1.7. Explains Pattern of Consumption over the Life Course
The labor commensuration theory of mass consumption also works as an explanation for the distribution of consumption over the life course. As noted earlier in the chapter, and also in Chapter 3, the prediction of the life cycle hypothesis—that people will attempt to maximize utility across the life course by becoming indebted when young and poor, saving when at the height of their earning power, and then spending after retirement—is not borne out by the evidence. The actual empirical pattern is as follows: When young, people underconsume relative to the predictions of the theory, because they are resistant to borrowing. When they are old, they also underconsume, because they spend a smaller part of their income than they should do, according to the theory. When they are middle aged, at the peak of their earning power, they overconsume (that is, undersave) (Deaton 1994). The peculiar thing, therefore, is the arc of spending over the life course—which would seem to indicate irrational risk aversion in youth, irrational risk taking in middle age, and irrational risk aversion in old age.
This pattern, which economists find puzzling, fits well with the theory of consumption as wage-labor commensuration. The young are reluctant to borrow in order to spend because they are much more likely to be in fulltime education or training.36 Even if they are working, their work is more likely to have strong element of on-the-job training (as formal or informal apprenticeship) and, for that reason, is something other than a straightforward wage-labor exchange. That people spend, rather than save, when middle aged, at the height of their earning power—when they have fully settled into the workforce—can straightforwardly be accounted for by the felt impulse to make their wage equivalent to the work done for it, by converting it into commodities. Moreover, the impetus to borrow, in order to finance consumption, takes on more force when people are in full-time work and, in particular, where wage levels seem insuficient to compensate for work. The old spend less than is predicted by the life cycle hypothesis because, as suggested in the discussion earlier in this chapter about the diferent uses of diferent kinds of income, postretirement income is one step removed from wage-labor exchange. This removes the wage-labor commensuration imperative to spend for retirees, which opens up space for other attitudes to income—for example, saving it to pass it on to heirs or else being risk averse and, therefore, reluctant to spend. There are of course clearly other possible explanations for what is going on here. But the fact that the life cycle pattern of consumption fits well with the predictions of the commensuration theory provides at least some support for the theory.
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Time for Things