Consumerism driving Growth ?

Is blaming consumerism on growth fair? How much of consumption accounts for growth?

Some folks tend to blame our habit of fast consumption on the need of our economies for growth. They ask questions such as: “Is consumption the true driver of growth? Would a world without consumption have a decent growth rate? Is growth responsible for climate change? Is our greed for growth responsible for all the disasters happening around the world? What if there was an economy without growth?”. You might have heard this and asked yourself if they were right or how you could contribute to their knowledge.

This article will give you a few tracks to explore.

First, let’s go back to the basics. All countries have what economist call the National Income Identity, which is what you may also know as GDP. It is the way aggregated information about the national economy is summarized into one equation. Gross domestic product equals the sum of consumption, investment, government spending and net exports.

GDP = C + I + G + NX

Growth is then computed like any growth rate, by dividing the difference of GDP between this year and last year by last year’s GDP.

So, by combining the two basic components above, you can already deduce that consumption is not the only element responsible for the growth of a country’s GDP.

Although we all have a devil’s advocate among our friends who would say: “Okay, I get what you’re saying, but isn’t consumption the ultimate driver of all demands, and therefore of investment, government spending and net exports?”. Well, that is true. In a world where everybody would produce and consume their own goods, without a need for external investment, government spending or imports, the GDP of a country would be equal to zero from year to year, and there would be no need to talk of growth rates. However, there would still be some ersatz GDP, that would consist of two options: consumption or investment. Let’s call this the Gross Personal Product equation.

GPP = C + I

But as you can see, there is still a choice between consuming or investing. If one chooses not to consume all his output from last period and to invest it instead, then there is still a possibility for growth. Investing a certain amount of output may lead to a greater amount of input. That is called growth. Now, you understand that growth is only the consequence of efficiency. Growth is just the outcome of a productive use of inputs. Therefore, the main driver of growth is not consumption, but, investment and innovation. Now, what determines the choice between investing and consuming? Well, everybody knows intrinsically that they will invest if they know that they will be better off doing so than not. In other words, they expect to consume more by investing today’s unconsumed inputs. In fact, they expect efficiency, thus growth, to consume more in the long run.

So, your friend blaming consumerism on our greed for growth, is ultimately right. But, because there is always a but, consumption, although being the final goal of growth, is not its main driver. In reality, the main drivers of growth are Innovation, investment, initial conditions, and institutions. We will discuss this in a coming article.

Check the links and sources below for more information and don’t forget to be curious, critical and polite !

Charles Emsens