24 February, 2012

Debt before dishonor

Last post was about the psychology of debt, and it ended with some open questions. Well, this time around some more empirically not-so-well founded considerations are due.

Starting point: a lot of human activity revolves around social groups. The animal instincts in us dictate that status is inherently a big thing in every group. Now, status can be defined in many ways: money, fancy cars, number of journal citations, points scored in matches, pretty much anything – even lack of any of the previous qualities. Our instincts are in that sense malleable that we can adapt to a variety of circumstances.

Now then, with materialism being the dominant “religion” in our society, it’s no surprise that matter – money, possessions, or anything that correlates with possessing lots of money – is also perhaps the most dominant determinant in one’s social status. All this is hardly very controversial.

How can one earn a lot of money, and status, then? Well, inheritance is one way, but to leave that aside, anything else means working – and succeeding – at something. Again, it doesn’t really matter what it is, it can be pretty much anything of the carious human activities. How does one succeed, then? Well, to paraphrase Titius Maccius Plautus, “you must spend money to earn money”.

And here comes the controversial part: I believe a lot of consumer credit and debt is about wanting to earn status amongst one’s peers. Why do you take a mortgage? An economist would probably say that because it’s cheaper than renting. What really is going on is that you take the mortgage because everybody else has a fancy house, too.

If this is the case, couldn't it well be that our ever increasing debts have something to do with this consumerist fighting over status? Debt before dishonor, in a way. And if so, is there anything we can do about it?

22 February, 2012

The Psychology of Debt and Materialism

Debt crisis, debt bomb, financial crisis – you’ve heard it everywhere. And it’s still going on. The European debt crisis may not make the headlines every night (seriously, the viewers can’t take it anymore) but the crisis is far from over. Blaming it on the spendthrifts of Acropolis may seem like a neat idea, but admittedly our Hellenic cousins are not the only ones who have been on a finance-fuelled spending spree.

Carmen Reinhardt, a University of Maryland economist, and Harvard professor Kenneth Rogoff published a book called This Time It's Different: Eight Centuries of Financial Folly three years ago. They report that 90% public debt-to-GDP ratio is a so-called critical threshold, beyond which problems are of the worrying scale[1].

Consumerism is a fundamentally materialist social order, holding buying and consumption as the most important ways of action in society. Whether you like it or not, we live in a consumerist society at the moment. Interestingly, both consumption, use of resources and debt levels have risen considerably in the last decade (see graphs).

As interesting as this is economically, a more important question in my opinion is why are we so indebted? What makes the debt rack up so fast?

In economic psychology, it has long been thought that materialism may well be connected to increased debt on a personal level. In this context materialism is a psychological stance, mainly meaning that a materialist person places a lot of value on things and possessing them. Usually studies differentiate between subjects with high and low materialism.

Is the connection of materialism and debt proven? In a study[2] Watson showed that materialism is correlated with laxer attitudes toward debt. In another study[3], Richins showed a connection between materialism and behaviors linked to credit overuse. So, the evidence is convincing in the way that materialism probably can be linked to higher debt levels, at least to some extent.
Quite frankly, linking this with the racking up of public debt is just an idea – it has never been proven (or even researched, to my knowledge). But there’s still a very important interplay of society and the individual here: namely, the process of acquiring a materialist psychological stance in the first place.

As with any belief system, there are two ways we can acquire materialism: either it’s in the genes or we have learned it through society. I can’t see the genetic argument really working for materialism. The world of our ancestors was hardly very focused on items, and hence “genetic materialism” seems to have very little face validity. Therefore, the only sensible conclusion is that we have learned the belief. And that is exactly the link that could justify the connection to global debt.

What if our global debt is also influenced by the same materialist beliefs? What if that’s why the system tries to get more than it can afford? And, more importantly, what will happen once we figure out we’ll never pay back our public debt?

Interesting, and scary, indeed.

[2] Watson, John J. “Materialism and Debt: A Study of Current Attitudes and Behaviors.” Advances in Consumer Research 25, no. 1 (January 1998): 203–207.
[3] Richins, Marsha L. “Materialism, Transformation Expectations, and Spending: Implications for Credit Use.” Journal of Public Policy & Marketing 30, no. 2 (Fall 2011): 141–156.