9. Consumption doesnt help economy, savings do!

I have heard arguments that consumption helps economies, that's why you should go and consume more. Savings are sometimes even called bad for the economy. This article explains the fallacy in these arguments.

Saving more helps me, and also helps the economy

Consumption is bad for me, for my family and by extension, for the society as a whole

What I earn I can either consume or save. If I consume it, I will be poorer; if I save it, I become richer. Savings add to my wealth. Consumption takes away from my wealth, it is a drain on my savings.
What is true for one person is true for a group of persons or a family, and by extension over millions of citizens, for a country or the world as a whole.
Savings are the fuel which drive my financial health, and in turn for the whole country. Consumption drains this nest egg of savings.

The bizarre idea that increase in consumption will lead to increase in production was popularized by Keynes, and is actually quite popular in economics and central bank circles. It is completely contrary to what common sense tells you. No one individual or family got richer by consuming more; how can a nation get richer by consuming more? Keynes was a finance/economics idiot, and placed central banks at the center of economics, job creations, etc. (a self-serving position, maybe...), and it is no surprise that people in these circles still believe him. More on the irrelevance of central banks here.

I have known many people who went bankrupt by consuming more. I guess they helped the other guy? If martyrdom is your goal, sure consumption helps.

A prosperous society is a society which consumes nothing but produces everything in large quantities. Think of uber robots who don't even need energy to run---they keep producing bread, steel, jewelry, houses, cars, airplanes, etc. in extremely large quantities at zero cost. That is a rich society. Whenever you consume something, you take away from this ideal rich society.

Just as a man who doesn't spend anything at all, I mean zero, from his salary assures that he will be rich; so does a society or country which spends nothing assures that it will be rich.

So next time someone talks to you about stimulating the economy, providing jobs for the country, etc. by increasing consumption, you need to run away from them!

Here's what Smith said about parsimony (savings) vs. consumption (prodigality):

"Capitals are increased by parsimony, and diminished by prodigality and misconduct.

Whatever a person saves from his revenue he adds to his capital, and either employs it himself in maintaining an additional number of productive hands, or enables some other person to do so, by lending it to him for an interest, that is, for a share of the profits. As the capital of an individual can be increased only by what he saves from his annual revenue or his annual gains, so the capital of a society, which is the same with that of all the individuals who compose it, can be increased only in the same manner."


More savings lead to more production which leads to more consumption.

The right causality in savings/production/consumption is this-more savings lead to more production, which leads to more consumption. But everywhere, you have to produce more to consume more. Generally speaking, people consume a part of their production (measured in money), and save or invest the rest. So most may be consuming about 80% of what they produce, and saving the 20%. Obviously how much people consume vs. their production varies a lot-and also varies a lot with age, etc. But one must never forget that the way to consume more is to produce more, which starts by saving more.

A rich man in any country consumes more than a poor man. He can do so because he produces more (earns more money, the unit commonly used to measure wealth).

What is true for an individual person is also true at the country level-the country being a summation of all individuals taken together.

A rich country consumes more, because it produces more.


Related topic of the Central banks setting interest rates, creating jobs, controlling inflation, etc.