Elite overconsumption: a necessary evil or a necessary good?

Analyst Dmitry Nekrasov devoted his next publication to the problem that worries many people on the planet - property inequality. It is no secret that in Russia it has grown so much in recent years that the question of progressive taxation is again raised. But is this concept such an absolute evil as the overwhelming majority think about it? Here is what Nekrasov writes about this:

“If we look at inequality in developed countries not through the prism of monetary income, but through the prism of inequality in actually consumed utilities, then over the past 100-200 years it has radically decreased.

Education or health care, 100-200 years ago, were available to an absolute minority of the population, and today they have become a universal standard. Yes, and today the rich can afford a slightly better education and medical care than the poor, but earlier the difference was that some had access to these services, while others, in principle, did not.

A hundred years ago, the poor were often physically starved and regularly slept on the streets. Today, the poor are more obese than the rich, and life on the street in developed countries is more of an existential choice than a forced necessity.

Inequality looks even less significant if we compare not the lives of the richest 1% and the most disadvantaged 10%, but the life of the upper middle class (9% of the population, after the first 1% of the wealthy in terms of income from the top. In the United States, these are households with an average income of $ 245,000 per year) and the life of the lower middle class (30% of the population is between fifty and eighty percent in terms of income from the top. In the United States, these are households with an average income of about $ 42,000 per year)

Both those and others own their own vehicles. Yes, the upper middle class has a few more cars on average per family and these cars have more expensive labels. However, for a consumer from the 1950s, the difference between modern Audi and Skoda is vanishingly small. Moreover, in the 1950s, families in the upper middle class had a car, while families in the lower middle class did not.

It is even harder to see the difference in practical value consumed by upper and lower middle class clothing or furniture. In terms of strength, convenience and durability, it is virtually nonexistent. Only styles and brands differ. Looking from any previous epoch of human development, we would say that both the modern lower and modern upper middle classes have a completely redundant surplus of clothing and household items that goes beyond common sense.

Both go to restaurants and hairdressers, go to cinemas and car washes, and have the same access to transportation or communication services. A century ago, many of these services were available only to the wealthy.

Even 70 years ago, travel to other countries for entertainment was, in principle, available only to the rich. Today they are available to the vast majority of the population of developed countries, adjusted for ticket class and number of stars. But what is the big inequality in real consumption: when one family flies to the sea in business class and another in economy, or when one family flies to the sea, and the other is basically deprived of this opportunity?

The rich once spent less time at work than the poor. Until 1983, the bottom 20% of Americans had more people working on average more than 50 hours a week than the top 20%. Today, by contrast, the top 20% have twice as many such workaholics than the bottom 20%.

In today's world, income inequality translates into two things:

1. Symbolic inequality.

A $ 50,000 watch is almost the same as a $ 10 watch in terms of its practical value. Symbolic inequality has always existed, but in conditions when the total amount of resources created by society did not greatly break away from the amount of resources needed for simple survival, expenses were largely directed to the acquisition of real objectively existing "utilities". And inequality meant that someone was well fed and warm, while someone was often starving, physically working hard and did not know where to spend the night. Today, a much larger share of the expenses of the upper income groups goes to pay for the status component in the price of goods and services, is converted into labels on clothes and hoods of cars.

And here one cannot but recall the positive property of inequality to stimulate creative activity. In conditions when the real quality of life of the upper and lower middle class practically does not differ, while the upper middle class spends more time on work, on average has a better education (past labor costs) and better competencies, then it is not at all clear what for the representatives the upper middle class are making all these efforts? By and large, for the nameplates on the hoods.

On average, the upper middle class work harder and with higher productivity than the lower middle class. At the same time, the upper middle class pays more taxes, of which various social programs are paid, the beneficiary of which is mainly the lower middle class, and public goods that are used by everyone (education, health care, roads).

Therefore, the symbolic difference in consumption between these two groups can be viewed as a tribute to the respect that the lower middle class pays to the upper middle class for the latter's greater contribution to ensuring the level of objective quality of life achieved by society.

2. Inequality in decision-making rights.

This is more true for the 1% of the richest members of society. Neither Warren Buffett, nor Bill Gates, nor their descendants in 20 generations will physically be able to spend their tens of billions of dollars on the personal consumption of objectively existing goods.

Most of the income of truly wealthy people is either reinvested in business or spent in charity, and in either case, the money provides the ability to make decisions that affect a large number of people: whether to build stores or spaceships, fight cancer or expand the desert. Sahara.

A successful businessman is the result of consistently making a large number of successful decisions. The modern economic system constantly selects those whose ideas about changing life have been positively evaluated by humanity in the money paid for them.

Elon Musk earned his power to make decisions about the construction of spaceships and electric vehicles because his previous ideas (PayPal) were judged by consumers as life-changing for the better (that this important score was backed up by the money spent on purchasing them). And if he is wrong now, then his ability to make such large-scale decisions will dramatically decrease.

And now the actual spin-off in which we will consider separately the topic of elite overconsumption as one of the costs of inequality.

By "overconsumption" I mean the destruction or demonstratively not rational use of material resources in order to demonstrate their social status. In extreme forms, it looks like throwing gold goblets into the sea after a toast, dissolving pearls in wine, building a palace out of ice by the Russian empress Anna Ioanovna, or deliberately burning a real palace as entertainment at a holiday by Peter the Great. In moderate modern times, overconsumption is more often expressed in large yachts, luxury cars and other expenses, which look wild especially when compared with how many starving children in Africa could be fed with this money.

It is overconsumption that, as a rule, causes the strongest negative reaction from the majority of the population and affects the subjective perception of inequality. There is no doubt that overconsumption damages the general welfare by redistributing resources from directions where they could be used more efficiently.

Nevertheless, in this case, there are several important caveats:

1. Overconsumption is not the prerogative of the rich and, moreover, not even a function of wealth. Many rich people live modestly, while some members of the middle class often go out of their way to show off their conspicuous consumption of elite goods / services, often in debt.

Braudel very vividly describes the situation when two worlds coexisted in parallel in Western Europe in the 15th-18th centuries: in Holland, Venice and the trading cities of France, it was customary among rich people to dress on the street as modestly as possible, and at home, among many merchant families, it was considered bad form to show unnecessary luxury. Right there next to the courts of the French and English kings, the nobility, which was often many times poorer than the merchants described above and burdened with huge debts, emphatically scattered money, leading a demonstratively wasteful lifestyle.

No one prevented merchants from swimming in luxury, and no one prevented the nobles from being economical. Nevertheless, some borrowed in order to lower them on clothes, while others refrained from demonstrative spending, being many times richer (in both strata, of course, there were different strategies of behavior, I'm talking about the prevailing ones).

In modern Sweden, it is generally considered bad form among wealthy people to demonstrate their wealth, and in the Gulf countries or Russia of the 1990-2000s, both among the rich and among the middle class following them, on the contrary, it is / was considered correct to demonstrate the consumption of luxury goods with all its might. beyond their objective capabilities. It should be noted that in Russia this social norm changed quite a lot in the 2010s towards less conspicuous consumption.

Thus, the costs that the economic system incurs from overconsumption are associated not so much with the very fact of the existence of property inequality, but with cultural and social attitudes that allow / encourage the demonstration of this inequality. It is obvious that if there were no inequality in property at all, then no one would be able to demonstrate it in such a wasteful way. However, with an equally high level of actual inequality, it is easy to exist both in societies in which the conspicuous consumption of the rich is the norm and a significant percentage of GDP is spent on it (France XVII-XVIII centuries, Russia in the second half of the XVIII and early XXI centuries, modern monarchies of the Persian Gulf), and societies in which conspicuous consumption is less widespread and socially condemned (Holland of the New Age, modern Scandinavia).

This means that the issue of minimizing the costs associated with overconsumption lies more in the field of culture and, to a lesser extent, public policy (although progressive taxation of elite consumption can be welcomed in every possible way), rather than in the area of actual inequality in income or in capital ownership.

2. One can consider overconsumption not as a pure evil that should be eliminated in any way, but as an inevitable cost of a more efficient organization of the economic system.

For example, in the USSR, spending on overconsumption within the economy was extremely insignificant. Even the party elite lived very modestly by world standards, and the possibilities of shadow guilds or criminals to convert money into purchasing consumer goods of an elite level were limited. However, the Soviet system as a whole proved to be economically ineffective. The losses from the restriction of entrepreneurial initiative for the system as a whole were much greater than any possible economy of public resources on the overconsumption of the elites.

The possibility of overconsumption, as well as the prospect of passing this opportunity on to your children, is a powerful stimulus to work and innovation. Many citizens of the USSR, who were potentially able to make a serious contribution to the development of the economy, earning their right to overconsumption, instead drank vodka, collected stamps or went on hikes, because the level of their real consumption within this economic system depended very little on their efforts , and accordingly there was no incentive to make such efforts.

3. A house on the Cote d'Azur can be sold for several hundred million dollars, but the cost of building such a house itself is measured in units of millions of dollars .

The difference between price and cost is explained solely by the fact that many rich people want to have a house in certain areas of the Cote d'Azur and, as a result, astronomical land prices are formed there. The cost of antiques, art objects or large diamonds is determined not by the fact that humanity has spent some phantasmagoric real resources on their creation, but by their rarity and the fact that a lot of rich people want to own this particular item.

Even in the most tangible sectors of luxury consumption, such as jewelry or super-expensive cars, the notable component of their cost is not piles of gold and millions of man-hours, but symbolic capital. From the category of Michael Jackson / Princess Diana, they also wore such. The prime cost consists of participation in advertising of models and celebrities, the maintenance of boutiques on expensive shopping streets, the cost of renting on which is high for the same reasons as the cost of a house on the Cote d'Azur, and other similar things that are difficult to directly compare with the resources consumed for the production of goods mass demand.

It should be understood that refusing to buy a watch for a million dollars will not automatically create several thousand extra tons of grain for African children, just as refusing to build a house on the Cote d'Azur cannot be directly converted into the construction of a thousand houses for the middle class in the French hinterland. 1,000 houses for the middle class will require 100-200 times more concrete, metal and man-hours of work than a luxurious mansion on the French Riviera. Although the market value of this mansion can be equal to the market value of the specified thousand houses.

4. Mass consciousness, as a rule, greatly overestimates the magnitude of luxury overconsumption.

Just a few numbers for comparison:

Wallmart network turnover in 2019 amounted to $ 514 billion. So many inexpensive goods are sold by a large, but one chain of stores "for everyone" out of several thousand existing in the world. Middle-class car maker Toyota had sales of $ 273 billion in 2019, and mid-class gadgets Apple made $ 266 billion.

The global yacht market for 2019 was $ 6.5 billion. Revenue separately Lamborghini in 2019 amounted to 1.8 billion euros Ferrari 3.8 billion euros. A total of 28,500 new cars of super luxury brands (Ferrari, Bentley, Rolls-Royce, Lamborghini, Maserati, Aston Martin, etc.) were sold worldwide in 2015. Even if we assume the average price of one such car is 400,000 dollars (and most of these cars are in the range of 200-300 thousand, so even taking into account cars more than a million, such an average seems to be greatly overestimated), then the total sales of these cars amounted to about 11 billion dollars or 25 times less than the revenue of Toyota alone.

The entire market for personal luxury goods (watches, jewelry, handbags, alcohol, cosmetics and other luxury brands) amounted to 281 billion euros in 2019. And obviously not all of this volume was consumed by the super-rich. Most of the expensive alcohol and cosmetics, as well as jewelry from the lower price segment of elite brands, are consumed primarily by the upper middle class.

Again, it should be recalled that most of the value of these luxury brands is not accounted for by the expenditure of physical resources, which could be redistributed from luxury consumption to hungry children in Africa, but on the valuation of symbolic capital, often created solely by the fact that other rich it / want to own it. The share of real resources (materials, labor costs) in the creation of elite goods is much less than the average for the economy, and if we managed to suppress elite consumption by some administrative methods and redistribute resources to help starving children in Africa, the volume of such aid expressed in tons of food would be several times less than could be assumed from the price expression of the elite goods market.

It is very difficult to accurately estimate the volume of the world's resources spent on elite overconsumption. Firstly, there are no statistics for all segments, and secondly, it is always difficult to draw a distinction between elite consumption goods and goods for the upper middle class. But if we argue logically that BMW is within the limits of the norm available to the upper middle class, and Ferrari is overconsumption, that flying in business class is within the norm, and a private jet is overconsumption, and also consider as expenses only the elite produced this year. goods, elite services rendered and elite houses built (excluding the turnover of previously created works of art, real estate or cars), then, with all the maximum assumptions, I could not count even 1% of world GDP accounted for by overconsumption (and for this 1% of world GDP several times less man-hours of work and material resources in physical terms are spent than on any other 1% of world GDP: the share of the value of brands in the price of final goods related to overconsumption is too large). However, I admit that a researcher with different ideological orientations can count two or even three percent of GDP. Those. will reach the volume of resources comparable to world military expenditures.

This comparison is very revealing. Why does mankind spend money on military needs at all? In general, because it happened so historically that some groups of people who seized power in different geographic locations in different ways are afraid of each other and do not trust each other. From the point of view of humanity as a whole, it is impossible in principle to come up with any rational explanations for why military expenditures are needed. At the same time, smaller-scale spending on overconsumption can be seen as payment for the efficient operation of the economic system.

Another figure for comparison: spending on public order (police, prisons, courts) is about 1.7% of GDP in the EU and 2% of GDP in the United States, and this is without taking into account private spending on security and safety, not to mention legal services ( if we sum up all this to the maximum, we will reach the region of 5% of GDP). These costs are essentially a payment for disincentives against rule violations. Overconsumption can be viewed as payment for creating positive incentives to work. And when you look at the world in this way, their actual size seems surprisingly modest.

Summarizing the topic of elite overconsumption, it should be said that:

a) the objective costs incurred by the economic system are greatly exaggerated in the public mind;

b) the main negative consequences of overconsumption are more moral (irritation of the bulk of the population and the growth of subjective inequality) than economic in nature;

c) the most effective methods of limiting overconsumption relate more to the plane of public morality and culture than to issues of economic policy;

d) even if we accept as an axiom the assumption that in economic systems based on high inequality the costs of overconsumption are higher than in societies built on other principles, we can perceive them as payment for creating more effective incentives that allow society as a whole to live more prosperously.

And this fee is surprisingly modest.