Academic journal article Journal of Economic Issues

Corporate Power and the Evolution of Consumer Credit

Academic journal article Journal of Economic Issues

Corporate Power and the Evolution of Consumer Credit

Article excerpt

The evolution of consumer credit involves the use of corporate power to remove the liquidity constraints that historically have limited consumer spending. Lack of liquidity constrains consumer spending, hindering the ability of corporations to transform consumer assets into corporate profits. Power stems from the size of the financial resources that corporations command, the willingness to use those resources to remove institutions that constrain consumer spending, and the willingness to commit resources to create new institutions that encourage spending. [1] As John Kenneth Galbraith so ably observed, increasing expenditures stem from the corporations' vested interest in increasing output (Galbraith 1958).

Advertising helps create desires, and--where income is lacking--credit provides the means. Advertising channels the emulative propensities of human beings toward the consumption of goods that corporations sell. Credit provides consumers an immediate claim to those goods. In exchange, corporations receive a claim to the future income of consumers, a claim that disciplines the worker, molding his time, habits, and ideas to the corporation's pursuit of pecuniary values. The underlying view of human nature is not that of an individual who rationally trades off future income for present consumption, but a social being subject to social influences (Ackerman 1997).

Inducing individuals to trade off future income required removing a number of cultural and institutional constraints. Removing the first constraint involved undermining the cultural influences of Protestantism toward debt and spending. Protestantism taught that the rewards for thrift, hard work, and discipline are material wealth in this world and eternal salvation in the next. In doing so, Protestantism provided an ideology rationalizing the accumulation of capital (Weber 1958). In a materially poor economy that values increasing production, thrift is conducive to accumulating capital. In an affluent economy churning out an abundance of goods, thrift becomes a hindrance.

Overcoming the second constraint meant overcoming the lack of liquidity imposed by a lack of current income. The durable goods revolution introduced many new products: radios, washing machines, automobiles, and so on. Their expense, particularly that of the automobile, exceeded the budgets of most consumers. Installment credit solved the problem by providing liquidity to the consumer, while reassuring the creditor by allowing the purchased good serve as collateral. The proliferation of installment credit in the early twentieth century was associated with the rise of a new institution called sales finance companies, established for the purpose of financing consumer spending.

The third constraint lay in providing credit on demand, which required overcoming the lack of liquidity stemming from a lack of current income and a lack of collateral. The solution was the universal credit card, an instrument providing instant credit for virtually any purchase, based on, among other things, the cardholder's prospective income. This in turn required solving technical problems involved in processing credit and in the institutional problems associated with establishing national credit card banks. Further expansions of credit card use followed the deregulation of consumer credit, reductions in the costs of processing credit, the automacy of extending credit, and so on, largely owing to advances in information technology. In recent years, the rise of statistical devices and credit scoring has reduced further the costs of processing prospective cardholders.

The fourth and latest constraint has become apparent with dismantling the system of regulations and overcoming the cultural biases against consumer credit beginning with the deregulatory movement that swept the industrial nations in the late 1970s. While the details differ, the general effect has been to allow consumers in other countries to finance their expenditures with credit. …

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