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Competition among consumers?

By Sofia Ferrer
web posted September 20, 2021
 
 Self-interest—it’s what makes the world go around, according to most economists. We witness this principle in every aspect of society and the economy; businesses “selfishly” seek to maximize their profits, so they produce the highest quality products at competitive prices. These unsuspecting enterprises have been in fact led by the “invisible hand” towards the promotion of the common good as consumers can now enjoy the benefits of quality goods and relatively low prices. What we see here is not only self-interest, but also competition. Perhaps competition, then, with “self-interest” at its core, is one of the main driving forces in economics, placing victory-thirsty players on the battlefield while they unintentionally produce benefits for society as a whole as they maximize their own productivity and success. Competition among enterprises is not an especially novel idea, but we may not have considered competition among consumers. The question is whether competition among consumers contributes to similar population-wide benefits. Paul Krugman, in his article titled “Money can’t buy happiness. Er, can it?”, answers “yes.”

Imagine this: people of all kinds rushing to purchase the most novel, luxurious products at a time when they were relatively new—cell phones, fancy TV sets, the latest car models, everything. This illustrates the spending mania during the economic expansion of the late 1990s. Krugman describes that usually consumers spend less during times of economic expansion since they reason that they might as well save for the future possibility of economic hardship, but strangely, the boom of the late 1990s was met with the unexpected response of the spending frenzy. As Krugman explains, “while the economy expanded an impressive 4 percent between the first quarter of 1998 and the first quarter of 1999, consumption grew 5.5 percent, and spending on consumer durables—cell phones, bathroom fixtures, S.U.V.'s and home entertainment systems—surged an incredible 12 percent.”

So what was causing this unexpected twist of high levels of consumer spending? As Krugman notes, the stock market’s success could not have accounted for it as most people had “no significant personal stake in the stock market.” Moreover, now more than ever, Americans had no savings, indicated nervousness about job security, and expressed reluctance to demand wage increases.” It was not even necessarily that consumers gained any significant satisfaction from spending, as often during this time one would hear “complaints about the annoyances of prosperity—complaints, in effect, that spending lots of money isn't as gratifying as people expected it to be.”

The answer, then, most likely lies in competition. Competition among consumers. It is natural for humans to “to judge themselves not by their absolute standard of living, but in comparison to others,” driving us into a sort of “luxury fever”, as Robert Frank termed it, as “families with annual incomes of $30,000 try to emulate the consumption of those with $60,000, who try to emulate those with $120,000, and so on.” We don’t necessarily have a drive to be wealthy, but a drive to be the wealthiest. Below average disgusts us, and mere average disappoints us. We also think about what could be, what we could have, the future’s promises keeping us enthralled, the status quo not enough. Man is happy until he learns that his neighbor is richer than him. Competition pits us against each other, pulling our strings and making us spend as much as possible, sometimes with money we don’t have.

And, as we might have expected, this does wonders for society and the economy, or at least that’s what Krugman argues. Nation-wide spending naturally leads to a rise in jobs. More jobs signify less unemployment, and hence, a more fulfilled, more confident, financially secure population. And more jobs lead to greater production and a more successful economy.

Yet, is excessive spending truly all that wonderous? There is little doubt that this is true when an economic boom renders its individuals sufficiently wealthy to be able to afford great spending, but I would argue that it is different when individuals may not be necessarily wealthy enough, or when they spend more than they have. And I think this might often have been the case in the late 1990s, and America in general. Debt is no uncommon problem in the United States, and this problem can be multiplied during a time when the population not only develops an especially strong tendency to spend, but it also saves less than ever. The competition driving them can turn almost into an addiction, driving consumers into the never-ending cycle of desiring more wealth, more luxury, higher status to surpass their fellow competitors. And when this reaches such an extent, it is natural for people to fall into a greater and greater debt, although they may continue their extensive spending regardless. Is it truly beneficial to the economy when consumers spend money they do not have? At least the Great Recession of 2008 suggested otherwise, with loaning money to individuals who couldn’t return it being one of the main causes of the crisis. Of course, widespread consumer spending may contribute to a surge in employment, but I would argue that it is fair to question what can happen in the long run if consumers continue to spend beyond their limits.

Economics is about choices—what drives them, what they are, and what is given up when they are chosen. A choice to produce this or produce that. A choice to spend this or spend that. One of the main driving forces of the choice to spend on higher end items or latest technologies might be competition, but whether this drive is morally detrimental to consumers is of no concern to economists. Instead, the question becomes whether crazed spending caused by this endless, intense drive to compete among other consumers contributes positively to the economy or not. But in fact, even this question may be more complex than it was originally thought. Krugman thinks that such consumer spending leads to job growth, thus benefitting the economy; while this may have some truth to it, I also believe that an economy held by pillars of consumers spending money they do not have is unstable, at least in the long run. ESR

This is Sofia Ferrer’s first contribution to Enter Stage Right. (c) 2021 Sofia Ferrer

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