Chapter 3: Classical theories of consumption – Consumption and Management

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Classical theories of consumption

Consumption and Management is a gathering of the essence of domestic and foreign theories about consumption.

This comprehensive book refers to almost all the famous Chinese and foreign economists’ theories concerning consumption. The author integrated the penetrating statements and unique ideas of these economists and drew out their essence to form the theoretical basis of this book. We can say that the author won’t reach the research level without the research work of these predecessors.

Section 1 Consumption theory in Chinese traditional culture

The consumption concept of Confucius

The main trend of the traditional Chinese concept of consumption is the hierarchy consumption thinking of Confucianism; the representative is Confucius. The core of Confucius’ consumption thinking is to regulate the consumption concept, behaviors, and modes by the hierarchy of ‘Rite’.

Confucius thinks that consumption behaviors should follow the idea of economy of expenditure and simplicity. Rite, asks for simplicity rather than luxury in the eyes of Confucius. Luxury is not only a category of expenditure, but also a consuming desire of people that will make them lose moral control of their consumption behavior so as to destroy the hierarchy consumption regulation of ‘Rite’. On the other hand, ‘simplicity’ looks shabby but it represents the moral control of consumption behavior and is suitable for the hierarchy consumption regulation of ‘Rite’.

The consumption concept of Laozi

The consumption concept of ‘letting things take their own course’ is important in Taoism; the representative of Taoism is Lao zi, the founder of Taoism. He advocated morality, adaptation to nature, governing by doing nothing and having a small territory with small population. As for consumption thinking, he promoted giving up luxury and coming to simplicity, purifying one’s heart, and restricting one’s desires, and experiencing happiness to lead to contentment.

Laozi proposed the contentment rule for how to satisfy the needs of consumption on the basis of ‘few desires’ and simplicity: ‘There is no guilt greater than to sanction ambition; no calamity greater than to be discontented with one’s lot.’ He thought the standard of satisfaction did not lie in material goods, but in the contentment of one’s heart. If the person couldn’t be content with what he had, that would be the greatest calamity. Contentment represented the spirit of Tao.

The consumption idea of ‘letting things take their own course’ in Taoism denies the enjoyment of consumption and advocates having few desires, simplicity, and contentment. His contentment asks for stability in one’s present condition, which objectively suppresses people’s consuming desire. Laozi and Taoism require few desires and contentment to suppress the increasing human needs of consumption. We can say that contentment is full of philosophical meaning and has positive significance to the harmony of one’s body and soul, as well as the adjustment of the contradiction between consumption needs and consumption power.

It is worth noting that Confucius (and Confucianism) and Lao zi (and Taoism) have different academic interests and values, but they both focus on the simplicity trend of consumption thinking. And their different consumption thinking features are presented under this similar trend.

The consumption concept of Mozi

The consumption concept of Mozi is unique in Chinese economic consumption thinking history. His concept regards economy of expenditures as the center of consumption. He proposed the general consumption standard which broke the hierarchy system; he asserted that consumption could be ensured by developing production; he claimed that the consumption level should increase with the growth of production: ‘The pursuit of beauty comes after the satisfaction of one’s hunger; the pursuit of elegance comes after having a warm coat; the pursuit of happiness comes after stable living.’

Mozi pointed out the real causes of ‘three miseries’ were that there was no basic consumption guarantee for common people. ‘No food for hungers, no clothes for people who feel cold, no rest for labors’, and ‘these three phenomena are the great miseries for common people’. For these, Mozi cried out: ‘We must supply food for the hungry, clothes for the cold, and rest for labors.’ There are points which can be referenced in Mozi’s ideas:

• To repress the consumption polarization. Mozi proposed the general consumption standard, which broke the hierarchy system to satisfy most people’s consumption needs; and only this standard could ensure the stability of society and the development of society.

• To increase the consumption level should be based on the development of production. Mozi realized the relations between production and consumption; he asserted that the consumption level should be based on the development of production. He emphasized that social consumption should be based on the development of production and the consumption level should correspond to production conditions. ‘Wei’ and ‘Shi’ are the production relations and consumption. If ‘producers are sick and there are a great number of consumers, then there will not be a harvest year.’ So, if we want to ensure and improve consumption, we should try our best to develop production.

• To practice thrift from top to bottom and to condemn waste. The purpose of Mo zi’s economy of expenditures is upward not downward, and is to restrain the parasitic consumption of the upper ruling class. Mo zi put forward that all the kings, vassals and officials should ‘be thrifty to themselves and then become examples for the common people’ so as to realize an economy of expenditure in the whole society, to form a good social atmosphere, and to benefit the country and people.

The consumption concept of Guanzi

The consumption concept of Guanzi, a philosophical work by the 7th-century author Guan Zhong, opened the author’s mind. Guanzi’s consumption concept is unique and has incomparable academic significance.

In the book Guanzi there are consumption ideas of thrift as well as ideas of advocating luxury. The thrift consumption rule is generally in use while the luxurious consumption rule is proposed under special social conditions to stimulate social production. The two consumption ideas form a unity of present stability and social development. The consumption thinking in Guanzi shows an idea that in daily life, we cannot simply judge the importance of thrift and luxury and absolutely treat them as ‘suitable’ or ‘unsuitable’. Timely appropriate practice of thrift and luxury is crucial.

There is an article in Guanzi entitled ‘Luxury’ that focuses on the luxurious consumption which had unique significance in ancient China. This article emphasizes the policy influence and practical significance of luxurious consumption and does not regard it as the basic rule of social consumption behavior. This point of view shows the characteristics of dialectical thinking. Luxurious consumption in Guanzi is outstanding with foresightedness because there is no school that has a similar idea in pre-Qin period. It adds new color to the traditional thrift consumption thinking.

The idea of advocating thrift and suppressing luxury runs through the book of Guanzi; we can see it in the chapters ‘Jin Du’, ‘Fa Fa’, and ‘Qing Zhong’. Thrift is the main aspect of consumption thinking in Guanzi, while the luxury thinking draws most attention. Guanzi pointed out that if the country was too frugal, it would be harmful for the infrastructure projects, while if the country was too luxurious, it would be harmful to commodity resources. It means there are negative factors for production in thrift, and luxury will lead to wealth being wasted. Of course, this is from the perspective of consumption’s influence on wealth production. From the theoretical point of view, thrift consumption thinking and luxurious consumption thinking are put forward as ways of overcoming these two harmful trends, and they become each other’s cause so as to conform to the Taoist tradition of Guanzi.

Guanzi also discloses that consumption’s stimulation to production is not unlimited, and luxury should have a ‘degree’. ‘Be strict to oneself, conform to the regulations and be thrifty, then disaster will not come even if happiness is lacking; be luxurious, break the law and offend the regulations, then happiness will never come even without disaster.’ A clear understanding and judgment of the degree of luxury is the important rule and standard for its value. Excessive luxury will not promote economic development and causes the contradiction of production and consumption so as to waste resources and hinder the development of production and social progress. On the other hand, excessive luxury will foster hedonism and the one-sided pursuit of material enjoyment so as to cause various corruptions and a declining social moral.

Section 2 Consumption theory in Western economics

In Britain, classic economics began with William Petty and David Ricardo; in France, it began with Boisguillebert and Sismondi; Adam Smith and Quesnay were also among them. After 150 years of research, these economists demonstrated the factors, conditions, and approaches for increasing capitalistic wealth and the systems and principles of capitalistic economic operation. They set up the foundation of labor value theory, with a focus on contradictions between salary and profit, and profit and land rent. They did not mention to a significant degree. The author of this book draws more from the theories of the economists discussed below.

The consumption thoughts of William Petty

English classical political economics is considered to be the beginning of Western economics. Classical political economics reflects the age and class characteristics of capitalism during its inception and development period; it emphasizes capital accumulation and advocates consumption frugality. It affirms the status and role of consumption compared with mercantilism.

The core of Petty’s consumption thought insists on less consumption and more accumulation. He thinks that abundance of products for consumption leads to over-consumption, and over-consumption can make people become lazier. Workers are satisfied with a minimum living standard, so he thinks that law should only ensure that the workers can get the most necessary life materials. If the life materials extended to the workers are doubled, then, what the workers do will be halved compared with what they are capable of completing when their wages are not doubled. For society, that is tantamount to losing the products created by the same amount of labor. He also classifies capital expenditure according to the degree to which the expenditure is favorable to production; they are eating and drinking, purchasing clothing and furniture, building houses, improving land, mining and fishing as well as the enterprise of importing gold and silver from abroad in turns. It indicates that his thought is also heavily marked by mercantilism. He insists on using taxation to change the proportional relation between consumption and accumulation: ‘Through imposing taxation on people who indulge in eating and drinking, the fund accumulated can be used for useful practice, such as improving land, fishing, mining and opening factories. It is obvious that this kind of taxation is beneficial for the country where these people are located’ (Petty, 1662).

Adam Smith’s The Wealth of Nations

Just like William Petty, Adam Smith also puts capital accumulation in first place and advocates frugality in consumption. His understanding of consumption thought lies in his genuine recognition of the role and status of consumption for the first time in history. He initiated the proposition that the sole purpose of production is consumption, and the essence of consumption power (what he actually refers to is purchase power) is the consumption value obtained by income, but not the currency or gold, which is the negation of the concept of the wealth of mercantilism.

Adam Smith argued that in the mercantile system the interest of consumers is almost constantly sacrificed for that of producers, and that it seems to consider that production rather than consumption is the ultimate end and object of all industries and commerce (Smith, 1776). He suggested that consumption is the sole end and purpose of all production; the interest of producers ought to be attended to only as needed for promoting that consumers. Smith used abstract general production instead of capitalistic production, regarding satisfying consumers’ interests directly instead of chasing profit as the sole end of this kind of production. We should note that Smith thought the realization of the purpose of production required a division of labor to develop production, a laissez-faire approach at home and free commerce abroad, so as to supply more commodities to satisfy people’s consumption demands. Adam Smith held that consumption was the ultimate end of demands. The theory proposed by Adam Smith and other classic economists didn’t mean that consumption was a key element for demands, but the single production of commodity. If there was no consumption, then the demands of production would be meaningless.

Keynes’ The General Theory of Employment, Interest and Money

In the 1930s, the great economic crisis and great depression brought unprecedented shock to traditional economic doctrine; in The General Theory of Employment, Interest and Money, Keynes (1936) proposed that the root of the capitalist economic crisis lies in inadequate effective demand, which results from people’s psychological state – ‘diminishing consumption propensity’, ‘diminishing capital marginal efficiency’ and ‘flexible preference’. He makes use of marginal consumption propensity to illustrate the condition for maintaining the stability of the multiplier principle and the capitalist economic system. When marginal propensity declines, the multiplier principle can amplify investment amounts, which can reduce the gross income and gross employment, cause dramatic shock to the economy, and, thereby expand effective demand through demand management. Starting from expanding demand, he approves expenditure for personal squandering as well as for public squandering and agrees with the viewpoints illustrated in Mandeville’s The Fable of the Bees (1714). He thinks that, in the long run, because of the decrease in the interest rate (the marginal efficiency of capital will also decrease), high-income people will tend to reduce their savings and raise their consumption propensity. Seen from the pattern of income distribution, with the decline of the consumption propensity among high-income people, assuming that society adopts the mode which is in favor of eliminating the inequitable situation to redistribute wealth and income, then considered from the perspective of promoting propensity to consume, it is beneficial for capitalist economic growth. Keynes invented the concept of consumption function and absolute income hypothesis. Both became the foundations for successive research studies. Thereafter, research on the consumption function became an enduring hot topic in economics.

Keynes (1936) also considered that employment was decided by effective demand (including consumption needs and investment needs), and effective demand was affected by three basic psychological factors – ‘consumption tendency’, ‘expectation for asset’s future earnings’, and ‘liquidity preference’ for currency and volume of money. His advice was to extend government’s power of intervention in the economy – taking financial measures, adding public expense, lowering the interest rate, stimulating consumption, increasing investment so as to improve effective demand and realize the full employment balance of economy.

Samuelson’s Economics

Samuelson’s Economics (Samuelson 1948) also gives great enlightenment to the study of consumption science systematic theory. Samuelson was the first American economist who won the Nobel Prize. He was a universal genius in economy who researched in economics, statistics, mathematics, and other fields. He combined Keynesianism and traditional micro economy and founded the ‘neo-classical synthesis’ – the modern framework of western economics in which all schools were given clear explanation and just evaluation. In 1970 he was given the Nobel Prize by the Royal Swedish Academy for developing mathematics and dynamic economic theory, and his research concerns in all the fields of economy.

Samuelson combined Keynes’s macro-economic theory with a new classical micro economic theory to form the new classical synthetic school. From the first edition in 1948 to the current 19th edition, the school continuously absorbs new research results of modern economists and the book Economics became the most influential schoolbook of the second half of the 20th century. Its consumption theory integrates the thoughts of various schools. Using the perspective of the micro consumer behavior theory, the marginal analysis utility theory of Jevons and Pangbaweike and the theory of demand by Hicks are inherited and absorbed. Ordinal utility theory is used to replace cardinal utility theory and homogeneous curve concavity; relative diminishing marginal utility and revenue budget line are adopted to illustrate the marginal principles rational consumers abide by. Price change generates an earning effect and substitution effect for consumers and enables the demand law to take effect. Demand elasticity and supply elasticity decide the proportion of interest gained by consumers and producers, respectively. In this way, consumption theory has become the starting point of research for all modern micro economics. As to its macro part, analysis is conducted for the consumption rate for both the long term and short term. In Economics, Samuelson (1948) argued that seen from the perspective of the long term, a low consumption rate or low consumption propensity is beneficial for economic growth: ‘Higher consumption relative to income can decrease investment and slow down economic growth; lower consumption relative to income can generate high investment and rapid economic growth’. Within short periods of time, its relation is uncertain:

The interactive relation between consumption and income plays different roles within short periods of time, especially during the expansion or contraction period of the economic cycle; when the economic situation promotes the rapid development of consumption and investment, the overall expenditure or overall demand will increase, short-term output and employment rate will improve. However, when high taxation rates or low consumption confidence leads to the decrease of consumption, the overall consumption will decrease and the economy will probably enter into a recession period.

All in all, Samuelson’s consumption theory is the combination of classical thought and Keynesianism.

In the sixth chapter of Economics, Samuelson gave a wonderful statement of consumption. The choice and utility theories, diminishing marginal utility theory, substitution effect, individual demand, market demand theory, and consumer surplus theory in the book have greatly enlightened the author of this book. For example, the choice and utility theories tell us that selective consumption means consumers tend to choose the goods and services which they consider as the most valuable. Utility means how the consumer arranges the order of different goods and services. Marginal utility theory is about the new and extra utility produced when the consumer uses up one unit of commodity, while diminishing marginal utility theory tells us that accompanying the consuming of certain goods, the new or extra marginal utility is decreasing – when the consuming amount of certain goods is increasing, the marginal utility is decreasing. All these theories gave great edification to the author’s research and management.

The consumption thoughts of Say and Malthus

Jean Baptiste Say (1803) formally introduced consumption into the theoretical system of political economics. He considers that consumption means the extinction of utility and the things whose value cannot be diminished cannot be consumed; the phenomenon of houses catching fire is also consumption, for the utility is extinguished. In this way, he thinks that the sole research subject of consumption is the degree to which consuming behavior generates satisfaction, and the sole purpose lies in the comparison between the loss incurred by or the satisfaction provided by consumers’ consumption. Thereby, the gain and loss estimation made by consumers decides the appropriateness of consumption. Say indicated that production can create self-demand and avoid inadequate demand. Malthus, Sismondi, Marx, and others objected to his law. However, before the revolution conducted by Keynes, Say’s viewpoint had always been considered as the mainstream thought.

Thomas Robert Malthus brings forward the concept ‘effective consumption’ for the first time in the history of consumption theory. He points out that effective consumption believes that people are capable and willing to pay a price to purchase products to the effect that this kind of price can sustain the continuous supply of the products without reducing the profit margin. He thinks that the consumption of the landlord is essential for avoiding the economic stagnation caused by the surplus supply of the market; the special function of a group of non-productive consumers is to protect the balance between products and consumers and enable the hardworking people nationwide to gain maximum exchange value and promote the growth of wealth. Although Malthus approves the consumption behavior of the landlord employing a large number of employees but objects to the transfer payment made to poor people to increase consumption demand, for this practice can increase population; meanwhile, he objects to providing funds for excessive non-productive consumption.

Section 3 The consumption theory of Karl Marx

In Marx’s Capital and his other famous works there is no specific chapter on consumption, but there are many statements about consumption. The consumption thinking of Marx is discussed below, based on the statements he made.

The scientific definition of consumption

Marx believes consumption includes scientific research and production consumption, as well as personal consumption. The process of production consumes materials like raw materials, fuel, workshop, and equipment, and consumes the physical and mental labor of the producer. Material products are produced through consumption. This kind of consumption and production is united directly – ‘production is directly consumption’; ‘from all the concerned factors, production itself is a consumption activity’. Another kind of consumption refers to personal consumption, that is, living consumption. It is the destination or the final purpose of social reproduction. Living consumption also has active significance to the whole social reproduction sector.

The inherent unity of consumption and production

Marx regarded consumption as a concept relative to production, which was one of the basic sectors of social reproduction such as production, circulation, distribution, consumption, and so on. Seen from the operation mechanism of the social economic system, consumption has interdependent, inter-connectional, and inter-creation relations with production. In Marx’s preface of the famous Capital, he stated the dialectical relation of the unity of opposites between production and consumption. ‘Production is direct consumption’; ‘consumption is direct production’; ‘there is no consumption without production’, and vice versa. In terms of all production factors, the production process is also a consumption process, – the consumption of production materials.

The decisive role of consumption on production

Marx emphasizes the decisive role of consumption on production from three aspects:

• Consumption makes production become realistic production. Products become realistic goods only in consumption, and consumption is the final checking of production.

• Consumption creates new demand and supplies motive and purpose for production.

• The realization of new production modes requires that the guidance of production should be the extended range and appearance of new production modes.

When discussing the production and consumption of relative surplus value, Marx uses three key terms of consumption – volume, range, and new needs – to emphasize that only by extending the present consumption volume to a larger range can new needs be created. Only as new needs appear, can the new use value be discovered or created so as to produce new consumption. If there is no new consumption (including increasing the consumption amount, enlarging the consumption range, creating new consumption patterns, and so on), the use value produced by new production departments which are different from those produced by original departments will not be acknowledged by society.

Consumption power and consumption level

Marx brought forward the theory of consumption power for the first time. Consumption power refers to the consumption capacity of consumers within a certain period of time, which includes consumption power in two senses:

• knowledge, know-how obtained from learning

• payment capacity obtained from distribution.

Therefore, in Capital, Marx (1867) indicated that consumption capacity is the precondition of consumption and the first means of consumption; this capacity is the development of one person’s talent and the development of one kind of productivity. Marx establishes a correspondent relationship between consumption power and productivity and points out their connection. He said:

Economy is also the economy of labor time… and this kind of economy is equal to developing productivity. It is obvious that, the purpose of economy is not to be abstinent but to develop productivity; the development of productivity is not only the development of consumption capacity but also the development of consumption materials.

Marx clearly illustrates the internal relation between consumption power and productivity. To develop productivity also means to develop the capacity of production, which leads to the development of consumption power and consumption materials? Consumption materials are objective factors of consumption; consumption capacity is a subjective condition of consumption. Consumption capacity not only realizes consumption, but also expands the market for production and provides a conceptual ‘internal motive’ for production, becoming the precondition of production; meanwhile, consumption also gives back producers for production, and producers are decisive factors of the development of production. The producer quality is to some extent decided by the consumption capacity. If people have high purchase capacity, they will acquire richer knowledge, higher technique, and high consumption quality and, thereby, high self-quality. Consumption knowledge and technique are cultivated during learning and spare time, being a talent of human beings. People’s talent is also a production capacity, and thereby, the development consumption capacity is ‘the development of a kind of personal talent’, also ‘the development of a kind of productivity,’ and it can ‘act upon the labor productivity as the more powerful productivity’ (Marx, 1867).

Marx’s consumption theory holds that consumption is established on an integral base where production, exchange, distribution, and consumption are mutually acted upon and organically related, being both dialectic and systematic. Production, exchange, distribution, and consumption are mutually related and inseparable important factors within the same system. The recognition and understanding of exchange, distribution, and consumption are essential for the recognition and understanding of production.

Section 4 The consumption thought of Deng Xiaoping

Deng Xiaoping’s consumption idea is an important part of his theory system. At the same time as China’s reform and openness period, Deng boldly proposed his consumption idea and pointed out that the improvement of consumption level is the essential requirement of socialism. He asserted that ‘poverty is not socialism’ and pointed out that enhancing comprehensive national power should regard the improvement of people’s living standard as its premise, the increasing of gross national product (GDP) had laid a solid foundation for the improvement of people’s living standard.

The strategic aim of consumption

The consumption strategic aim of Deng’s theory was in three steps: adequate food and clothing, being well-off, common prosperity. The first step was to double China’s GDP in the 1980s and in the base year of 1980, the GDP per capita was only 250 dollars; doubling it meant we should reach the GDP per capita of 500 dollars; the second step was doubling the GDP per capita of 500 dollars at the end of this century to 1,000 dollars. The realization of this aim would mean we have become a well-off society; we have transformed a poor China into a well-off China, and, at that time, our GDP would be over 1,000 billion dollars. Though we still have a low per capita number, the national power would be greatly strengthened; the aim still has the third step: in 30 to 50 years of the 21st century, the GDP per capita will quadruple the rate of 1,000 dollars and reach 4,000 dollars. If we realize this step, China will achieve the level of a moderately developed country, and this is our ambition.

The strategic emphasis of consumption

The first step of Deng’s strategic aim for consumption is to solve the problem of adequate food and clothing; the second step is to reach the welloff level and finally to achieve common prosperity. In the entire strategic plan, he regards the second step – well-off – as the one to emphasize: ‘When we reach the well-off level, people’s mental outlook will be different.’ The so-called well-off level is not only an aim for level of living, but also an integrated aim for consumption. This is the first time Deng used statistical indicators to quantify the strategic aim of consumption.

Consumption policy

Deng’s consumption idea can be divided into three aspects:

• The policy about agricultural development. He said, ‘In 2000, the problem of grain should be solved’ (Deng, 2006). The aim of this policy is to satisfy the people’s demands for crops; and the increase of peasants’ consumption level will bring an extremely large demand for industrial products so as to push the development of industry.

• The policy of common prosperity. This requires us to try our best to increase the consumption level of all citizens. But common prosperity is the ultimate aim; during the realization process, we allow part of the people to get rich first and some areas to become prosperous first, because common prosperity doesn’t mean average prosperity; nor does it mean prosperity at the same pace.

• The policy of moderate consumption. Deng stresses many times the need to strengthen the policy guidance for human consumption: ‘moderate’ is the key.

The author has a deep understanding that Deng’s strategic idea of consumption is a scientific and systematic theory, the inheritance and development of Marx’s thinking about consumption in the new situation. His theory not only outlines the ambitious objectives of the China’s development of consumption which can be achieved through effort, but also puts forward the theoretical basis for the road of sustainable consumption. The author has made a thorough study of Deng’s consumption idea that develops Marx’s consumption thinking and acknowledges its great instructive influence on Consumption and Management.

From the above analysis, we can see that this book systematizes and refers to the consumption theories in China’s traditional culture and Western economics as well as the consumption theory of Deng Xiaoping, which has unique Chinese characteristics and is the important feature of this work. In this light, the academic point of view expressed by this book is not groundless but the inheritance, development, and innovation of ancient and modern ideas and theories on consumption.

The exploration of truth is eternal and we are continuously pioneering the road leading to truth. The academic innovation of this book is to some extent based on the research achievements of predecessors and the book contains an understanding of the laws behind social phenomena as well as the conclusions produced by the author through years of laborious study and research.