Dissenting Opinion: Propagandanomics

For the F.A. Hayek Institute of Canada

Author: Diogenes

Written on: December 30, 2010

The main economic theory behind US consumerism, which totals 70% of US GDP, is behavioral economics. Behavioral economics is a scientific branch of economics that employs behavioral, cognitive and social psychological methods to analyze, model, predict and control the economic decisions of individuals and institutions. In layman's terms, behavioral economics is precisely the science of driving consumer spending. In addition to skewing the entire US economy away from production and towards consumption, especially consumption beyond the means to repay debts, i.e., encouraging the use of consumer credit over savings, the use of behavioral economics at the microeconomic level, i.e., as a government policy, has had serious unintended consequences: social, cultural and economic.

Perhaps the most important thesis of behavioral economics is Bounded Rationality, a theory of economic decision making which maintains that the rationality of decisions made by individuals is limited in terms of information, cognitive ability and time, thus the decisions of individuals can be influenced by controlling cognitive stimuli and available information under a time constraint. Bounded Rationality indicates that, under the right conditions, individuals predominantly seek satisfaction (potentially irrational choices) rather than maximizing utility (rational choices). Thus, individuals can be manipulated into making desired decisions, whether rational or irrational, by controlling the information and cognitive stimuli available to them where there is a time constraint within which a decision must be made.

Given limited and declining education levels, i.e., limited cognitive abilities; along with insular, superficial, sensationalistic news media dominated by a handful of large corporations; dysfunctional self-absorbed drama, feel-good pap and gratuitous gore passing as entertainment; and a pace of life where two or more incomes are required to maintain an average family with children, American consumers are the perfectly cultivated subjects for behavioral economics. The term "consumer" itself, rather than previous monikers such as citizen, person or individual, speaks volumes.

The combination of limited information and cognitive stimulation within a time constraint has been successfully used in modern business for decades, i.e., in sales, marketing, advertising and public relations. The genius of behavioral economics is to apply behavioral, cognitive and social psychological methods not merely to the promotion of the products and services of a single company but to the economy of an entire nation. The result has been to stimulate consumption to levels that have altered not just the economic landscape but also the cultural and social landscape. America is a nation where retail workers risk being trampled to death and where shoppers risk being assaulted in a contest to buy consumer products on the media-hyped Black Friday shopping day. With each passing year Black Friday receives increasing "news coverage" similar to that of a sporting event, and each year the violence of brainwashed "consumers" escalates adding gladiatorial entertainment value as a bonus for the advertisers that sponsor the "news". Commentators abroad have referred to America as a "gulag of forced consumption".

As the basis for domestic economic policy in the US, behavioral economics has produced a wasteful and morally destructive socioeconomic competition marked by conspicuous consumption. Driving consumer spending as the basis of economic growth has created a competition among consumers to borrow and to spend the most money, and it has been accompanied by social and moral decay that goes beyond mere decadence. American culture has degenerated into a venal, petty, backstabbing, reality-television-show-like race to obtain and exhibit the symbols of the so-called American dream: owning the latest technological gadget; driving a new car; wearing the latest advertisement-bearing garments (e.g., designer logos, film and television motifs, etc.) - all made in Asian or South American sweatshops; unaffordable McMansions; exotic, debt-financed vacations complete with credit card "rewards", and so forth. Traditional American values such as self reliance and individual liberty have been subsumed in the mosh pit of post-American culture; a culture defined by consumerism.

Consumerism is a manufactured phenomenon. American consumers have been programmed so successfully with trivialities, indulgences and diversions that they actually believe that they are "living the dream" while their financial futures swirl in a toilette bowl before their eyes. Mentally facile, obese, diabetic, super-sized American consumers are routinely manipulated into making whatever economic decisions best serve the interests of the corporations that direct US economic policy, despite the fact that the decisions they make may be financially or physically injurious to the individuals who make them. Levels of consumer debt in the US economy provide compelling evidence of the malleable psyche of the American consumer, the degree to which behavioral control over the US consumer base has been developed, and of the degeneration of American culture into a radical form of materialism. Consumer buying binges, like the so-called "Cyber Monday" can be manufactured at will by advertisers and the media. Consumers are directed when to spend and what to buy and they have been so conditioned that they will, obediently, do almost anything to obtain the latest consumer products or services.

The unintended consequences of behavioral economics include shifting consumption towards hedonism and instant gratification, thus encouraging the use of credit by consumers, while at the same time shifting businesses practices towards pulling demand forward, i.e., by financing customer purchases, as well as towards a focus on quarterly profits at the expense of all else. The consumer credit bubble that peaked in 2008 represents a sustained period of monetary expansion, which implies inflation. Constant inflation, even at low rates, discourages savings and encourages the use of credit, thus producing a consumer base living paycheck to paycheck. The unintended consequence has been an increase in economic fragility, thus economic volatility, since any recession will trigger waves of consumer bankruptcies.

The shift of business models towards subscription and "perpetual payment" is another consequence of behavioral economics, i.e., a race among businesses to capture the consumer's savings, cashflow and future income. In the last thirty years, many US industries have moved away from business models based on discrete transactions, e.g., product sales, and towards business models based on debt service or recurring payments, e.g., subscription-based services. In theory, a service based business model with predictable, recurring revenues would stabilize and "recession proof" cashflow versus a business model based on one-time sales. Curiously, the opposite is true because recurring payment models have led to a competition among US corporations to capture future consumer spending.

The competition to capture the consumer's income stream and future income became so intense that a new business model evolved in the US that can be accurately described as "perpetual payment". The business model is based on marking up prices to fantastic levels so that a one-time decision by consumers, such as going to college, undergoing a medical procedure, purchasing a home, etc., creates a perpetual debt that can never be retired. The inability of the consumer to actually pay the full price is not a barrier to sales because the goal is to maximize the amount of the consumer's future income that can be captured, i.e., cashflow.

Like consumers living paycheck to paycheck, a critical mass of businesses relying on the future income of consumers increases economic fragility, thus economic volatility. Where consumption is subsidized by debt, the consumer's income inevitably reaches the point of maximum leverage, i.e., there is no available future income remaining and it is mathematically impossible for the consumer to carry any additional debt. Eventually, savings disappear and new spending ceases because all existing reserves, cashflow and future income is fully committed. In other words, the consumer has been wrung dry. The absence of savings is problematic when there is a recession because consumers, who are living from paycheck to paycheck, default on their obligations quickly. Thus businesses revenues become increasingly fragile because a recession, particularly a recession marked by high unemployment, not only interrupts cashflow from consumers, e.g., debt service payments, but also damages the financial condition of businesses through credit defaults. The result is that economic stability is undermined and, unless bad debts are purged during a recession, recovery from recession, i.e., a return to genuine, sustainable economic growth, is impossible; which is one of the key reasons why the US economy has not recovered form the recession that began in 2007.

The application of behavioral economics at the microeconomic level, while it has been an utter disaster for the United States, has been highly successful in achieving its goals. The evidence of its success includes the fact that American consumer cash reserves, cashflow and future income have been either extracted or committed in perpetuity, i.e., consumption has been absolutely maximized. Unfortunately, the shift away from production towards consumption has contributed to deindustrialization and unsustainable levels of debt. As a result, there is relatively little proverbial meat left to pick from the bones of what was once a great nation. The unrecognized reality on the part of US policy makers is that neither further economic growth nor monetary expansion can be produced via consumerism. Behavioral economics has run its course. In the future, historians will look back at the four decades from 1971 to 2011 as both a consumerism bubble and as a credit or debt bubble; as something like a 40-year-long tulip mania. Whether the legacy of social, cultural and moral decay that accompanied the phenomenon of consumerism (manufactured by behavioral economics) will also prove unsustainable is yet to be determined.