From Income Taxes to Consumption Taxes

You may think that tax policy sounds like the most boring topic in the world. That is precisely what most governments, corporations, and special interests would like you to think, because tax policy is where much of society and the economy gets shaped. It is also where well-informed citizens can achieve socioeconomic revolutions with astonishing speed and effectiveness—but only if they realize how much power they might wield in this domain. If citizens don’t understand taxes, they don’t understand how, when, and where their government expropriates money, time, and freedom from their lives. They also don’t understand how most governments bias consumption over savings, and bias some forms of consumption over other forms, thereby distorting the trait-display systems that people might otherwise favor.

One strange aspect of taxation is the pervasive mismatch between what governments do and what experts recommend. In most developed countries, including the United States and the United Kingdom, governments rely mostly on income taxes. However, most people who have thought hard about tax policy—ranging from conservative economists to eco-activists—favor consumption taxes. The sales tax levied by most U.S. states is a simple example of a consumption tax: consumers pay an extra 4-8 percent on top of most retail purchases, which goes to the state government. The value-added tax (VAT) favored in Europe is a slightly more complex consumption tax that is levied not just on retail purchases by individual consumers, but on all transactions throughout the supply chain, from mining and manufacturing through distribution and retail.

Virtually all economists agree that consumption taxes, compared with income taxes, encourage less consuming but more earning, saving, investing, and charitable giving. By making consumption relatively more expensive, consumption taxes make all these other activities relatively less expensive, so people tend to shift their money from consumption to the other activities. Thus, consumption taxes tend to reduce conspicuous consumption and promote longer-term retirement security, family wealth, social welfare, technical progress, and economic growth. In essence, income taxes penalize people for what they contribute to society (labor and capital), whereas consumption taxes penalize people for what they take out of society (new retail purchases). So, to tax experts, it is no surprise that U.S. and U.K. citizens spend too much and don’t save enough, relative to what would be optimal for society and even for themselves. The problem is not just that consumers lack moral self-restraint at the individual level, but that citizens face perverse economic incentives at the aggregate level.

Most Eastern European countries (such as Ukraine, Latvia, Serbia, and Romania) already switched to consumption taxes in the 1990s, with largely positive results. Most Western European countries, plus Japan, already levy some sort of VAT that functions as a consumption tax. A U.S. consumption tax has been advocated by the economists Alan Greenspan and Robert Frank, and by the FairTax organization.

FairTax suggests a simple, visible, federal retail sales tax (of about 23 percent) on all retail purchases of new goods or services by individual consumers at the point and time of sale. Its proposal would abolish all federal personal and corporate income taxes, and all gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes. It would be a mildly progressive tax, giving a “prebate” to ensure that no one below the poverty level pays the tax. It would also raise revenue more fairly from illegal immigrants and tourists (who do not file tax returns but do buy things), and underground-economy workers (such as burglars, prostitutes, and babysitters, all of whom typically underreport their income but who cannot hide their retail purchases).

More conservative analysts tend to favor a flat tax—a fixed percent of the yearly difference between one’s income and one’s consumer spending (excluding all savings, investments, and charitable donations). Either the FairTax or the flat tax would be simple to implement and easy to understand, and would save hundreds of billions of dollars in tax-compliance costs.

The economist Robert Frank has suggested a more steeply progressive consumption tax. This would be administered like the flat tax, but the percent paid would increase with each individual’s net consumption, minus a moderate deduction for basic living costs (around $30,000 for a family of four). The consumption tax would start at a low rate such as 10 percent, but would gradually climb as a family’s net consumption increased, to a top marginal rate of about 100 percent for families who spend more than $10 million per year. Robert Frank’s reasoning, like mine, is that many purchases function as positional goods that display one’s wealth, status, or personality traits rather than yielding true happiness benefits or fitness payoffs to the purchaser. (“True happiness” here has the uncontentious meaning of “subjective well-being” or “overall life satisfaction,” as it can be measured reliably and validly with many different questionnaires.) For big spenders seeking high status through consumption, even a very high consumption tax rate would not actually decrease their happiness or their fitness. It would just redirect some of their money from zero-sum forms of conspicuous waste, precision, and reputation into positive-sum forms of government spending. All my arguments are highly supportive of Robert Frank’s proposal for a progressive consumption tax.

Different Consumption Tax Rates for Different Products?

For consumption taxes collected at the place and time of retail sale, it would be easy to charge different tax rates on different kinds of goods and services. It might be fair and reasonable to impose a higher consumption tax rate on products that impose higher “negative externalities” (costly side effects) on society and the environment, so government programs can offset those side effects. For example, if a $1 pack of cigarettes imposes about $6 of additional costs on a country’s nationalized health care system, to cover the expenses of caring for the increased number of lung cancer and emphysema cases, then the consumption tax on cigarettes should be 600 percent. (Currently, U.S. states impose a consumption tax to cover the higher health-care costs for smokers, but this tax ranges from only $.18 per twenty-cigarette pack in Mississippi to $2.58 in New Jersey.). Such a tax could reduce the long-term health-care costs of smoking, especially in large poor countries, such as China (where 65 percent of men—420 million—smoke) and India (where 45 percent of men—250 million—smoke). That’s 1.3 billion lungs regularly exposed to carcinogens.

As another example, if a $1 pineapple is transported two thousand miles by truck on federal highways, and imposes $2 of wear and tear on the nation’s transport infrastructure, its consumption tax rate should be 200 percent—much higher than for a locally grown apple or avocado. Conversely, socially and ecologically innocuous products (such as bicycles, universities, and iTunes downloads) might pay much lower consumption tax rates.

Before barcodes, laser scanners, and computerized inventory systems, it would have been impractical for retailers to charge product-specific consumption tax rates. Now each product type could be assigned to a certain consumption tax rate by federal government economists, on the basis of real data concerning externalities, and this tax rate would automatically be imposed as cashiers scan the item or charge for the service.

Any products that yield “positive externalities” (whose acquisition and use actually saves resources for government, society, and the environment) might be subject to a negative consumption tax rate (effectively, a government subsidy). These positive-externality products might include home insulation (to minimize global warming), airbags retrofitted to older cars (to minimize costly injuries), and vocational training (to minimize unemployment).

At the other extreme, the consumption tax rate should be very, very high for any products that impose massive negative externalities. Consider handgun ammunition. Currently, one can buy five hundred rounds of 9 mm ammunition for about $110 from online U.S. retailers—about twenty-two cents each. But each round of ammunition has a slight chance of falling into the wrong hands and killing someone. How slight? About 10 billion rounds are sold per year in the United States. There are about thirty thousand gun-related deaths in the United States per year (including suicides, homicides, and accidents). Assuming the typical gun death involves one round of ammo, the chance that any given round will end up killing someone is about thirty thousand divided by 10 billion, or three per million. Now, a person’s life is generally reckoned to be worth about $3 million, according to the usual cost-benefit-risk analyses by highway engineers, airlines, and hospitals. If each bullet has a three per million chance of negating a $3 million life, then that bullet imposes an expected average cost on society of $9. That’s about forty times its conventional retail cost of $0.22, so, by my reasoning, it should be subject to a consumption tax rate of 4,000 percent. This is obviously a rough calculation; it ignores the injury costs of nonlethal shootings (which would increase the tax) and the crime-deterrence effects, if any, of citizens having ammo (which would decrease the tax). In any case, the five-hundred-round box of ammo should cost about $4,500, not $110.

Such a high tax rate would in no way undermine the sacred Second Amendment, which the National Rifle Association holds so dear. People could still have the right to keep and bear arms, but would simply have to pay society the true expected costs that their dangerous hobby imposes on others. They could pay $4,500—more than one month’s median U.S. household income—for a five-hundred-round box of ammo for “recreational shooting.” If they’re unwilling to pay that much, they should offer a principled argument for why the rest of us should subsidize the aggregate social, economic, medical, and funeral costs of their avocation.

Similar arguments might apply to motorcycles and pit bulls (both of which maim and kill their owners at ghastly rates). The consumption tax rate should also be high for service industries that impose costly side effects on society in the form of obesity (fast-food restaurants), noise pollution (concrete demolition), or false hope that delays medical or psychiatric treatment (purveyors of Christian Science, Scientology, homeopathy, or vibrating phytoplankton). Yes, people should be free to choose the level of physical risk they wish to impose on themselves, but they should pay steeply for the likely social costs if the risks are very high.

By this reasoning, a product-specific consumption tax would allow governments to legalize a much wider range of goods and services. Most products that are illegal somewhere (drugs, prostitution, trans-fatty acids) are outlawed because regulators assume that they impose unacceptable externalities on society (addiction, AIDS, obesity). If evidence-based consumption taxes negated the true costs of these externalities, the main economic and moral reason for outlawing such products would evaporate. The world’s most influential regulators (who are now in Brussels rather than Washington) could focus on minimizing harm from the truly dangerous products and business practices.

Drawing the True Cost Map

It would present a great challenge to determine the appropriate consumption tax rate for each product category, and to do so based on legitimate empirical research rather than ideology. For many product categories, governments and environmental activists might try to maximize the applicable consumption tax rate, while marketers would try to minimize it. At first, only the most obvious social costs—health care, transport, pollution—could be estimated in dollar-per-product terms. Quantifying the average long-term health-care costs to the user of smoking a pack of cigarettes would be much easier than quantifying the costs of the secondhand smoke. Quantifying the highway-repair costs of transporting each pineapple two thousand miles would be much easier than quantifying the alleged patriarchy-reinforcing, rape-promoting effects of each pornographic magazine.

A vast amount of new scientific research would need to be done on product-specific externalities, and that research would have to be very carefully funded, analyzed, and interpreted. There would be ubiquitous confounds and complexities—maybe fatter people tend to smoke more, and the fat, rather than the smoke, is contributing to lung cancer. Maybe low-agreeableness males tend to buy porn more often, and also commit more rapes, but perhaps the porn doesn’t cause the rapes. Ideally, the externality measurements would use the same sort of randomized trials now used to determine the safety and efficacy of clinical drugs. This would require a radical change in the government’s mind-set—from arrogantly assuming that we know how policies will influence behavior to humbly realizing that we need to run social experiments to determine their effects.

For instance, if we really want to know whether soda consumption increases obesity and diabetes rates, we could run a study using the consumption tax itself. The soda consumption tax rate could be set at a wide range of different random levels (so that a can of soda could cost anywhere from $.25 to $50) in several thousand different towns and cities. Given sufficient policing to minimize the resulting black market in untaxed soda, higher tax rates would reduce soda sales, so would lead to different soda consumption rates in different areas. By recording those consumption rates and obesity and diabetes rates in each area for several years, we could see exactly how much each can of soda increases the average obesity and diabetes rates, and resulting health care costs. The soda consumption tax rate could then be set accordingly. It may sound coldhearted to run such studies, which in effect cast soda drinkers as guinea pigs. However, this is exactly the data needed to settle the debate that has been raging since the 1970s between anti-soda activists and soda manufacturers. Both groups, insofar as they have any intellectual integrity, should want better causal data on the issue, and the only way to obtain that data is through this sort of randomized study. Once a few such studies across different countries are published, the issue would be resolved.

Skeptics might object that to set appropriate product-specific consumption tax rates would require a vast new government bureaucracy. We would need thousands of economists, statisticians, actuaries, and psychologists to measure all the externalities, risks, and costs of every product class. That is true, but that is precisely what we need: good solid data about the true social and environmental costs of the goods and services we buy. If we don’t collect and analyze such data, all arguments about the social and environmental effects of different policies are just blather. They can’t be evidence-based if there is no evidence.

As a government project, a massive scientific initiative to gather evidence about consumption externalities doesn’t sound as exciting as an Apollo program to send a man to the moon. However, it might give us a much greater long-term payoff: an accurate map of how our consumer decisions affect our society and environment. We could call it something catchy, like the True Cost Map, rather than something bureaucratic, like the Evidence-Based International Reference Matrix of Product-Specific Externalities (EBIRMOPSE for short?). Developing the True Cost Map would have many other benefits, such as giving meaningful work to thousands of underemployed social scientists who would otherwise run around teaching the Wrong Radical Model to gullible undergraduates.

Garrett Hardin’s “tragedy of the commons” arises whenever people don’t have to pay for the true externalities that their consumption choices impose on others. However, when people are responsible for such payments, their consumption choices become aligned almost perfectly with the interests of society at large. If fish consumers had to pay the true full price that their fish eating imposes on endangered stocks, overfishing would be automatically reduced. Ideally, the consumption tax on each class of products should be used to offset the specific externalities imposed by that class of product. In reducing the tragedy of the commons effect, it doesn’t really matter whether the consumption tax dollars are collected and burned, or collected and spent on useful social and environmental programs. The latter seems more sensible though.

To conservatives and libertarians, such a consumption-tax system may sound like a nightmarish new way for the government to interfere with the free market. In practice, it would severely restrict the government’s power to meddle. Suppose product-specific tax rates were required to be based on rigorous empirical evidence concerning externalities. Then governments could only impose higher-than-minimum rates on products that demonstrably impose costs on other people and on their environment. Even the most ardent libertarians, such as Robert Nozick, have recognized the need for a “night watchman state” that protects people’s lives and property from other people’s bad behavior. Laws against murder and robbery are, from an economist’s viewpoint, simply ways of deterring people from imposing negative externalities such as death or property loss on others. Product-specific consumption tax rates would simply deter consumers from imposing other sorts of negative externalities (such as pollution, highway wear and tear, and risks of getting shot) on others.

All negative externalities are, by definition, encroachments on other people’s lives and property. So, even hard-core libertarians who believe that governments should do nothing more than protect people from such encroachments should be willing to accept a consumption tax specifically designed to counteract such encroachments. From this viewpoint, the consumption tax is not paternalistic meddling. Rather, it is a classical “Pigovian tax” designed to correct the negative externalities of market activity. Democratic governments are, among other things, ways for people to manage the externalities of human economic behavior in free markets. From that perspective, it seems reasonable that governments should impose consumption taxes designed to neutralize each product type’s externalities. In other words, we should be free to choose what we buy and how we live, as long as we pay the fair price for every harm we do to others in the process.

Promoting Product Longevity

Consumption taxes could help solve another problem with modern consumerism. At the moment, corporations can often maximize long-run sales through planned obsolescence and shoddy build quality. If you’re a mop maker, you get a fourfold-higher revenue stream from selling plastic-handled mops that cost $8 and break within two years (yielding $4 per year in sales per customer), rather than steel-handled mops that cost $12 and last twelve years (yielding $1 per year). The environmental costs of making each mop might be similar—perhaps each imposes $4 of externalities. But the plastic-handled mops need replacing six times as often, so over a mop user’s lifetime, the use of plastic-handled mops will impose those $4 externalities six times as often. The consumption tax rate imposed on a product category could be scaled up for products of lower build quality that depreciate faster, break faster, and need replacement more often. For example, steel-handled mops might pay only one-sixth the consumption tax rate of plastic-handled mops—perhaps a rate of 12 percent rather than 72 percent. Thus, the steel-handled mop’s total price would be $12 plus 12 percent, or $13.44, whereas the plastic-handled mop’s total price would be $8 plus 60 percent, or $13.76. The sensible consumer would then buy the steel-handled mop because it’s cheaper, even if he wasn’t aware of the different build qualities, average breakage rates, and expected replacement rates.

These depreciation-sensitive consumption tax rates could apply to much costlier goods that impose much heavier externalities, and the benefits to society and the environment would be even greater. For instance, consider two midsize SUVs that cost about $29,000: the Toyota Highlander and the Ford Explorer. Suppose for the sake of argument that the Highlander is designed to run for an average of 240,000 miles before it wears out, whereas the Explorer is designed to run for an average of only 120,000 miles. It might make sense to charge twice the consumption tax rate on the Explorer (maybe 40 percent instead of 20 percent), because habitual Explorer buyers will have to buy new vehicles twice as often as habitual Highlander buyers. Consumers would then face a choice between a $34,800 Highlander ($29,000 plus 20 percent) and a $40,600 Explorer ($29,000 plus 40 percent). This would make reliability differences more salient to consumers, and would shift buying patterns from more-disposable products to longer-lasting ones.

Depreciation-sensitive rates would be even more important and beneficial in the housing market. In 1997 we bought a house in Red-hill, England, that was built in 1898. It had solid brick walls, thick roof tiles, and sturdy woodwork, and was apparently designed to last about two hundred years. In 2001 we moved to Albuquerque and shopped for houses. The 1950s first-generation suburban houses were fairly well built (cinder-block walls, oak floors, coved plaster ceilings), so we bought one of those. However, the new houses all seemed to be built from chopsticks and cardboard: walls of half-inch gypsum board nailed onto widely-spaced two-by-fours, floors of nylon carpet above oriented-strand board, flat roofs of tar paper and grit, thinly sprayed stucco siding, hollow-core doors, and plastic bathtubs. They are apparently designed to last about ten years, and everybody knows it, which is why they are sold as “used” houses after five years of all-too-visible depreciation. If consumption tax rates on new houses were much lower for better-built houses with greater expected longevity, such rickety abominations would never be built. Developers might not use solid brick walls as they did in 1898 England, but they might invent something even longer lasting. We could take our inspiration from the Clock of the Long Now project, which aims to build a mechanical clock on a Nevada mountaintop that will keep time for ten thousand years. We want developers to build houses that our grandchildren could inherit, so they need not spend their lives paying a mortgage on yet another generation of misconceived shacks. We might even consider arranging economic incentives so we can enjoy built environments that age gracefully through hundreds of years, like Umbrian villas or Oxford rectories. It’s the least we can do for future generations.

Good design can minimize depreciation even for more transient goods, such as clothes. The mainstream fashion industry intentionally produces clothes with extreme and quirky designs and colors so they can be rendered aesthetically obsolete more easily the following year, when the new design features are decided at Paris Fashion Week, and the new colors are “forecast” by the Inter-Society Color Council and other trendsetters. By contrast, the new trend for “eco-fashion” by designers such as Rebecca Earley (“Green is the new black”) aims to create attractive clothes that are both physically and aesthetically durable. They are produced from sustainable, nonpolluting sources (organic cotton, rayon, or hemp rather than conventionally grown cotton, which requires high pesticide use), and are designed to resist and hide stains from spills, dirt, and sweat, and to require lower-energy washing, faster drying, and no ironing. Eco-fashion uses more classically appealing designs and colors that cannot be rendered obsolete as easily, and so arguably should be subject to a lower consumption tax than extreme high fashion of the sort that dominates Vogue and In Style.

It would be a bit tricky to implement a consumption tax that was both differential (based on product-specific externalities and depreciation rates) and progressive (based on the purchaser’s annual total consumption). The differential consumption tax (with different rates for different products) is collected most easily at the point and time of sale by the retailer. By contrast, the progressive consumption tax is collected most easily if people file an annual tax return that reports the difference between their total income and their total savings and charitable giving. Some ingenuity would be required to develop a practical, secure method of collecting a differential, progressive consumption tax at the point of retail sale. However, if we can invent international computerized systems for managing cell-phone calls, airline reservations, debit charges, and Amazon.com shipments, it seems likely that we could organize such a consumption tax system. The technical challenges would be solvable, and the social and environmental benefits would be dramatic.

What the Consumption Tax Might Accomplish

Suppose we followed the experts’ advice and derived all government revenue from a consumption tax averaging about 25 percent on all new retail purchases. How would this shift our consumer behavior and our social systems of trait display? I can see five major benefits.

First, people would reduce, reuse, and recycle more, because only new retail purchases would be taxed. There would be no consumption tax on used items sold through the secondary market, such as used cars, secondhand books, thrift-store clothing, antique furniture, or pre-owned houses. If you wanted a new-built house in a developer’s new exurban gated community, you would have to pay the consumption tax on the full price of the house; whereas if you wanted to renovate an older house in an established city or town, you would pay the consumption tax only on the building materials and labor costs. If you wanted the newest model of car, you would pay the consumption tax on the car’s full price, but if you were content with a used car that just needed some new tires, you would pay tax only on the tires. This would create incentives to make the best use of what previous generations have already built and produced. It would hugely expand the secondary market, and the scale and efficiency with which used goods get traded and used. Estate sales, yard sales, eBay, classified ads, and flea markets would flourish. The matter and energy that is invested in the production of physical objects would stay in circulation longer, and their ecological costs would be amortized over a much longer period.

Second, the consumption tax would also create incentives for people to buy longer-lasting goods that have a higher resale value in the secondary market. They would be motivated to maintain and repair those goods more conscientiously, and to replace them less often. If the old washing machine can be repaired with a new $20 part (plus $5 in tax) rather than replaced with a new washing machine for $500 (plus $125 in tax), people might opt for the repair more often, and see more clearly the absurdity of premature replacement. We already saw how depreciation-sensitive consumption tax rates would increase manufacturers’ incentives to produce longer-lasting products. These other effects—consumers thinking ahead about product resale values and repairability—would allow retailers to charge more for products that are easier to maintain, repair, upgrade, and redecorate, and so would further encourage the production of such items.

Third, the consumption tax would encourage people to buy products that consume less energy and matter to operate. As gas, oil, charcoal, electricity, batteries, water, printer ink cartridges, and coffee filters would all be subject to the full consumption tax, consumers might prefer cars that get better mileage and printer cartridges that use ink more efficiently. The promotion of green buildings would be especially important. About 45 percent of the world’s energy budget is used to heat and cool buildings (far more than to power all vehicles combined), but new materials and design methods can easily reduce building energy needs by about 80-90 percent. Currently, such energy efficiency is rarely maximized in new construction, because it costs about 15 percent more than energy-inefficient methods. However, as consumers realize how much they could save in highly taxed running costs by spending a tiny bit more up front, the profitability and popularity of energy-efficient building should grow. Or, energy-efficient buildings could simply be subject to a lower consumption tax rate.

Fourth, the consumption tax would promote social capital and neighborly camaraderie. It would apply only to formal retail purchases, so it would push people to barter, borrow, and make more things themselves. Citizens would develop and use less-formal systems of trade, reciprocity, reputation, and trust. Friends would have higher incentives to lend one another useful items, and to make one another more practical gifts. Neighbors would have higher incentives to trade mutually useful services—babysitting, gardening, tutoring, carpooling, house-painting, barn raising—to avoid the consumption tax premium for formally hired employees. To economists who believe that an atomistic division of labor in a formal job market necessarily yields the highest economic efficiency, this sort of informal service sector might sound horribly misconceived. But to most humans—members of a species evolved to flourish in small-scale societies built on mutual recognition, respect, and trust—it might sound rather pleasant and fulfilling.

Finally, the consumption tax would increase savings, investment, and charity. In effect, each dollar that an individual allocated to investment or charity would buy 25 percent more than each dollar allocated to consumption. Investment and charity could be made more salient in everyday life as signals of one’s personal traits, through various new electronic databases, displays, and technologies. Then conspicuous consumption could easily fall from favor as the standard trait-display system. More matter, energy, time, and skill would be invested in the long-term infrastructure of civilization, and less in burning through short-term displays of conspicuous waste, precision, and reputation.

The Will to Change

Civilizations change most dramatically when their status-signaling systems change. Marx overlooked an important truth: the means of display, not just the means of production, are crucial factors in economic and social revolutions. Signaling systems show strong lock-in effects: once a signaling convention such as runaway consumerism gets established, it can be very hard for a population to shift to another set of conventions. The signaling conventions start to look like an inevitable outcome of cosmic evolution, rather than a system of historically defined cultural norms. Conspicuous consumerism is neither natural nor inevitable, but just one possible mode of human trait display.

Also, because conspicuous consumerism requires an alienating suppression of many natural social instincts, it is especially poor at arming us with good indicators of some key personality traits such as agreeableness and conscientiousness. To display these traits, consumers are slowly shifting from traditional conspicuous consumption to conspicuously ethical consumption. Highly agreeable and conscientious consumers now try to buy recycled computer-printer paper at a 40 percent premium above virgin paper, or purchase shade-grown Fair Trade coffee at $12 a pound rather than Wal-Mart generic coffee at $3 a pound. Conspicuously ethical consumption is certainly one potent way to improve the world, but there are even more revolutionary possibilities. If we could find more efficient ways for people to display their Central Six traits—especially agreeableness and conscientiousness—the social and environmental results could be even more positive.

The last few chapters have outlined several ideas for shifting our trait-display system away from conspicuous consumption and toward other signaling games that are more natural, humane, efficient, accurate, environmentally responsible, and fulfilling. The ideas may seem radical, especially to Americans, who are unaccustomed to really significant changes in socioeconomic policy. Other countries better appreciate the potential speed and depth of change. In the past twenty years Europe has been transformed from a patchwork of ragged empire remnants into the world’s largest, richest, best-integrated economy. China, India, and Russia have abandoned socialist planning in favor of free markets and free trade. The number of countries with multiparty democracy has increased from less than fifty to more than eighty. There are now 6.7 billion people on earth. Half of them are under thirty—they had not yet reached puberty when Bill Clinton was elected United States president, when Tony Blair was elected U.K. prime minister, or when Kurt Cobain killed himself.

In the global long run, it doesn’t much matter how the United States or U.K. change their consumption patterns, because their populations and economies are such a small and shrinking proportion of the entire world’s. The two countries that will matter most are the ones with vast populations and fast-growing economies, namely China (1.3 billion people, 10 percent economic growth per year) and India (1.1 billion people, 8 percent growth per year). Those two countries still have a good chance to shift their trait-display systems before conspicuous consumption becomes locked in as the cultural norm.

Dramatic policy changes are much easier for China to accomplish, because its stronger central government is less constrained by the competing special-interest groups (ethnicities, religions, castes, languages) that characterize the feverish Indian democracy. For example, from 1995 to 2007, China built about thirty thousand miles of expressways—about the same in a twelve-year period as the United States had built in the forty years after the Federal-Aid Highway Act was enacted in 1956. The current “fourth-generation” Chinese leaders are mostly bright, practical-minded engineers, already keenly aware of the environmental and social costs of conspicuous consumption. Most of my key ideas—social norms favoring status through informal assessment of people’s personal traits and moral virtues, better objective psychometric testing for education and employment, a progressive, product-specific consumption tax—would not undermine their political power or China’s social stability. Indeed, many of them dovetail nicely with traditional Confucian ideals (respect for merit and virtue within individuals, families, and states) and practices (such as the imperial civil service exams), and with communist principles (at least, at the abstract level of promoting the positive externalities and minimizing the negative externalities of social and economic activity). They also fit well with China’s strong new interest in building eco sustainable New Urbanist cities, such as Tangye New Town in Jinan Province. If China adopts such farsighted policies, and thrives, it will serve as an exciting new role model for other developing and developed nations.

Despite India’s more chaotic political system, it already shows thoughtful ambivalence about the idea of economic growth for its own sake, and an increasing determination not to mimic the worst aspects of American-style conspicuous consumption. The older generation of Indian intellectuals still clings to the Nehru-era socialist ideals that imposed the lamentable “Hindu rate of economic growth” and delayed India’s climb out of mass poverty from the 1940s through the early 1990s. However, those socialist ideals also undercut the reputability of conspicuous consumption—as do the older traditions of Hindu asceticism, Buddhist nonattachment, and Muslim brotherhood. Many of the younger generation of Indian entrepreneurs obtained degrees and work experience in the United States and Europe, and are fluent in English, the international language of both business and science. These younger entrepreneurs have seen both the social and cultural costs of runaway consumerism, and the ways that some countries have minimized those costs. Many of them seem to be setting a good example by leapfrogging over conspicuous consumption straight to conspicuously ethical investment and charity, in just a single generation. It is crucial for India’s younger generation to avoid viewing runaway consumerism as the only “modern” alternative to the stultifying traditions of religion, caste, patriarchy, socialism, and identity politics.

Why the Sky Won’t Fall If We Gently Shift Our Signaling Systems

The changes suggested in the last few chapters might sound alarming to some. If people suddenly adopted product-specific consumption taxes, self-policing communities of like-minded citizens, and these other innovations, wouldn’t some very bad things happen? If people bought fewer goods and services, then consumer demand would shrink, sales volumes and prices would drop, unsold inventories would increase, supply chains would clog, companies would go bankrupt, factories and malls would shut, and unemployment would skyrocket. Then currencies, equities, bonds, and real estate values would go into free fall, and investment bankers would fling themselves from tall buildings in New York, London, and Hong Kong. Tax revenues—whether from income, consumption, or investments—would evaporate. First recession, then depression, then economic collapse. The next steps are predictable: governments fall, police vanish, riots flare, anarchy spreads, services collapse, utilities fail, people starve, babies cry, gangs rape, plagues spread, warlords rise, armies clash, nukes explode. The misery would be long enough to cause hysteria, and wide enough to cause great pain. Without conspicuous consumption to keep everyone busy, wouldn’t we all end up living in an eco-communo-primitivist dystopia whether we wanted to or not? Wouldn’t we go straight from American Beauty through American Psycho to Mad Max?

Such fears would be reasonable if the changes happened too quickly for markets, companies, and governments to adapt. Moon-size meteors are bad for biodiversity, because they kill too many species too quickly for evolutionary adaptation to compensate. (Remember the Permian-Triassic extinction 251 million years ago that destroyed 96 percent of all sea species and 70 percent of all land vertebrates? Oh, maybe not.) Likewise, short sharp shocks to the social norms governing our trait-display systems can be bad for human societies—consider the 1789 French Revolution (outcome: Napoléon Bonaparte), 1917 Russian Revolution (outcome: Joseph Stalin), and 1994 Republican Revolution (outcome: Newt Gingrich).

But over the longer term, economies are astonishingly resilient. Joseph Schumpeter observed that economies actually thrive on the “creative destruction” sparked by radical changes in technology and society. Other Austrian and Chicago School economists have emphasized that free markets are the most ingenious, resourceful, and adaptive systems ever invented by humans. Free markets embody the aggregate intelligence of every buyer, seller, and innovator, and, like life itself, they always find a way forward. This isn’t wishful thinking, it’s historical fact. When hired shepherds were replaced by border collies, they become factory workers. Buggy-whip makers morph into bumper sticker designers. Medieval knights are rendered obsolete by the crossbow, but their male descendants may become Formula 1 drivers, navy pilots, or Segway enthusiasts. Milkmaids are replaced by vacuum pulsation milking machines, but their female descendants may become software project managers or radio astronomers. The Civil War ends cotton-plantation slavery, but the South rises again by inventing Nascar and the Atlanta hip-hop scene. In each case, our ancestors could hardly have imagined the jobs people hold now, or the products they buy, or the ways they seek status.

Whole sectors of the economy rise and fall, but the market lives on. Our ancestors survived vast economic disruptions without going extinct, adapting from hunter-gatherers to farmers and herders in the Neolithic Revolution, from peasants to factory workers in the Industrial Revolution, and from thing makers to status purveyors and experience providers in the marketing revolution. Given historical precedent, the same creative destruction is likely to yield viable business, investment, and employment opportunities even if conspicuous consumption is replaced almost entirely by ethical consumption and ethical investment. We just have to preserve the institutional and cultural prerequisites for free markets to work: peace, the rule of law, property rights, stable currency, efficient regulation, honest government, and social norms of truth, trust, fairness, and honor. I’ve heard that these prerequisites already exist in Hong Kong, Silicon Valley, and Switzer land, so they’re clearly not unattainable.

Conclusion: Self-Gilding Genes

Consumerist capitalism is largely an exercise in gilding the lily. We take wondrously adaptive capacities for human self-display—language, intelligence, kindness, creativity, and beauty—and then forget how to use them in making friends, attracting mates, and gaining prestige. Instead we rely on goods and services acquired through education, work, and consumption to advertise our personal traits to others. These costly signals are mostly redundant or misleading, so others usually ignore them. They prefer to judge us through natural face-to-face interaction. We think our gilding dazzles them, though we ignore their own gilding when choosing our own friends and mates.

This is an absurd way to live, but it’s never too late to come away from it. We can find better ways to combine the best features of prehistoric human life and modern life. Eco-communo-primitivism alone offers little more than squalor, ignorance, and boredom. Runaway consumerism alone offers little more than narcissism, exhaustion, and alienation. We need the freedom to explore different ways of displaying our traits to the people we care about. We need to legalize more diverse forms of trait display. We need to switch from an income tax that promotes short-term runaway consumption to a consumption tax that promotes longer-term ethical investment, charity, social capital, and neighborly warmth.

Above all, we need the freedom to live assortatively with like-minded people, and to establish a much wider variety of local communities with their own values and norms, sustained by their own forms of praise and punishment. Some communities may retain the focus on conspicuously amoral consumption. Some may shift to conspicuously ethical consumption or conspicuously ethical investment. I hope that eventually, most will invent systems of human trait display that we can’t even imagine now. When people are free to move where they want, live as they want, and allocate their time, energy, and money to the trait displays they want, they will discover some fabulous new ways to live and display. Humans may never give up their drives for status, respect, prestige, sexual attractiveness, and social popularity, but these drives can be channeled to yield a much higher quality of life than runaway consumerism offers. We can flaunt our fitness with more individuality, ingenuity, and enlightenment.