Wednesday, December 22, 2010

Production, not consumption drives economies

It is often said that we live in a consumer-driven economy, with the implication being that not only does the economy primarily serve the consumer, but there seems to be an implicit corollary to this statement that since consumer activity (or consumption) directs the economy, that a reliable method to increase the size of an economy is to increase the consumer activity of consumption.  This incorrect belief assumes that the correlation between an increase in a society's wealth and the increase in consumption of that wealth means that the consumption of that wealth is what created the wealth in the first place1.

To enrich the members of our society we have to produce more wealth for them to be able to consume.  While being able to consume wealth may be the motivation for its production, but consumption itself does not create more wealth any more than consuming a bowl of oatmeal causes more of it to appear in your pantry.

People consume goods and services, and not money, so wealth is definable as the quantity of goods and services available, and this is the measure of an economy.  The only possible way an economy is grown is by increasing the production of wealth. I say only possible way, but it's simpler than that - since a growing economy is defined as one where wealth is increasing, the only real way to increase wealth is to increase the rate of its production, unless, of course, one believes that wealth may be increased by use of either magic or pixie dust.
  • This requires capital investment in either new (higher output) equipment or research and development into more efficient methods of production.  
  • Only those people who have been able to amass and manage large amounts of capital are able to afford to both make those investments and support themselves comfortably.
  • Only if there is the possibility of reward will they risk the sure thing of keeping their money with the possibility of losing it on an investment that can go bad.  
  • Only the threat of losing their investment will incentivize them to do the necessary work to be determine that their money and the resources that will be consumed by it's spending will actually produce more wealth than is consumed.
Getting more money into the hands of consumers by allowing them to earn the money through their production of wealth will improve the economy.  But the increase in consumer spending is an effect, not a cause of increased prosperity.  When more wealth is produced it follows that more can (and will) be consumed and not the other way around.

I admit that this may sound about as ridiculous a point to argue as arguing that the earth is a sphere or that 2+2 really is 4, but I keep hearing people arguing, in effect, that 2+2 may equal 5 for sufficiently large values of 2.  The explanations are always long and involved, but they amount to nothing more than hand waving to distract from their hollowness.

I therefore assert that when people start talking about how getting more money into the hands of consumers will help the economy, and when they propose that it be done by either first taking that money from others or by just printing it, then either they are ignorant or they are lying.  I suspect that either explanation is equally probable for the current political class today.

  1. ^For the purposes of my explanation of why this is a stupid idea, I am assuming the impossibility of time travel, the existence of which I am willing to concede would be a possible means for goods and serviced could be utilized prior to their creation.  Of course if you want to debate this point with me you should first debunk Hawking's chronology protection conjecture.

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