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.

Savings help me, and also help the economy

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

Just like consumption by me doesn't help my financial situation, I will be poorer if I consume today, so it goes for the whole society or country. Consumption doesn't help; I need to find productive uses of my capital, so I produce more. For example, if for $1000 which the Government gives me in Tax rebates, if I go and buy a plastic dinosaur to help the producer of plastic dinosaurs, that hardly helps in me producing more bread (I am a baker by profession). However, if that $1000 goes towards buying a new storage box for the bread, I can produce more bread. More importantly, if I hold on to the $1000 in the bank and do nothing at all; my efficiency of making bread doesn't go down-and the bank can lend it to someone for more productive purposes, helping everyone.

A family won't get rich by increasing consumption. It gets rich by increasing production, increasing savings, and lowering consumption. The same is true for a country, or the entire human race as a whole. The bizarre idea that increase in consumption will lead to increase in production was proposed 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???

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 dont even need energy to run---they keep producing bread, steel, jewelry, houses, cars, airplanes, etc. in extremely large quantities at 0 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 0, 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."

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


1 comment:

  1. ”The stoppage in the flow of funds, which is an inexorable part of time-deposit banking, would tend to have a longer-term debilitating effect on demands, particularly the demands for capital goods.” Circa 1959

    Nobel Laureate Dr. Milton Friedman was one-dimensionally confused: From Carol A. Ledenham’s Hoover Institution archives: Friedman pontificated that:

    “I would (a) eliminate all restrictions on interest payments on deposits, (b) make reserve requirements the same for time and demand deposits”. Dec. 16, 1959.

    I.e., the iconic Friedman conflated stock with flow (not knowing as well, a debit, from a credit, i.e., flow).