.
WalterB
Dec 10 2018 at 9:17am
When I consider government-sponsored industry, one familiar phrase comes to mind: What could possibly go wrong?
Pierre Lemieux
Dec 11 2018 at 2:27pm
Indeed.
Wayne Xie
Dec 7 2018 at 7:57am
after I read this article, this paragraph makes attraction to me that ” Keynes did not worry about consumption as such, but about aggregate demand. Aggregate demand also includes exports, investment expenditures, and government expenditures. Keynes’s point was that government expenditures have to substitute for consumption expenditures (and investment expenditures) when the latter are not sufficient to purchase all production at the aggregate level.” it makes me associate to the current of China’s population dividend. By the sentence “government expenditures have to substitute for consumption expenditures (and investment expenditures) when the latter is not sufficient to purchase all production at the aggregate level” sentence says the government has to fill out the demand when it lack. And because China has 14 billion of people they need a huge number supply to meet their population demand, during this process government and the country has faster development than before, but once the supply met or surplus the GDP will increase slower or even fall. This will be China’s future problem. Japan is the example. In the last century, Japan is the most wealthy Asian country also developed well, but the market saturation is inevitable, Japan has the bad geographical advantage and less critical strength and that makes Japan fade out.
Robert EV
Dec 8 2018 at 10:06pm
And like most bosses, they only evaluate your work periodically (specifically when it’s time to buy or sell again).
As you say, it is necessary to consume in order to survive, so one’s freedom as a consumer is necessarily limited (unless one is wealthy enough that everything they consume can be bespoke). But I guess a bosses freedom to direct and control their subordinate is also constrained, so this analogy might be appropriate.
It’s possible to not consume the product of other people, which from the market’s perspective could make a person a producer without being a consumer.
Pierre Lemieux
Dec 11 2018 at 2:30pm
Yes, Crusoe (before Friday arrives) is a producer of all he consumes. He is both (the only) producer and consumer.
Hazel Meade
Dec 10 2018 at 1:47pm
Perhaps what Autry is trying to argue, whether he realizes it or not, is that producers should get to consume more. Or certain kinds of producers (i.e. manufacturing workers). Or that we should delay present consumption in the interests of future consumption – that production should be used to invest in capital goods so that future production can be increased, which will lead eventually to future consumption. I think the last one is somewhat respectable, though if that is the goal, it should be directed by the private sector – governments are terrible at directing capital. If we want to delay present consumption in favor of future consumption then the policy should be to reduce taxes on investment and increase taxes on consumption. The tariff policy seems to be obliquely aimed at increasing investment in domestic production capacity, particularly of manufactured goods. But the mistake is in thinking that it’s a good idea for the state to make that decision to pick manufacturing (of steel or automobiles) as the sector that needs investment, instead of letting the private sector decide where to direct capital.
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