Economists’ Meaning of “Consumption”

Natural language is a wonderful tool for communication. By using language, we humans manipulate air, paper, and pixels to transport ideas from one brain to other brains. Language allows each of us figuratively to put other people a good ways into our heads. You know from reading my sentence “I love potato chips,” that I greatly enjoy eating very thin slices of potatoes that are fried and salted. You don’t for a moment think that by writing that sentence I’m informing you that a snack food evokes in me an emotional attachment to it that’s akin to the emotional attachment that I have, say, to my son, who I’m happy to tell you that I also love.

But like all things human, language is imperfect. Even the most skilled wordsmith cannot put other people fully into his head. The “I love potato chip” hypothetical highlights one reason for this imperfection: very often, a word has two or more different, but not wholly distinct, meanings. There is some commonality in the “love” that I have for potato chips and the “love” that I have for my son. I’m glad that there is in my life both potato chips and my son; both potato chips and my son give me happiness that I’m willing to incur some sacrifices to experience. Nevertheless, no one who hears me say “I love potato chips” will suppose that the feelings that I have for potato chips are comparable to, and much less equal to, the feelings that I have for my son.

Unfortunately, often the use of words with different, but not wholly distinct, meanings does cause genuine misunderstanding. Such misunderstanding is frequent when economists talk with the general public.

Few statements by economists are subject to as much misunderstanding as is Adam Smith’s famous claim, in The Wealth of Nations, that “Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self-evident that it would be absurd to attempt to prove it.”

To an economist, Smith’s claim that consumption is the sole end and purpose of all production is indeed perfectly self-evident. To deny the truth of this claim is nonsense. Yet many people – almost all non-economists – do deny it. The reason for this divergence of non-economists from economists is that the word “consumption” evokes in the minds of non-economists a meaning subtly different from the meaning that it has to economists.

For an economist, “consumption” is defined as the end-purpose of economic activity. Your consumption desires are whatever you believe will directly contribute positively to your satisfaction with life. “Consumer goods,” in turn, are those goods (and services) that you believe will enable you, by using them, to directly satisfy your consumption desires.

One obvious contributor to improved life satisfaction is a comfortable place to regularly relax and sleep. So you buy or rent a house and furnish it with appliances and furniture, all of which you use directly. Your house, appliances, and furniture are among your consumer goods. While, for instance, your bed each night does, in practice, help you to prepare to be a more effective worker the next day, you don’t think of your bed as a means. You didn’t purchase your bed as an input to improve your on-the-job performance. It’s much closer to the truth to say that your excellent on-the-job performance is a means for you to acquire, among other consumer goods, a comfortable bed.

No two people have exactly the same tastes and preferences. You might prefer a king-sized bed to a queen-sized one while I prefer the queen-sized version. But every person has consumption desires. And for every person these desires are what motivate him to engage in economic activity – that is, to work and to exchange. Work and exchange can, and often do, directly supply satisfaction independently of whatever is created by the work, or by whatever is obtained through the exchange. But working and exchanging are overwhelmingly means to achieve consumption goods and services.

I’ve known many people – including myself – who love their jobs. But I’ve never met anyone who was so in love with that job that he or she would continue to do it without pay. Even jobs that people love are means, not ends.

Likewise, my grandfathers and my father all enjoyed woodworking as a hobby, as does my son today. But I’ve never known any of them to be indifferent to the final physical results of their carpentry efforts. Each of these men worked to build things – kitchen cutting boards, bookcases, an addition to the house – that, when completed, supplied human satisfaction. None of these men ever sawed, hammered, sanded, drilled, or glued merely for the sake of sawing, hammering, sanding, drilling, or gluing. On those rare occasions when the results of their woodworking were worse than what they anticipated – say, the bookcase wasn’t level or the kitchen cutting board was aesthetically unappealing – they were disappointed. They assessed the time and effort spent to produce the defective outputs as wasted.

The economist, then, reasons from this reality that production is not simply the exertion of human effort to transform inputs into outputs. Production is the creation of value — “value” meaning additions to consumer welfare. For the economist, production and consumption are two sides of the same economic coin; one is inseparable from the other. As is obvious, nothing can be consumed unless it is first produced. But also, and as is much less obvious, nothing is produced unless it is destined to satisfy consumption desires.

The non-economist often misses the inseparability of the concept of production from that of consumption. The non-economist often thinks of production and consumption as being alternative, competing values. I can’t count the number of times that I’ve heard or read someone accuse economists — and especially economists who support free markets — of having a shallow, or excessively materialistic view of humans. “Life is about more than consumption!” we’re told. “People also find meaning in family, community, and work!”

To the ears of many non-economists, the word “consumption” seems to mean only the satisfaction of physical desires. The word here carries an almost negative connotation; it conjures images of individuals self-interestedly and narrow-mindedly satisfying ‘low’ desires with little concern for persons beyond themselves and their immediate families, or for values beyond base sensual gratification.

On this understanding of “consumption,” life is indeed about more — much more — than consumption. But, again, this understanding of “consumption” is emphatically not economists’ understanding. On economists’ understanding, consumption includes not only the likes of eating, watching the Super Bowl, and bedecking oneself with jewelry. Consumption includes also the satisfaction we get from living in safe and thriving communities, from enjoying our jobs, from interacting pleasantly with our neighbors, our fellow church members, and our co-workers. It includes the joy and knowledge derived from traveling, reading, and attending public lectures.

Consumption, as economists understand it, is that wide array of actions, the experience of which we anticipate will directly make our lives more fulfilling. The fact that production is a necessary means to enable consumption is undeniable. Yet precisely because production is a means, while consumption is an end, there is no conflict between the ‘social value’ of consumption and the ‘social value’ of production. More consumption requires more production, and more production enables more consumption.

For this reason, no one really chooses to attach a higher value to production activities while attaching lower values to consumption activities; to produce more necessarily is to enable greater consumption. The people we admire for being ‘highly productive’ are admired precisely because they produce lots of goods and services for their or other people’s consumption. While we might admire the determination and skill of a worker who toils long and hard, ultimately this admiration is rooted in our understanding that the application of such determination and skill are highly productive of outputs that further consumption desires. No admiration would be bestowed on a worker who toiled long, hard, and skillfully baking sawdust and maggot pies, for such a worker would do nothing to increase human beings’ consumption opportunities.

Because “to produce” means “to increase humans’ opportunities to consume,” Adam Smith is correct: consumption is indeed the sole end and purpose of all production.

The post Economists’ Meaning of “Consumption” was first published by the American Institute for Economic Research (AIER), and is republished here with permission. Please support their efforts.