Productive Consumption
Transcript of Productive Consumption
ECONOMICS HONOURS
SEMINAR PAPER
PRODUCTIVE CONSUMPTION: CAPITAL GOODS AND
PRODUCTIVE CAPACITIES
TEJASWINI KATE
SYBA (A)
ROLL NO.56
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CONTENTS
Preface 3
SECTION I: Productive Consumption an Overview 4
1. What is productive consumption?
2. An example from the Keynesian purview
3. How is it different from non-productive consumption?
SECTION II: Relevance of Productive Consumption 8
1. Intrinsic relation to labour economics & GDP accounting
2. Capital goods
3. Creation of productive capacities
4. Productive Chains
SECTION III: 12
Conclusion
Appendix: Synopsis
SECTION IV: 14
Bibliography
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PREFACE
Production and consumption are two inseparable aspects of the production and reproduction
of human life, but in modern society these concepts have become separated.
Production and consumption are identical in another way: production consumes labour-power
and other products of labour, and is therefore equally consumption; production of labour-
power entails consumption of food, education and so on and so forth, and is therefore equally
consumption. Thus production of the means of production is impossible without production
of the means life and vice versa, and the system of distribution and exchange must ensure the
proper balance between the two.
Thus the system of distribution and exchange, which mediates between productive
consumption and consumption in production, is not just an entity external to production, but
an integral part of the relations of production. The failure of the method of distribution and
exchange to maintain proper coordination of consumption and production leads to crisis.
Further, the system of distribution and exchange (commerce) is not only inseparable from
production and consumption (labour) but the system of distribution and exchange is one of
the forces of production, production is constituted the cooperation of labour and therefore
potentially in the exchange of labour and thus the system of distribution and exchange
necessarily penetrates the labour process and becomes a part of it.
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SECTION I
What is productive consumption?
Productive consumption adds to utility and income at the same time. The shadow price of a
productive good is equal to its money price less its marginal product. As more of the good is
consumed, its shadow price rises because of diminishing productivity, and the consumer's full
income also rises because the marginal product is positive. Productive consumption enables
the satisfaction of current needs and simultaneously increases the productive potential of
labour. From the perspective of growth theory, the productive-consumption hypothesis is of
fundamental interest because it modifies the harsh inter-temporal consumption trade-off
traditionally assumed.
Gersovitz (1988) distinguishes three forms of productive consumption:
(A) Nutrition,
(B) Health
(C) Education
All three forms serve the satisfaction of current needs, and, consequently, can be labelled as
consumption expenditures; though occasionally this might be assessed differently in the case
of education. Simultaneously, the efficiency of labour or – depending on the interpretation –
the stock of human capital increases. From this point of view, the underlying consumption
expenditures can be classified as productive.
Gersovitz (1988) expresses this notion as follows: “Health and nutrition expenditures share
some attributes of educational ones; they affect welfare beyond the period when they are
made. To a much greater extent than in the case of education, however, these expenditures
also affect current well-being, and it would be impossible to devise a convincing allocation of
these expenditures between current and future consumption. For instance, at low nutritional
levels, food consumption has joint effects on current and future well-being and productivity.”
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Productive consumption, when employed as a technical term, is commonly defined as the use
of wealth in the production of further wealth; and it should properly include not all the
consumption of productive workers, but only that which is necessary for their efficiency. For
consumption is the end of production; and all wholesome consumption is productive of
benefits, many of the most worthy of which do not directly contribute to the production of
material wealth.
Productive Consumption increases human capacity; for example education provides a
consumer good and simultaneously enhances an individual’s productive capacity. Medical
care, social services also fall under the same category.
Productive consumption enables the satisfaction of current needs and, at the same time,
increases the productive potential of labour. Theoretical as well as empirical evidence
suggests that productive consumption is primarily relevant to low-income countries. From the
perspective of growth theory, the productive consumption hypothesis is of fundamental
interest because it modifies the "harsh" inter-temporal consumption trade-off traditionally
assumed
Productive consumption enables the satisfaction of current needs and, at the same time,
increases the productive potential of labour. As a consequence, the potential for the
satisfaction of future needs rises. Two interpretations of the productive effect of consumption
can be distinguished: First, a rising level of per capita consumption can be considered to
increase the efficiency of labour. Second, a rise in the level of per capital consumption can,
on the other hand, be interpreted as increasing the stock of human capital [Blaug (1987)].
From the perspective of growth theory, the productive consumption hypothesis seems to be of
fundamental interest because of two reasons: First, productive consumption essentially
modifies, that is partially eliminates, the inter-temporal consumption trade-off. That is, as far
as the possibility of productive consumption exists; the hypothesis of productive consumption
does not assert that every consumption activity is productive. Second, theoretical as well as
empirical evidence suggests a systematic, which is negative relationship between the level of
per capita consumption and the marginal productive effect of consumption. Concentrating on
the importance of productive consumption for economic growth does surely not intend to
neglect the importance of other factors that undoubtedly influence growth and development,
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e.g. the stability of the political system, the openness of the economy, or the development of
the financial sector.
Productive vs. non-productive consumption:
While productive consumption is an agent of economic growth, non-productive consumption
leads to economic impoverishment. Hence, while productive consumption sustains wealth
generators and promotes the expansion of real wealth, non-productive consumption only
leads to economic impoverishment. Productive consumption is a production process in which
the means of production (for example, the instruments of labour and raw and processed
materials) and human labour power (physical and intellectual strength) are consumed. In non-
productive consumption, which takes place outside of production, the objects of consumption
are used or finally consumed. Thus, products are created in productive consumption and
disposed of in non-productive consumption.
Printing money by the central bank produces exactly the same damaging effect as the
counterfeit money does. Likewise the creation of money through fractional-reserve banking
produces the same damaging effect. The expansion of money sets the platform for non-
productive consumption — an agent of economic destruction.
In the Keynesian framework, during a recession when consumers tend to lower their outlays,
it is the duty of the government to step in and boost its expenditure. For instance, the
government could employ various unemployed individuals to dig holes in the ground.
The money that the government pays these workers will boost their consumption, and this in
turn will lift the overall income in the economy. According to this framework, it doesn't
really matter whether holes in the ground contribute to individuals' well-being; what matters
is that people are getting paid and then using the money to boost consumption.
Government doesn't earn money as such. It is not a wealth generator. So how then does it pay
various individuals who are employed in non-wealth-generating projects? It secures the
money through taxation, by asking the central bank to print money, or by borrowing. If we
ignore overseas borrowings, it basically amounts to the diversion of wealth from wealth
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generators to government activities. This is the same outcome achieved by printing money: it
sets in motion non - productive consumption.
Example of productive consumption:
A baker exchanges his ten saved loaves of bread for ten potatoes. The potatoes are now
sustaining or funding the baker while he is engaged in the baking of bread. Likewise the
bread sustains the potato farmer while he is engaged in the production of potatoes. The
respective production of the baker and of the potato farmer enables them to secure goods for
consumption. What makes the consumption productive in this example is the fact that both
the baker and the potato farmer consume in order to be able to produce.
The consumption of both the baker and the potato farmer maintains their lives and well-
being. This is the only reason for production. The introduction of money doesn't change what
was said so far. For instance the baker can exchange his ten loaves of bread for Rs.10 — he
then uses money to secure ten potatoes. Likewise the potato farmer can now exchange his ten
dollars for ten loaves of bread. Observe that, apart from fulfilling the role of the medium of
exchange, money has contributed absolutely nothing to the production of bread and potatoes.
Example of non-productive consumption:
So far we have seen that to secure potatoes, the baker had to exchange bread for money and
then employed money to secure potatoes. Something was exchanged for money, which in
turn was exchanged for something else — or something for something is exchanged with the
help of money. Trouble erupts when money is created "out of thin air." Such money gives
rise to consumption, which is not backed by any production. It leads to an exchange
of nothing for something.
For instance, a counterfeiter has printed a perfect Rs.20 note. Since he secured this money by
means other than the production of some useful goods or services, the counterfeiter has
therefore obtained the Rs.20 by exchanging nothing for it.
The counterfeiter uses the Rs.20 to buy ten loaves of bread. What we have here is the
diversion of real funding — ten loaves of bread — from a potato farmer towards the
counterfeiter. Note that the diversion takes place by the counterfeiter paying a higher price
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for bread — he pays two rupees per loaf. Previously the price stood at one rupee per loaf.
Also note that since the counterfeiter doesn't produce anything useful he is engaged in non-
productive consumption.
The potato farmer is now denied the bread that he must have to sustain himself while he is
producing potatoes. Obviously this will impair the production of potatoes. As a result, fewer
potatoes will become available, which in turn will undermine the consumption of the baker,
thereby impairing his ability to produce.
Thus, we can see that, while productive consumption sustains wealth generators and
promotes the expansion of real wealth, non-productive consumption only leads to economic
impoverishment.
SECTION II:
Intrinsic relation to labour economics & GDP accounting:
The only productive consumers are productive labourers, but not all consumption by
productive labourers is productive consumption: ‘that alone is productive consumption,
which goes to maintain and increase the productive powers of the community’. This idea
goes back to the physiocrats: it is a notion that a certain quantity of consumer goods produced
in the economy, namely wage goods must be fed back into the production of manpower itself
in the household sector.
Productive Consumption is simple an input to maintain human capital intact. If wages are at
subsistence, the whole of the wages bill is required for productive consumption. However,
workers do consume a certain quantity of ‘luxuries’, and in that sense the wages are
consumed unproductively. The fact remains that consistent classical income accounting
implies deducting all productive consumption from the gross national product to arrive at the
true net national product, which consists simple of profits plus rent; the net product is entirely
created by productive labour and is spent entirely on investment goods and true consumption
goods i.e. non -wage goods. The point is however that only a society bent on maximising
capital accumulation would want to adopt this kind of accounting, a major drawback being
the segregation of wages into productive and unproductive parts.
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Capital Goods and creation of productive capacities:
The nature of productive consumption has been explained above. The value absorbed by it is
what has been called Capital. The trader, manufacturer, and cultivator, purchase the raw
material (The raw materials of manufacture and commerce are, the products bought with a
view to the communication to them of further value. Calicoes are raw material to the calico-
printer, and printed calicoes to the dealer who buys them for re-sale or export. In commerce,
every act of purchase is an act of consumption; and every act of re-sale, an act of production.)
And productive agency, which they consume in the preparation of new products; and the
immediate effect, is precisely the same as that of unproductive consumption, namely, to
create a demand for the objects of their consumption, which operates upon their price, and
upon their production; and to cause a destruction of value. But the ultimate effect is different;
there is no satisfaction of a human want and no resulting gratification, except that accruing to
the individual from the possession of the fresh product the value which replaces that of the
products consumed, and commonly affords him a profit into the bargain.
To this position, that productive consumption does not immediately satisfy any human want,
a cursory observer may possibly object, that the wages of labour, though a productive outlay,
go to satisfy the wants of the labourer, in food and raiment.
But, in this operation, there is a double consumption, one of the capital consumed
productively in the purchase of productive agency, wherefrom results no human gratification:
Secondly of the daily or weekly revenue of the labourer, i.e. of his productive agency, the
recompense for which is consumed unproductively by him and his family, in like manner as
the rent of the manufactory, which forms the revenue of the landlord, is by him consumed
unproductively.
This does not imply the consumption of the same value twice over, first productively, and
afterwards unproductively; for the values consumed are two distinct values resting on bases
altogether different. The first, the productive agency of the labourer, is the effect of his
muscular power and skill, which is itself a positive product, bearing value like any other. The
second is a portion of capital, given by the adventurer in exchange for that productive agency.
After the act of exchange is once completed, the consumption of the value given on either
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side is contemporaneous, but with a different object in view; the one being intended to create
a new product, the other to satisfy the wants of the productive agent. Thus, the object,
expended and consumed by the individual, is the equivalent he receives for his capital; and
that, consumed unproductively by the labourer, is the equivalent for his revenue. The
interchange of these two values by no means makes them one and the same.
So likewise, the intellectual industry of superintendence is reproductively consumed in the
concern; and the profits, accruing to the adventurer as its recompense, are consumed
unproductively by himself and his family.
In short, this double consumption is precisely analogous to that of the raw material used in
the concern. The clothier presents himself to the wool-dealer, with Rs.1000 in his hand; there
are, at this moment, two values in existence, on the one side, that of the Rs.1000, which is the
result of previous production, and now forms a part of the capital of the clothier; on the other,
the wool constituting a part of the annual product of a grazing farm. These products are
interchanged, and each is separately consumed: the capital converted into wool, in a way to
produce cloth; the product of the farm, converted into crown-pieces, in the satisfaction of the
wants of the farmer, or his landlord.
Since everything consumed is so much lost, the gain of reproductive consumption is equal,
whether proceeding from reduced consumption, or from enlarged production. In China, they
make a great saving, in the consumption of seed-corn, by following the drilling in lieu of the
broad-cast, method. The effect of this saving is precisely the same, as if the land were, in
China, proportionately more productive than in Europe.
In manufacture, when the raw material used is of no value whatever, it is not to be reckoned
as forming any part of the requisite consumption of the concern; thus, the stone used by the
lime-burner, and the sand employed by the glass-blower, are no part of their respective
consumption, whenever they have cost them nothing.
A saving of productive agency, whether of industry, of land, or of capital, is equally real and
effectual, as a saving of raw material; and it is practicable in two ways; either by making the
same productive means yields more agency; or by obtaining, the same result from a smaller
quantity of productive means.
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Such savings generally operate in a very short time to the benefit of the community at large;
they reduce the charges of production; and in proportion as the economical process become
better understood, and more generally practised, the competition of producers brings the price
of the product gradually to a level with the charges of production. But for this very reason,
all, who do not learn to economise like their neighbours, must necessarily lose, while others
are gaining. Manufacturers have been ruined by hundreds, because they would go to work in
a grand style with too costly and complex an apparatus, provided of course at an excessive
expense of capital.
There is almost insuperable difficulty in estimating with precision the consumption and
production of value; and individuals have no other means of knowing, whether their fortune
be increased or diminished, except by keeping regular accounts of their receipt and
expenditure; indeed, all prudent persons are careful to do so, and it is a duty imposed by law
in the case of traders.
Productive Chains:
In boosting solidarity in productive chains, the organization of final and productive
consumption is fundamental. The activity of consumer cooperatives and other organized
consumer groups proves that by organizing themselves, consumers are able to increase their
purchasing power and improve their quality of life, while at the same time -if they belong to
solidarity-based networks- making it possible to commercialize the goods produced by
solidarity-based ventures. Thus the novelty of this system is that productive chains can be
boosted through a solidarity approach starting from the final and productive consumption,
insofar as supply undertakings are selected according to technical, environmental and social
considerations. That selection is based on the notion that the price paid by consumers for the
final product not only spurs the production of the enterprises that sell the final product, but
also indirectly spurs the production of the different operators that supply an input
incorporated in the final product consumed or any other element used in the process of
production of that good or service. Thus, the consumption of the final product is what enables
companies
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Whose products are sold at one end of the chain to earn and reckon the profits corresponding
to that part of the product consumed. Meanwhile, as the solidarity-based network boosts the
productive chain, creating supply ventures, the profit that was previously accumulated in
those segments of the productive chain becomes, thus, a surplus that goes back to feed the
expansion of the network. In this way, a network that organizes ventures capable of
generating a certain amount of surplus can grow by collectively reinvesting such surpluses,
engaging in new ventures and boosting the productive chain of the final product itself. So, by
selling the same amount of the final product, there can be a substantial increase in the number
of workers in the network, the number of solidarity-based productive ventures, the volume of
income distributed in the network as wages, the surplus generated in the network and its
assets.
With the aim of promoting the correction of value flows, ensuring the well-being of consumers
and increasing the possibilities of sustainable ventures, the proposal is to diversify the final
product offering, allowing for base ventures to be simultaneously integrated into several
solidarity-based productive chains. As a result of such multiple connections and network flows,
these ventures become sustainable by receiving a significant volume of steady demand.
In this way it is possible to generate the conditions necessary to progressively replace the
relations of capitalist accumulation and to expand production and consumption relations based on
solidarity, sharing the surplus generated, creating new jobs, increasing consumption among
participants and developing a great diversity of products and services that ensure the well-being
of all those involved in solidarity-based labour and consumption.
SECTION III
CONCLUSION:
Empirical evidence clearly indicates that productive inputs are not exclusively accumulated
as a result of the renunciation of consumption. Especially at early stages of economic
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development, consumption can in a specific sense be regarded as a source of the
accumulation of a productive input (human capital) and thus output growth.
In the end, the growth of capital and production can only be for the purpose of consumption.
The growth of capital, or at least stock, driven by saving behaviour and expresses in the
proportion between society’s productive labour and its unproductive labour, is the
prerequisite for expanding division of labour, increasing productive consumption and
production.
APPENDIX
SYNOPSIS:
All the members of the community are not labourers but all are consumers and consume
productively and unproductively.Whoever contributes nothing directly or indirectly to
production is an unproductive consumer. What they consume in keeping up or improving
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their health,strength and capacities of work , or in rearing other productive labourers to
succeed them is called Productive Consumption.
This paper attempts to throw light on this phenomenon of Productive Consumption that has
been cause for a lot of debate among economists as early as the 18 th century. Through the
paper the various facets of this angle of consumption is showcased.
Numerous topics such as the,
true meaning of the term,
comparison with non productive or unproductive consumption,
implications with respect to capital goods and creation of productive capacities,
its relation to labour economics
importance in productive chains are highlighted.
The research process would entail a thourough reading of various books, articles, research
papers resulting in a complete secondary analysis of the topic in concern. The paper also
seeks to question the basis of establishment of the theortical aspects of this fundamental idea
and also aspires to explain its intricacies through various examples and diverse situations.
Through the secondary research the paper attempts to delve into the various nuances of the
the term- Productive Consumption by analysisng the various research papers, and attempting
to compare and critique them so as to gain greater insight to this aspect of the consumption-
production connundrum.
The paper also attempts to trace the history of productive consumption through the ages and
through pertinent, relevant, modern examples hopes to explain the term in the simplest and
most uncomplicated manner as possible. The paper further hopes to enlighten the reader
about this relatively unknown economic phenomenon and explain its relevance in the real
world.
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3. August Hayek Friedrich, McCloughry Roy ,Money, capital & fluctuations: early essays, London School of Economics and Political Science
4. Blaug Mark, Economic theory in retrospect
5. Gupta Manash Ranjan, (2002) Productive consumption and endogenous growth: a theoretical analysis, Economic Research Unit, Indian statistical institute Calcutta, India.
6. Mance Euclides André ,( 2002) Solidarity-Based Productive Chains, IFiL, Curitiba,
7. Say, Jean-Baptist (1855), A Treatise on Political Economy, Philadelphia: Lippincott, Grambo & Co.
8. Steger ,Thomas,( 1997),Productive Consumption and Growth in Developing Countries
9. Gersovitz, Mark (1988), Saving and Development, Handbook of Development Economics, Volume I, H. Chenery and T.N. Srinivasan (eds.) Elsevier SciencePublishers, 382-424.
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