Marco was kind enough to respond to my adventurous blog Otherwordly. In it, I had suggested that we might be only a decade away from a shift in the economic model that has dominated the past twenty years. Over-consumption, where households currently spend 85-95% of their disposable income, could begin to taper off as new generations—Gen Z and Alpha—enter the workforce and start earning. The crux of the idea was that the dual existences these younger generations experience—an offline world (that is increasingly losing its appeal by the way) and the vibrant, multifaceted online ones—might trigger a lasting change in consumer preferences, shifting away from physical goods.
Marco’s points are all very well taken, though I still maintain there is something significant in this idea, something large enough to warrant a serious discussion about potential mitigation strategies.
Let me share some ideas on his points of skepticism.
Crying wolf. We've all sat through our fair share of presentations by marketing gurus and futurists, who assured us that a new generation with radically different preferences was on the horizon, promising that the world as we knew it would never be the same. They would warn that if certain corporations didn’t prepare, they'd be bankrupt within five years. I’ve always been skeptical of the flood of money corporations seem to ‘invest’ following one of these presentations—usually sparked by a compelling (and handsomely remunerated) speech at an event or during a board meeting.
Also, we have not cried wolf to the devastating impact of these new worlds and social media. Perhaps, we should have, for once.Sharing, Sharing is a prime example of illusion of change, and I agree with Marco's critical point about home ownership. However, it's important to clarify something here: my argument isn’t about ownership versus sharing, but rather about the physical goods themselves. I personally use a car-sharing service and have chosen not to own a car. While my demand for exclusive car ownership has dropped, my overall utility hasn’t been significantly affected—except for those frustrating moments when there isn’t a car nearby. Incidentally, this also means I’ve shifted my consumption from a manufacturing good to a service (another valid point Marco made in his response). The key takeaway here is that the same level of utility across the population can now be met with far fewer physical goods. In this case, the demand shifts from owning a car to using a service, while the supply of physical goods—like cars—must contract accordingly.
Spoiled brat. I agree, of course, and I'll admit that I may have contributed to the spoiling of our Western offspring. However, Gen Z and Alpha have little to do with the West. Where are those kids? Exactly a third are in India and China, while only a little more than 10% reside in the West (US, Canada, and Europe). The question is, are Indian and Chinese kids so spoiled that they would claim they don’t need anything? When they begin to consumer, this could go in one of two directions:
Scenario one: Consumer with a Vengeance. As they grow older and wealthier, these kids could become even more consumer-driven than those in the West, reacting to their childhood frustrations—living in poverty while watching Western kids indulge in an abundance of toys and gadgets.
Scenario two: A new way. While they will likely consume more, they could save a significantly larger share of their income compared to their Western counterparts. We’re already seeing this trend among Gen Y, particularly when it comes to housing affordability for first-time buyers globally (here and here). The situation is even more dire in rapidly growing emerging markets, especially China and India. And adjusting to higher savings might be made easier by my original point: a lower weight for consumption in personal utility functions linked to digital worlds. Marco makes this point, as well.
Influencers. Sure, but the definition of "influencer" has evolved significantly. It's no longer just about individuals who get free stays at luxury hotels or promote makeup brands. My daughter recently introduced me to a new wave of influencers who focus on entirely different areas like playing games online (most of which are free) or tackling social issues. And they are not fringe.
Of course, all of this is just a collection of weak signals, and, in truth, I remain rather skeptical of my own idea. But as Marco writes in the last section of his response, the economic rules in a world with reduced consumption would inevitably lead to some substantial adjustments.
And really, wouldn’t it be wonderful for us economists to have entirely new worlds to tinker with and inevitably complicate?
All excellent points, Luca. One important point that emerges from our discussion is the distinction between lower consumption overall and lower consumption of physical goods (because people switch to services, which are just a different form of consumption). They would both be very significant, but they would have different implications. Overall, I completely agree that this is a theme to explore further and monitor. You are rather skeptical of your own idea -- I am rather skeptical of my own skepticism on it... As for the prospect of new world for economists to mess up...oh, now I really envy the younger generations (of economists)!