Physical versus Psychological Wants

In an Affluent Society, Galbraith describes the transition of America from a poor society in which production was determined by basic, physical wants to an affluent society in which consumers opulent desires are molded by production. Although the basic, physical needs of consumers have been satisfied, because conventional wisdom places such great emphasis on continually increasing production (GDP) as a measure of a healthy, flourishing economy, producers have resorted to using advertising and marketing to impose wants and needs on the consumers, creating the wants producers need to satisfy. As production increases, the amount companies spend on advertising likewise increases in order to create a consumer demand for the product they produced. Higher levels of production lead not to higher levels of welfare as conventional wisdom claims, but rather to higher levels of want creation. If advertising and marketing were non-existent, the increased output by producers would yield a utility of zero because there would be no consumer demand for it. However, even though consumption is driven by production, conventional wisdom declares that the process of the consumer independently determining their wants and needs still survives. The disconnect between economic reality and conventional wisdom places a huge importance on private spending within the economy; as long as advertising makes the increased output of more and more luxurious goods something that the consumers ‘want,’ the economy will survive.

The inefficiency created in private spending by conventional wisdom is also confounded by conventional wisdom’s inefficient approach to increased public spending. As discussed by Galbraith in his chapter on Production and Price Stability, government spending is, at any point in time, to be as near to the minimum amount the community finds acceptable. Many complain that government spending results in waste and inefficiency; however, what many do not realize is that this waste and inefficiency can be cut, and the important function still be performed. But, for most, it is easier to cut the function than the inefficiency. The conventional wisdom that big government equals bad performance can be seen through the current debate on the extent to which the government should be involved in providing healthcare for Americans. Republican presidential nominee Mitt Romney stated on the issue that, “The right way to reign in healthcare costs is not by applying more government and more controls and making it more like the post office, it's by making it more like a consumer-driven market.” This statement adheres to the conventional wisdom on government spending, and completely ignores the fact that the ‘consumer-driven’ market has been replaced by the ‘producer-driven’ market; Kaiser is one of many health insurance providers that utilizes television, internet, and radio adds to make their ‘product’ more attractive to the American people. Galbraith likewise examines the conventional wisdom that increased government spending limits the freedoms of individuals within the market. This conventional wisdom is echoed in Republican vice presidential nominee Paul Ryan in his statement on Obamacare. “This…is the government basically running the entire healthcare system, turning large insurers into de facto public utilities, depriving people of choice, depriving people of options, raising people's prices, raising taxes when we need new jobs.”  What this conventional wisdom does not recognize is that limiting public spending ultimately throws off the social balance that exists between public and private spending within the economy; having too much private spending and not enough public spending creates a society in which consumers drive around in huge, expensive cars they only think they need, but cannot afford to cover the costs of the injuries they incur when they crash into other huge, expensive cars. The economic inefficiency created by this social imbalance can be seen by looking at the below graph, which compares consumer spending on different goods by four different affluent nations. Directing your attention to the data on healthcare, one can see that the United States spends roughly three times the amount that the United Kingdom does on healthcare, and twice the amount Canada and Japan do. This data, when examined in light of the fact that the governments of the United Kingdom, Canada, and Japan all provide subsidized healthcare to their consumers, exemplifies the economic inefficiency created by American’s ‘conventional wisdom’ regarding private and public spending.  As Galbraith pointed out many times throughout his book, low public spending impairs economic performance.

The irrationality of the conventional wisdom that persists in America is preventing consumers from realizing that they need these public goods more than their manufactured ‘want’ for inefficient overproduction. Because conventional wisdom has shifted the American economy to be driven by production, these producers have in turn focused consumers’ desires on increasing their material, tangible standard of living. Even though an increase in public spending on healthcare and education would cause an increase in consumers’ standards of living in the long run, this production-based society has focused the consumers’ attention on measuring their immediate wealth through short term gains of cars, pools, and houses.