Sympathy for the Middleman
Despite mounting debt, it's imperative that we continue to laugh at calls for austerity and conservation, and celebrate those noble marketers that keep us consuming -- whoops, I mean innovating.
Employees at Northwest Airlines were understandably unhappy when, after a round of pay cuts and layoffs, management distributed a booklet containing a list of "101 Ways to Save Money" including such helpful tips as "Buy no-frills vitamins", "Grow your own vegetables and herbs", and "Don't be shy about pulling something you like out of the trash". Needless to say, the newly unemployed are not especially interested in lessons drawn straight from the voluntary-simplicity movement, particularly when dispensed by their former employer. Still, the widely reported outrage and ridicule over this incident seems disproportionate, as if the very idea of trying to save money was risible. The Association of Flight Attendants-CWA declared that its members' "intelligence" and "dignity" had been insulted, (from Bloomburg News) which implicitly suggests thrift is synonymous with stupidity and conservation itself is somehow shameful. A respectable place in American society, of course, depends upon never having to "use public transportation" or "cut your cable television down to basic."
That we would associate frugality with indignity suggests that Americans (as historian Lizbeth Cohen argues in A Consumers' Republic: The Politics of Mass Consumption in Postwar America, Vintage, 2003), regard their ability to spend as a measure of their liberty in a free society. We are ultimately only as powerful as our wallets make us, since freedom, no longer considered a matter of the equal opportunity to do things, has become the ability to choose among the panoply of consumer goods our economy beneficently supplies. (Doing and shopping have become more or less equivalent, and experience in general no longer seems like something we make for ourselves but is instead regarded as an object for sale, whether in the form of a pre-packaged vacation or a meal at a theme restaurant.) Hence, it's no accident that the long-declining personal savings rate in America has been negative for nearly two years, that as a society we consume more than we earn. The ever-widening current-accounts deficit mimics the dismal savings rate only on a national scale, charting the massive amount America must borrow from other countries to sustain its current levels of consumption.
That may seem a cause for concern, especially as the housing bubble is showing signs of having popped -- housing starts are down, the supply of unsold houses is growing, and the measures of the sentiment among builders are plummeting. One theory about how Americans have managed to save less than nothing in the past few years was that the deficit was made up for by rising home values -- people saw the rapidly appreciating value of their homes as their retirement savings. Many homeowners decided to take advantage of historically low interest rates to borrow against that newfound home equity, which allowed them to keep consuming despite stagnant income levels and rising energy costs. But now the doom-saying about housing seems to be taking its toll on consumer confidence, which reached an unexpected low in August. ("Consumer Confidence Tumbles", Wall Street Journal Online, 29 August 2006) Most telling is people's low expectations for the future: consumer attitudes are even more sour when asked to consider what they anticipate down the road. Combine that fear of the future with stabilizing (if not falling) house prices and higher interest rates it would seem that the shopping spree would have to be coming to an end, and perhaps austerity measures like those Northwest Airlines' management so insensitively suggested will have to become more widely adopted.
With a negative national savings rate starving the nation of investment capital, or at least increasing the economy's dependence on foreign investment, you would think it would make sense to take steps to reverse it. But as rational and necessary as it may seem that we eventually revert to a commonsense, pay-as-you-go approach, the consequences could be disastrous. Not only would it mean fewer flat-panel HD televisions for free-spending debtors, but it could very well unravel the basis of our recent economic growth. According to Dean Baker of the Center for Economic and Policy Research, "We've backed ourselves into a very dangerous situation. The economy is dependent on everyone consuming like crazy. If everyone heard my diatribe and said, 'Yeah, we better start saving,' the economy would go into a recession." ("The Zero-Savings Problem", 3 August 2005, CNN.com)
Not that lower- or middle-class people would notice -- their slice of the prosperity pie has already been shrinking. (The Census Bureau's recent report on income, released on 29 August, reveals a widening gap between rich and poor, with median earnings rising for the top 20 percent in income, and falling for everyone else ("Median Household Income Rises 1.1%", Wall Street Journal, 30 August 2006). But it could jeopardize what investment bank UBS has called "the golden age of profitability" for businesses. ("Real Wages Fail to Match a Rise in Productivity", New York Times, 28 August 2006) Then, ironically, those valiant, prudent few who had been salting money away into 401Ks would have to watch their balances painfully dwindle as stocks go in the tank.
Hence, it's helpful to have fresh rationalizations of unbridled consumption, such as the ideas offered by economist Amar Bhidé, a proponent of "venturesome consumption". Usually, the word venture is reserved for the production side of the economy, for entrepreneurs attempting unproven enterprises or for the institutions that put up the capital to support them. But Bhidé, following MIT economist Eric Von Hippel, argues that consumers "often play a venturesome or 'entrepreneurial' role in leading or participating in the development efforts, bearing 'unmeasurable and unquantifiable' risks and in resourceful problem solving . The willingness and ability of users to undertake a venturesome part plays a critical role in determining the ultimate value of innovations". ("Venturesome Consumption, Innovation, and Globalization", presented at Joint Conference of CESifo and the Center on Capitalism and Society, Venice, 21-22 July, 2006,) From this point of view, consumers are not only beta testers who collaborate on the production of new goods, providing valuable input that shapes a product's development, but often they are guinea pigs, risking time and money on newly created wants, the utility of which are wholly hypothetical -- as Bhidé suggests, "people don't have a clue about the value of things they have not experienced before" and its precisely these new experiences that he sees as driving growth.
Following Joseph Schumpeter, Bhidé believes that "economies cannot sustain increases in productivity and living standards simply through increasing efficiencies in the satisfaction of existing wants." Instead, new wants must be developed and exploited through what Bhidé calls "non-destructive creation", an inversion of creative destruction, Schumpeter's famous term for capitalism's modus operandi. Schumpeter pointed out that innovation inevitably has a destructive component; new inventions create a new complement of economic winners and losers -- the automobile puts blacksmiths and horse traders out of business. But Bhidé insists that innovation can be a win-win situation, creating new markets that don't cannibalize existing ones.
Venturesome consumption -- the consumer's willingness to try new things that may very well be useless -- is all-important for sustaining non-destructive creation. Such consumption rewards unproven innovation, making global research into technological developments and enhancements ultimately profitable. After all, if we are all shopping at thrift stores and out of garbage cans, the incentive for companies to manufacture cheaper, faster computer chips may well be muted. Also it defrays the loss of innovators -- the scientific and engineering talent is being developed more extensively outside of the United States. Because, Bhidé argues, the benefits of innovation accrue to the users (not the inventors), as long Americans consume innovative technology, they will reap the greatest benefits from it. ("Economics focus" column, The Economist, 29 July 2006).
In fact, Bhidé's theory implies that engineers and scientists aren't all that important to a nation's wealth; far more important in his opinion are the very members of society who sometimes can seem its most parasitical -- the marketers, middlemen, project managers, industrial designers, salesmen, advertisers, franchisers and hucksters who keep Americans collectively consuming. They aren't leeches sustaining themselves on the genius of others, they are "downstream innovators" who do the real work of making ideas profitable. More important than developing new ideas is the ability to package, market and sell them in the form of desirable products. (Edison, for example, is not a genius for inventing the lightbulb -- which he didn't -- but for devising a way to make it commercially viable.) Without a strata of motivated promoters and distributors, new goods may never be adopted, and all their benefits and ensuing competitive advantages never properly enjoyed.
Endogenous-growth guru Paul Romer, an economist at Stanford University, concurs, pointing out in an interview that it is important to take "freely floating, contentiously discussed ideas from the realm of science and then get them out into the market process, because the reality is that there are virtually no ideas which generate benefits for consumers if there's not an intervening for-profit firm which commercializes them, tailors them to the market, and then delivers them. You can point to examples where things jump right from science to benefits for the consumer, but that's the exception, not the rule." ("Post-Scarcity Prophet", Reason Online, December 2001) From Romer's point of view, only the promise of profit could inspire the middlemen, who then must use other means to convince the public at large about the necessity of innovation. Commercialization, then, is not the process of taking an existing known benefit and exploiting it; rather it's how innovation becomes beneficial to consumers in the first place. As in The Social Contract, where Rousseau described the necessity of forcing people to be free, downstream innovators will force consumers (and employees, when we're talking about middle managers making institutional purchases) to change their habits, for their own good.
That's where another species of middleman, service journalists and business writers do their part as well, not merely by promoting new consumer goods in lifestyle magazines, but by popularizing the belief that all new goods inherently constitute some kind of progress, that anything novel is automatically beneficial. As Bhidé explains, "The common beliefs that now undergird the demand for new products and services have distinctively modern features. The widespread belief in the inevitability and desirability of technological progress is an important case in point. In earlier times, a relatively small number of visionary inventors and scientists held such views. Now many popular magazines, TV shows and management books are predicated on the assumption of scientific and technological progress. Their growing acceptance has turned such beliefs into self-fulfilling prophecies." Thus we are sold on a myth of innovation as desirable, for our own good, and nothing but the power of our belief sustains the illusion. Wal-Mart is better than Main Street, fast food is better than made-to-order meals, MP3s are better than LPs, as long as we believe. Innovations that create profit opportunities for entrepreneurs and investors are triumphantly repackaged as hallmarks of the glorious and irresistible march of progress, bringing an endless stream of benefits to us all.
So salesman and popular ideologists work in tandem to promote the teleological notion that everything new is "improved", is in some way necessary and beneficial. Were it not for the aggressive salesmanship spurred by a highly competitive marketplace, order-following wage workers would continue on with the same processes and equipment, and the general public, presumably conservative and incurious by nature, would be content to make do with whatever already existed. But salesmen, even if they can't immediately convince the average person, are able to reach those exceptions to the rule about consumer reluctance, the early adopters of gadgetry, who are not, from this perspective, suckers who pay too much for the dodgiest equipment, but laudable consumer adventurers who subsidize the benefits of innovation we all shall enjoy in their wake. Their vanity in needing to be the first to own something is not a character flaw, but a socially necessary trait, as Bhidé explains: "Early purchasers of goods like flat panel TVs apparently enter into a tacit bargain with other consumers: They incur the higher risks and costs which then drives down prices and improves the quality for the consumers who 'wait'; in return, those who wait, give the early purchasers the gratification of being first." These avant-garde consumers rise to the level of downstream innovator, adding their word-of-mouth power to the putsch for "progress".
But what if these innovations, while enhancing productivity and spurring economic growth, aren't adding benefits to consumers' lives at a personal level? As economist Richard Layard explains, individual happiness often fails to rise along with economic growth because we rapidly adapt to new standards. "Living standards are to some extent like alcohol or drugs. Once you have a certain new experience, you need to keep on having more of it if you want to sustain your happiness. You are in fact on a kind of treadmill, a hedonic treadmill, where you have to keep running in order that your happiness stand still". Thus, the kind of satisfaction we derive from goods is different from that we get from stabler sources: a fulfilling job, time spent with one's friends and family (Happiness: Lessons from a New Science, Penguin Press, 2005).
So as innovation introduces all manner of new wants and begets accelerated growth, it does so at the expense of consumers, who find the fashion cycles governing their desires accelerated as well, but yielding no pleasure, only imminent exhaustion. Downstream innovators do their best to maintain the veil over our eyes regarding adaptation and habituation, keeping our focus on earning and spending rather than living.
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For more Rob Horning, visit the Marginal Utility blog.