Your Wish is My Demand, Part 1: "But asset stranding won't happen because consumer demand for beef is rising."
- 3 hours ago
- 11 min read
When I meet someone, say at the department Christmas party or a college formal, and this person comes from either economics or finance, and they ask me about my research, the conversation typically goes something like this:
Mr. Financier/Economist: "So what's your PhD on?"
Me: "I'm working on stranded assets in food systems from a transition to sustainable diets."
Mr. Financier/Economist: "Oh - very interesting. But what are the assets that would be stranded?"
Me: "I'm looking primarily at assets in the cattle and beef sector - specifically meatpacking plants."
Mr. Financier/Economist: "Huh. But how will those assets be stranded? Demand for beef is rising."
Me: "Well, you know, ultimately I think the transition is going to have to be policy driven."
Mr. Financier/Economist: "But that's never going to happen. Look at the US. Policymakers are never going to do that. So it will have to be consumer demand driven - and consumer demand is going up, so assets won't be stranded... so like - what's the point of your research?"
A fair question!
I've had this exchange many times and it is always cause for reflection. At first glance, the disagreement appears to be about 'whether asset stranding will happen.' In this short exchange, Mr. Financier/Economist thinks I'm saying 'asset stranding will happen' - an understandable assumption because, for a long time, people were saying asset stranding would definitely happen in the energy transition and it didn't (at least, not in the way they thought it would.) So there is a tendency to replay that script for food systems.
However, I'm not saying 'asset stranding will inevitably happen.' I'm saying that a food system transition would entail stranded assets. So if we wanna transition, we're gonna have to deal with the costs of asset stranding.
But the more interesting disconnect this exchange reveals is how vastly different our views are on consumer demand - what it is, how it's shaped and its role in transitioning systems.
What typically emerges through these conversations is that Mr. Financier/Economist thinks change starts with the consumers. Or, more specifically, he believes consumers have innate demands and those demands are what drive markets. The consumer is sovereign and firms respond to what that sovereign consumer wants. It makes sense that Mr. Financier/Economist thinks this because this belief underpins all of modern mainstream economics.
I, on the other hand, do not think consumers are sovereign and I do not think their demands are innate or that they exclusively shape markets. I think consumers are told what to want by firms who create and maintain markets in the image of their balance sheet. It also makes sense that I think this because this view underpins both political economy and the entire advertising industry.
The distance between these views is too large to cover over passed hors d'oeuvres. However, if Mr. Financier/Economist is lucky enough to be sat next to me at dinner and if I'm cranky from wearing heels, I would go on to say:
(1) "consumer sovereignty" is a construct invented by economists to make the outcomes of markets seem inevitable,
(2) the singular focus on consumer demand serves as a devise to let other economic agents off the hook for the negative externalities of the products they make, and
(3) attempting to internalize those externalities by focusing on shifting consumer demand is like bringing a knife to a gunfight.
Now, where Mr. Finance/Economist and I do agree is that there is no guarantee the food system transition will happen. However, if it doesn't, I don't think it will be because consumers didn't demand it - although that is absolutely what economists (and companies) will say. If assets are not stranded, it will not be because consumers failed to 'vote with their dollar', but because economic agents with sunk capital actively maintained consumer demand. That's the starting point of my research into stranded assets.
Prior to these conversations, I didn't really have an appreciation of how much these preconcieved assumptions held on such things shape all our subsequent views on how exactly we think this transition will (or will not) happen. As is the case with such assumptions, my view seemed completely obvious to me. Which is why it's always good to get out there and have people argue back at you about it. This oft-repeated convo led me to digging into where our respective views originated, in the hopes of (1) understanding why all these Financier/Economists think the same thing but how I missed the memo where everyone decided consumer demand rules all and (2) to see if my views have no grounding in reality or if there is some theoretical tradition I can draw on to argue my points.
I shouldn't have been surprised to find that Mr. Finance/Economist's views and mine are represented by two distinctly defined economic cliques and that these cliques have been in petty spats with each other for over a century. No one can do petty spats like economists and I love to see it.
To help with understanding the lay of the land on consumer demand, I e-sketched this very formal, very scientific framework for how the various camps sit in relation to each other on two questions:
What drives markets? Do consumers have demands that are exogenous to firms and firms have no choice but to respond to them? Or do firms influence and shape consumers, thus making their demands endogenous? Or, put more succinctly - Are consumers' demands innate? Or are they made?
How can market outcomes be explained? - When we look at a market and see what comes out of them - like products and externalities, what do we pinpoint as the source of those outcomes - individuals or systems? Consumers or institutions, laws, firms, capital and infrastructure?
The combo of these two questions leads to four very-broad-and-almost-offensively-crude-but-still-helpfully-intuitive camps: the Marginalists, the Institutionalists, the Nudgers and the Planners.
(Spoiler: I am an Institutionalist. Mr. Financier/Economist is a Marginalist. )
Nudgers and Planners are also a part of the economic discussion, but they're not the ones I tend to argue with on this particular subject (which this framework shows is because I agree with them on at least one point.) So we're not going to get into them so much today.
But this framework also helpfully shows that Marginalists and Institutionalsts disagree on both!! Which is a recipe for a very good pub night debate.
The Marginalists: "Consumers are sovereign individuals with innate and fixed demands."
When Marginalists think of a consumer, they think of Ron Swanson - a completely sovereign individual who has his innate preferences (for meat) that cannot be swayed by some little man in a green apron hocking vegan bacon. His demands are fully formed and immovable. He is an absolutely independent individual, completely rational in his decision-making. The only type of customer he's going to be is a hostile one. He absolutely knows more than you.
For Ron Swanson, we can ultimately thank William Stanley Jevons (yes, of the paradox). He was the one to let 'consumer sovereignty' in through the back door when he argued that the purpose of every economic exchange is to maximize individuals' marginal utility - thus launching the Marginalist Revolution and sealing the fate of millions of Econ 101 students. Based on this theory, the price of something price - the ultimate harbinger of value - is dependent on consumers' utility from it (e.g. an exchange theory of value) instead of how much it cost to make (e.g. labour theory of value). To the Marginalists, markets are made of up billions of little Ron Swansons walking around rationally maximizing their utility.
Jevons' focus on 'individual utility' established the consumer as the sun around which firms revolve and whose gravitational pull firms have no choice but to respond to.
Jevons' primary interest was less in theorizing about the role of the consumer as it was about math-ing economics. He was one of the first to say that if economics wanted to be a 'real' science, it had to start doing 'real equations, like all the other sciences.' And what do you know - marginal utility + price was very easy to 'math' because once you assume individual utility maximization and have price as a datapoint of that utility, you can write all these equations about economic exchanges.
Walras took Jevon's equations, said, "I'll raise you one" and developed the world's first models of whole economic systems, thus sealing the fates of millions of future computational general equilibrium modellers. Walras also loved math and thought other guys like John Stewart Mill (godfather of political economy) were rubes: "Why should we persist in using everyday language to explain things in the most cumbrous and incorrect way...as John Stewart Mill does repeatedly...when these same things can be stated far more succinctly, precisely and clearly in the language of mathematics?" (p. 28).. This began the segregation between Digitopolis and Dictionopolis, the official record of which was documented in The Phantom Tollbooth.
Once 'exogenous and fixed consumer preferences' was baked into the models, it was canon. To change that assumption would mean changing all the models (dare I say, stranding them....) and who wants to do that?
This all took place in the latter half of the 19th century. Flash forward to the 1936s when 'consumer sovereignty' was introduced to the public lexicon and consumer demand moved from pure math to taking on a political tinge. Hutt said: "The consumer is sovereign when, in his role of citizen, he has not delegated to political institutions for authoritarian use the power which he can exercise socially through his power to demand (or refrain from demanding)." Thus, sovereign consumer demand is not only about utility maximisation, but is what protects us from fascism (the Planners!). We have Hutt (and his predecessor, Fetter) to thank for the concept of 'voting with our dollar.'
Hutt also thought, as Pesky describes, that "consumer sovereignty is a mechanism developed through social evolution to discipline producers to the wants of consumers without threatening political legitimacy." "As a 'consumer,' each directs. As a 'producer,' each obeys."
Once consumer sovereignty was linked with freedom and democracy, the transformation of the consumer from one part of a large economic system into a libertarian sovereign unmovable Ron Swanson was complete. Combine it with the perceived inevitability of Schumpeter 'creative destruction' - and it becomes almost impossible for anyone to imagine markets moving - economically or politically - from anything other than Ron Swanson.
The Institutionalist: "Consumers are shaped by the environment they're in."
When Institutionalists think of a consumer, they think of this scene with Betty Draper. She has to host a dinner party for her husband's lame colleagues. She goes to the store and buys some Heineken, unaware that her ad man husband just launched a clever retail placement campaign that day to win a bet. She thought she was a sovereign, discerning individual - but actually she was influenced..
For a clear-eyed diagnosis of Betty Draper, we can turn to Thorstein Veblen who, around the turn of the 19th century, was annoyed as hell at the Marginalists math-ing everything. He looked around and saw Rockefeller's monolithic railroad companies and Proctor and Gamble's new advertising campaigns and thought the math economists were ignoring empirical evidence about how markets were actually working.
Veblen is most famous for The Theory of the Leisure Class where he wrote about conspicuous consumption. But The Theory of Business Enterprise (1904) is where he explains the behaviour of firms and what they do to maximize their utility (i.e. increase profits). He dusted off Adam Smith's old ideas on the social construction of consumer demand and extended it to include not just 'moral sentiments' but the modern advertising industry. I have to confess that I felt a bit convicted reading this:
"Advertising is competitive; the greater part of it aims to divert purchases, etc., from one channel to another channel of the same general class. And to the extent to which the efforts of advertising in all its branches are spent on this competitive disturbance of trade, they are, on the whole, of slight if any immediate service to the community. Such advertising, however, is indispensable to most branches of modern industry; but the necessity of most of the advertising is not due to its serving the needs of the community nor to any aggregate advantage accruing to the concerts which advertise, but to the fact that a business concern which falls short in advertising fails to get its share of trade. Each concert must advertise, chiefly because the others do."
Veblen's work was picked up by Galbraith in 1958 in The Affluent Society where he crystalized the 'dependence effect, - that demands are not innate but manufactured by the very industrial processes that satisfy them. It's all very master of puppets.
"Producers may proceed actively to create wants through advertising and salesmanship. Wants thus come to depend on output. . . ."
Ok so here it is important to state that lots of things shape consumer demand - not just advertising. And also that advertising is limited in the extent to which is changes consumer wants! However, advertising is just the most obvious source of evidence that firms are pro-active economic agents that do all kinds of things to ensure there is a market for their products. The playbook is much larger than just advertising, but includes interventions in several realms of society, including academic patronage and political lobbying.
Zooming out even further, Institutional Economics (which Veblen started) focuses on how markets are embedded in corporate, legal and political institutions and that institutional inertia and sunk costs - not just innate and fixed consumer demands - shape their outcomes and trajectories. For the Institutionalists, the consumer is not a sovereign sun around which firms orbit. The consumer is a participant in systems firms and governments build — and those systems are shaped and locked-in by capital, infrastructure, and policy long before any “choice” is made.
So when Betty finds herself at the grocery store - whether she is tired and stressed from the bazillion other things she has to think about that day or whether she fancies herself a very deliberate consumer making careful choices - her (and Ron's, for that matter) choice is constrained and channeled by the macro-institutions (political and legal) and micro-institutions (advertising) swirling around her. And those institutions are not neutral. They definitely have an agenda. (Whether that agenda contributes to broader economic welfare is a whole different discussion).
So when a Marginalist says to an Institutionalist, "but consumer demand," the Institutionalist says, "but what shapes consumer demand?" A Marginalist might then get annoyed because, to them, it doesn't really matter what shapes consumer demand (Hayek said as much). The point is - they demand it. And that demand drives markets. Thus, if you want to change markets, you have to change consumer demand. An Institutionalist would the respond and say, "Consumer demand will never change whilst existing institutions have a vested interest in maintaining it. You have to change the institutional structure to change consumer demand."
As I said above, these are very crude categories and their are endless permutations of these two trains of thought. Also, as with most things, this isn't necessarily a debate between correct and incorrect but about relative areas of focus - and how different focus areas set us on a trajectory of strategizing the transition in certain ways.
If you lean towards Marginalism and you're looking to transition an economic system and think consumer demand is the engine of economic markets, you might determine that to shift a system, you need to focus on shifting the consumers. You need to usher in some good ol' 'creative destruction.'
If you lean towards Institutionalism and you're looking to transition an economic system and you think consumer demand is constructed by economic agents with a capital-driven agenda, you might determine that to shift a system, you need to focus on shifting the behaviour of those agents - and that you can't rely on consumers to do this because consumer demand is a product of those agents' activity.
(A variation of both of these is an Institutionalist view of firms as economically-motivated and powerful agents driven by capital - but that institutions will never change so a Marginalist view is adopted that change must be forced by consumers. I also disagree with this as well - but that is for Part 2.)
A Marginalist hears 'asset stranding,' and they think of the consumer, assess what they think the consumer will do and then assess whether that means asset stranding will happen or not.
An Institutionalist hears 'asset stranding' and they think of the firm, what's at stake and the costs of the transition and what this means for how the transition will have to be handled financially and politically.