The Myth of Productivity and the Function of Consumerism: An Institutional Perspective

Productivity is an economic term that, like others, has more than one meaning. First, there is overall productivity, meaning the collective ability of a society to produce goods and services. Second, productivity is used to explain the distribution of incomes within a society, where productivity is taken to mean the relative contribution of each of the so-called factors of production, land, labor and capital, to the production process. These two aspects of productivity are inextricably linked in the U.S. mixed economic system.

Efforts to measure productivity in the second sense are chimeras. Productivity is the result of mixing machinery, human effort, and community knowledge. Productivity does not exist independently of any or all of these. If a woman uses a wheelbarrow to move bricks, what part of the result can be attributed to the woman’s exertions and what part to the wheelbarrow? Since it is impossible to measure independently the contributions of each to their combined output, economics uses the mechanism of prices to make this transition.

But this means that the only way to determine a laborer’s wage is to know it in advance. The only way to determine the rent of land is to know it in advance. By working backwards, it is concluded that the payments to the factors of production prove what their relative contributions are. If it were not so, their payments would be different. This is circular and tautological. Alleged productivity is used to rationalize what the individual actors in the economic drama are paid.

The distribution of incomes is not determined by productivity but by power relations and institutional arrangements of societies. Centuries ago, princes received huge amounts of the community product, while doing no productive work themselves. Their relatively greater income was acquired because they had the power, both legal and physical, to command tribute from their vassals. The penalty for not paying the prince his due could be the loss of one’s head.

Today, ownership and control of productive assets, with the resulting ability to command a disproportionate share of society’s income and wealth, still is enforced by law and social privilege. The “free private enterprise system” is slavishly credited with the overall production of the society and with the determination of individual rewards. Today the penalty for not paying the princes of corporations their due is the loss of one’s job.

Several decades ago, corporate CEOs in the U.S. were paid 40 to 60 times what the assembly line workers received. Whether they were worth 40 to 60 times more than the line worker then is an open question.

Today these same CEOs routinely are paid from 400 to 600 times more than an assembly line worker. Is it possible that CEOs became ten times more productive than they were 20-30 years ago? That would imply an annual growth rate in CEO productivity of almost 17%. The annual overall rate of growth of productivity averaged only a little more than one percent.

In 2005, the incomes of the CEOs of the 100 largest U.S. corporations grew by 25% while average U.S. worker pay increased by only 3%. Is it possible the CEOs are 400 to 600 times more productive than assembly line workers? The myth of productivity would tell us they are or they wouldn’t be rewarded so handsomely. The myth of productivity would tell us the CEOs were extremely productive in 2005.

What changed to permit this sweeping increase in the pay of CEOs were the institutional factors which determined what CEOs get paid by their Boards of Directors. Principal among these was the greater importance assigned to increasing the value of the corporation’s stock. CEOs who orchestrated acquisitions and mergers that temporarily inflated the price of company stock, or cut costs by firing 1,000s of workers were themselves handsomely rewarded with special bonuses, stock options, golden parachutes and lavish company perks. Overpaid CEOs gave corporations bragging rights in the world of big business.

Several years ago when the corporate CEO pay bubble burst, a number of the most “productive” of these individuals were prosecuted for defrauding their own stockholders and violating federal securities laws. A handful actually went to prison and the trial of two of the most prominent is currently underway in the Enron case. The obligatory calls for curbing these excesses were made by persons in authority. Notwithstanding, bloated corporate pay is again on the increase, while wages for most workers lag far behind.

One of the ways used to divert attention from the huge disparities in income distribution is to encourage growth and an ever larger output of goods and services. If everyone’s income is growing, so the argument goes, everyone is better off and the relative shares of different actors become less important.

It is contended that the wealthier income recipients deserve their extraordinary incomes not only because they are more productive than others, but because it is through their frugality and investment that growth takes place. It is allegedly this growth that is responsible for everyone being better off, through the so-called trickle-down theory.

Those who object to the trickle-down theory on the grounds they don’t like to be dripped on have a different explanation. In reality growth is financed by mega lines of credit for corporations from mega banks, by public assistance such as the use of local government taxation to pay for buildings to be used by private businesses, by tax abatements to lure new or relocating industries to communities, and by the issuance of new or additional shares of stock. Initial public offerings (IPOs) abound for new companies, and are quickly bought up by thousands of small investors, as well as institutional investors that pool the assets of millions of individuals.

There is another reason why inequality in the distribution of income serves to promote
ever-greater growth. Striving to keep up with one’s neighbors, friends and associates is effectuated through the mechanism of competitive consumption. Individuals and families are urged, through high pressure promotional devices (billions are spent annually on highly persuasive advertising) and social pressure, to maintain material standards of consumption as high as they can possibly attain, even if it means incurring huge debts.

U.S. consumers now are burdened with more than nine trillion dollars of debt. The average balance for those who carry credit card debt is $12,000! Additionally, the rate of interest on these unpaid balances ranges from 12 to 22 percent.

To continue to service this debt and to permit the ever increasing consumption levels of all but the poorest in the society, there must be a constant increase in overall productivity, i.e. the maintenance of a high rate of growth. It is a treadmill of our own design.

Industrial nations such as the United States produce more than an abundance of material goods, sufficient to enable the entire population to live materially comfortable lives, to enjoy productive, fulfilling work, to become engaged in community activities and to contribute to the eradication of world poverty, the real kind. There simply is no instrumental reason why this cannot be realized.

The only reason this promise is not realized is because of the power of man-made institutions to prohibit or inhibit its occurrence. Factories are not closed and workers laid off because it is no longer technologically feasible to operate the plant. They are closed for business reasons, for purposes of pecuniary enhancement, of the corporation and/or the CEO. It has nothing to do with the real productivity of either the workers or the machines they use in their work or the CEOs. That and the uneven distribution of income is the myth of productivity.

Presently, there can be severe economic and socio-psychological consequences when a factory is closed and hundreds or thousands of workers are laid off. In smaller, company towns, the closing of the local plant may literally mean the demise of the community. The United States is dotted with ghost towns that suffered this fate.

When factories are closed in larger communities, there is a ripple effect that has consequences for the entire community. Community income declines, other businesses suffer decreased demand, often resulting in additional lay-offs, fewer dollars flowing into the community from outside purchases, and a general negative economic impact. It is a cumulative process, and while it may not be fatal, it can have profound impacts on individuals and families, the local economy, government services, education, and quality of life.

With only five percent of the world’s population, the U.S. consumes more than 40 percent of the world’s resources used in any given year. This high mass consumption far exceeds any reasonable economic needs of the populace, but is continued because of the competition fostered by economic and social institutions. With the present institutional arrangements of society it is impossible for society as a whole to get off the high mass consumption treadmill, without fundamental changes in values and economic and social institutions.

Such changes cannot take place voluntarily, person by person, because we all are products of our environment and the constant pressures to “live better.” The current economic machine depends on high mass consumption to keep it running. Without changes in the system of rewards, any sudden rapid decrease in consumer spending would result in severe economic dislocation and depression.

If there are to be meaningful economic changes, it will require public education, public intervention, collective social direction and guidance, and relief from the enticements of private economic interests, especially the advertising industry. Advertising must become informative only, not misleading and designed to create wants where none previously existed.

With the tightening of the environmental noose and the inexorable depletion of the planet’s natural resources the continuation of consumerism such as that found in the United States and other capitalist nations will not be possible. Decisions about greater equality and reduced demand either will be made by us or for us. We need the planet. The planet doesn’t need us.

Jim Cornehls – Copyright: 2006

Jim Cornehls is Professor and Director of the Law and Public Policy Graduate Certificate Program at the University of Texas at Arlington.

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