Stop being snobbish about consumer spending

One of the hottest questions in economics remains, even after 200 years, why the Industrial Revolution happened where it did. How did Britain become an economic superpower rather than China, or India, or France? There are plenty of theories but the most intriguing one comes down to underwear.

For centuries the story of undergarments was, frankly, rather unappetising: people mostly had to make do with loincloths, rough woollen rags and, for the well-off, the occasional codpiece.

Cotton underwear helped drive the industrial revolution

But all that changed in the late 17th and early 18th century. For it was then, a few decades after the invention of the flying shuttle and spinning jenny, that Britons developed an appetite for white cotton underwear. It wasn’t long before households also began to splurge on white stockings, linen dresses, colourful jackets, ribbons, hats, wigs and neckerchiefs. Nor did this consumption craze end with clothes. Old rickety furniture was replaced by crafted wardrobes; pewter mugs by china cups. Pocket watches became a gentleman’s status symbol of choice.

Clerics and society’s self-appointed moral arbiters raised their eyebrows at this obsession with material possession. The great and the good dismissed it as the madness of crowds — did people not know any better? As it happens, they did.

It was upon this consumption frenzy that the Industrial Revolution was built. Yes: innovation, education and demographics had plenty to do with it, but had Britons not had such a prodigious appetite for purchasing stuff the satanic mills simply wouldn’t have had the customers.

In other words, Britain assumed its position in the world thanks to consumer spending; not despite it. Same thing for the US in the 20th century and, most probably, for China in the coming decades as its middle classes flex their wallets.

This is worth bearing in mind today, because it remains fashionable to moan about Britain’s reliance on the consumer. In a report this week, the Archbishop of Canterbury and the Commission on Economic Justice expressed alarm at forecasts that “household consumption will drive nine tenths of the estimated 2 per cent GDP growth”.

This does indeed sound alarming, until you consider that a) this figure would hardly be unprecedented: during Britain’s industrial heyday in the 1830s consumer spending accounted for an average of 93 per cent of total economic growth. And, more to the point, b) the number will almost certainly be wrong.

For it turns out that having powered the economy for several years, including in the aftermath of the Brexit vote, consumer spending has tailed off in recent months. Household spending rose by only 0.1 per cent in the second quarter of the year, which is the slowest rate for two and a half years and the main reason overall growth is only 0.3 per cent.

The consumer has always been, and will continue to be, the engine of Britain’s economy. So why is it sputtering? One explanation is the return of the squeeze on real incomes since the referendum. With the pound weaker and inflation higher, standards of living are falling again. Consumer confidence levels have fallen below the low point of last summer. And having relied on debt to fuel recent spending, households are now tightening their belts. Recent Bank of England data show that annual consumer credit growth dropped to 9.8 per cent in July — the lowest reading for 15 months.

Consumers are doing what they usually do when they smell trouble ahead: they are cutting back. They have spotted that house prices look unlikely to rise much further and are far more likely to fall, at least in real terms. They have detected that Brexit will be a long, drawn-out, unpredictable affair which has a small but significant probability of ending in disaster and a far smaller likelihood of yielding a sudden windfall. They know something is amiss and, for the time being at least, they are responding sensibly.

What does this mean? On the one hand, the economy is likely to grow slowly for a bit longer. For all the discounts and car scrappage schemes thrown at British families, we are unlikely to see strong spending again for a while. But let’s try to look beyond the loss of a few percentage points of GDP growth and focus on the good news: far from spending themselves into another crisis, as the more prurient moralists would have it, Britons are doing what they have always done and behaving wisely.

If you start from the presumption that people don’t know what’s best for them, that might sound a little preposterous. It might seem tempting to assume that feckless households are barrelling towards financial doom. But as it happens the vast majority of economic history tells a very different story. For the most part, crises occur because of policy errors inflicted on consumers, rather than the other way round. Much as it might pain the chattering classes, the fact is that most of the time British households know precisely what they’re doing.

Eventually we will learn this lesson. Back in the early Industrial Revolution, as the cognoscenti recoiled from that first great consumer spending spree, the poet Bernard de Mandeville, an early godfather of economics, suggested that perhaps it might all be for the best:

Thus every part was full of vice,
Yet the whole mass a paradise…

Leave a Reply