The Effects of Materialism on Economics

Economics studies the ways in which societies allocate resources--which, by nature, are limited--to meet their needs. This includes the study of how consumers use their resources, such as time and money, to satisfy their needs and wants. Some individual consumers have a materialistic outlook, placing a high premium on acquiring material goods. Materialism carries significant economic consequences, both positive and negative.

According to the Hoover Institution at Stanford University, consumer spending accounts for about 70 percent of the U.S. gross domestic product (GDP), a measure of total economic output. An attitude of economic materialism drives consumers to spend more of their disposable incomes and acquire more goods, which translates to economic growth as firms produce more to meet consumer demand. This increased spending and production increases the GDP.

Conspicuous consumption refers to consumer spending for the purpose of flaunting wealth. Economist and sociologist Thorstein Veblen coined the term in his book “The Theory of the Leisure Class” to describe the behavior of American society during the period of the late 19th century known as the Gilded Age. Materialism often finds expression as conspicuous consumption. Sometimes, people driven by materialism focus their energies on “keeping up with the Joneses,” a catchphrase for conspicuous consumption in which your neighbors become a standard for measuring your own prosperity. In a desire to keep up with their neighbors, consumers may purchase larger houses, more expensive cars and other luxury goods to give the appearance of success and prosperity.

Materialistic attitudes drive consumers to spend more and purchase more goods. However, as people spend more on goods and services, they may save little or none of their earnings. Over the years, economists in the government and private sector have warned of serious consequences resulting from the nation’s low savings rate. The Federal Reserve Bank of St. Louis reported in 2007 that Americans’ personal saving rate fell from about 9 percent in the 1980s to near zero in the early years of the 21st century. Low savings by American consumers result in less investment capital needed for economic expansion, which makes the U.S. economy increasingly dependent on foreign investors.

Materialism and a mentality to “keep up with the Joneses” may drive consumers to spend more and save less. Taken to an extreme, materialism can lead to many consumers spending more than they can afford, accumulating debt on high-interest credit cards or acquiring large mortgages for larger homes than they need or can afford. The nation witnessed this in late 2007 and early 2008, with the collapse of the housing market. Many Americans who had purchased large and expensive homes, financed by easy credit and investment income, fell behind or defaulted when the housing and credit markets crashed. Worse, as the problem spread across the U.S. economy and around the world, many Americans lost jobs and had little or no savings to help them through the difficult times.