Thursday, June 23, 2011

An Economy Grows on Production

With all of the economic problems we face today, there are a lot of myths out there.  These myths are promoted by the media and politicians and even some so-called economists.  They are Keynesians.  One of the biggest myths of all is that spending drives our economy.  When you think about it, this is really childish and yet many people believe this nonsense.  It is a mix up of cause and effect.

An economy grows because of production.  We get increased production from savings, capital investment, and increased technology.  An economy is not more productive because of consumer demand.  We can have all of the consumer demand we want, but it doesn't make things appear out of thin air.  I'm sure that people living in third world countries would like to have ipods, flat screen televisions, and be able to dine out at fancy restaurants.  But they simply don't have the wealth accumulation to have these things.  They can demand these things all they want, but they won't appear until there is production.

There is more consumption in a place like America as opposed to a place like Ethiopia because there is more to consume.  There is more to consume because America is wealthier.  There is more wealth because of the prior savings and investment that has taken place.  This is because of stronger property rights and freer markets.

Remember that you can't consume that which isn't produced.  The excessive consumption of Americans in the last decade does not exactly mean that people consumed future goods.  It means that they consumed more in place of saving.  Due to the lack of savings, it will hurt future production.  We are beginning to pay for that now as we can see with the economy.  Unfortunately, the government continues to exacerbate the problem.

Look at this from an individual standpoint.  Let's say that you have saved up $100,000 over the last several years.  You earned more than you spent each year and the difference was put into savings.  Now you decide to take an extravagant vacation.  You rent out your own private island for a month and get the best service available.  You have a great vacation, but you squander all of your savings of $100,000. Now you are left with nothing, except for your job.

This doesn't mean that you will starve.  You still have the income from your job.  But your lifestyle will have to take a hit from your one month vacation.  You will have to go back to work and live within your means again.  If you want to save money again for the future, you will have to live below your means.

There is nothing wrong with consumption from an individual perspective.  We need some consumption on a daily basis just to survive.  But most people realize that we can't always live for just today.  We do have to plan for the future.  This means saving money.  This allows capital investment, which increases future production.  It means we can have a higher standard of living in the future than what is possible today.

Government spending does not stimulate an economy any more than the person taking an extravagant vacation.  It might appear that your standard of living has increased, but in reality you are substituting savings for consumption.  You are simply living for today and not worrying about tomorrow.  The problem is, tomorrow is here now for Americans and for governments here and around the world.

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