Monday, November 13, 2017

Studebaker Review, Part 2: the Consumption Fallacy

1-- Consumption, as such, is not a primary factor in the economy. Production and trade are the primary factors. Consumption is the end goal of economic activity. Consumption is the motivator. But it is not the driver. Production is the driver. It’s not enough to need or desire something to consume. Need and desire won’t bring the non-existent consumer products into existence. Only productive work—reason-guided physical labor—can bring consumer goods into existence. To consume, we must work so we can consume what we created through our work—or trade our work product for the product of others’ work.

When we speak of the economy, we speak of production and trade. The economy is production and trade—specifically, creating wealth in the form of goods and services for the purpose of trading with other producers to obtain all of the goods and services we need and desire. Money greatly facilitates and expands production and trade, by enabling producers to create value for one producer in order to obtain values from another producer. But the basic principle—production comes before consumption—is the basic law of nature that can’t be escaped from. Production, of course, is driven by investment. Those of us who save $1 dollar or more—i.e., consume less than we earn—contribute to future production, which is needed to fuel future consumption.

A little introspection proves the point. Studebaker says we “focus too much on individuals and personal narratives.” That suits his propaganda purposes. But as Obama once said in discussing government finances, “What’s true for individuals is also true for nations, even the most powerful nation on earth.”

The macro view is useful, up to a point. But, if you want to properly judge economic policies, just ask yourself what they would mean for you if you implemented them on a personal level (which is exactly what Studebaker doesn’t want you to do).

Try eating a cake before you’ve baked it. You can’t. And neither can you trade an unbaked cake for money. If you haven’t produced a cake to offer in a trade (or the contractual promise to deliver a cake on some future fixed date), who’s going to give you money? So how can you do it as a nation, through massive deficit spending? You can’t. Yet Studebaker advocates just that; a reinvigoration of massive redistribution of wealth not only from the rich on down (He praises 90% tax rates) but within the middle and lower income groups (Studebaker praises Social Security and Medicare). Every dollar a government spends is a dollar taken from someone who first had to earned it through productive work. A government can not create demand. It can only redistribute it. It can not increase consumption. It can only divert it. Can you help yourself by running up credit card bills to fund overconsumption? Not for long. The government can seem to do it only because it can stick producers—taxpayers—with the bill. This may show up, temporarily, in higher GDP numbers. But the economy hasn’t expanded one iota.

A nation, taken as a whole, cannot consumption spend its way to prosperity any more than can an individual can. The crew and passengers of the USS Minnow couldn’t do it on Gilligan's Island. They had to work. Chuck Noland (played by Tom Hanks) couldn’t do it on his Castaway island. He had to work. No individual can do it, and neither can a government through “stimulus” schemes. “What’s true for individuals is also true for nations.”

Part of the confusion regarding “consumption economics” comes from the idiotic method we use for calculating the economy, which is based on the ridiculous idea that consumption is 70% of the economy, as if you can consume twice as much as you produce. In fact, consumption represents only about 40% of gross domestic product, which measures money changing hands. The rest is production and investment, as it logically must be. But the consumption theory of economics lives on because it serves as a great rationalization for “stimulus” programs of the Bush and Obama kind, which in turn adds to political control of our economic lives.

Once again, you can’t consume before you produce; nor consume more than you produce. The  idea that you can has led to disastrous political policies of government officials spending our money to “stimulate” the economy, including forced redistributionism, which in turn drains savings and investment capital and punishes (disincentivizes) producers, in turn hampering production and trade. George Reisman zeroed in on the essence of consumption economics—slavery. Studebaker says government should confiscate the savings of the rich, give it to the non-rich so they can spend it, which in turn will spur the rich to invest and work to replace the money that was taken from them to begin with. Reisman explains:

The idea that by consuming his product, one benefits the producer, by giving him the work to do of making possible one’s consumption, is absurd, the productionist holds. Only the use of money lends it the least semblance of plausibility. If it were true, then every slave who ever lived should have cherished his master’s every whim, the satisfaction of which required of him more work. A slave should have been grateful if his master desired a larger house, an improved road, more food, more parties, and so on; for the provision of the means of satisfying these desires would have given him correspondingly more work to do.

The belief that the consumption of the government benefits and helps to support the economic system is on precisely the same footing, the productionist argues, as the belief that the consumption of the master benefits and supports the slave. It is a belief the absurdity of which is matched only by the injustice it makes possible. It is the means by which parasitical pressure groups, employing the government as an agent of plunder, seek to delude their victims into imagining that they are benefitted and supported by those who take their products and give them nothing in return.

Why would anyone voluntarily perform unrewarded work so others can consume? One wouldn’t. Let’s break it down to the thing Studebaker dreads, the “personal narrative.” Suppose you owned a convenience store. Now suppose some thief came into your store and emptied your cash register. Now suppose the thief went home and handed the money to his wife, who then takes the money and returns to the convenience store, loads up her shopping cart with goods off the shelves of the convenience store, and pays for the stuff with the money her husband stole from your cash register. Would you be better off? In Studebaker’s policies, the government is the thief. This is what Studebaker advocates when he lauds policies instituted “between the 1930’s and the 1970’s” when, to “drastically reduced economic inequality,” the United States

redistributed wealth from the top to the middle and the bottom, resulting in consistent wage increases and consequently consistent consumption increases. This allowed investment to be put to effective use–because the bottom and the middle were rising, they were able to support the additional spending that business owners needed to successfully expand.

Many U.S. businesses did indeed “successfully expand.” But not thanks to redistribution. Would you call it a “successful expansion” when the thief returned to your hypothetical convenience store? Studebaker’s article is full of such non sequiturs. Now you know why Studebaker doesn’t want you to focus on “personal narratives”: Such real-life examples refute his premises. Macroeconomics is an escape hatch from economic reality. That’s why statists love macroeconomics.

Government spending has correlated to the grinding down of the economy over the past 15 years. Government spending is not the only cause. But it is a big one. Consumption economics is a fraud. But it serves a useful purpose: It serves as a justification to redistribute the wealth away from the successful, who do most of the investing, to lower income groups, who are more likely to spend on consumption, or to simply feed tax-and-spend government policies.

Related Reading:

My Objective Standard review of  The Forgotten Depression—1921: The Crash That Cured Itself, by James Grant

Equal Is Unfair: America's Misguided Fight Against Income Inequality—Yaron Brook and Don Watkins

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