What Comes First, Production Or Consumption.
What drives the economy, supply of or demand for goods and services. Does the economy grow because we consume more or can we consume more because the economy grows. This article by Mark Skousen title, “Consumer Spending Doesn’t Drive The Economy, Investment Does”, explains the public’s perceived chicken or egg conundrum about production or consumption. This is not a puzzling question at all, the answer is very logical and easy to understand. Consumption happens at the end of the production process. You can’t consume something that does not yet exist, and the only way a consumer’s good can exist is if someone produces it. Production is the act of creating wealth, while consumption is the act of destroying what has been created. Production always precedes consumption.
Keynesian thinking is the accepted truth of the world. It has so permeated our thinking we speak it without any understanding of what we’ve said. Stimulus spending, Government spending, Government investment, economic recovery plan, consumer spending, aggregate demand, Government job creation, shovel ready jobs, are all examples of words or phrases we use without understanding that they represent consumption, not production. When we continue to use the language of this Keynesian Zeitgeist, we give credibility to the false reality that, continuous Government spending can bring about a perceived world of abundance inside the real world of scarcity. People have to be educated about the meaning of words used in the Keynseian model. An example of this happened during the health care debate when conservatives said that health care would be “rationed” if the health care bill went through. Why were they unable to explain the reality that in every economic system, rationing happens because scarcity is the first rule of economics. The real question is, will health care be rationed by prices in a market system, or will it be rationed by bureaucrats, politicians, or panels in a centrally planed health care system.
What is the difference between Bush’s 180 billion dollar stimulus plan in 08, and Obama’s 900 billion dollar stimulus plan in 09? The only difference is 620 billion dollars, the idea that a stimulus plan will work is accepted by both sides. They’re both wrong. Stimulus is funded by debt, which will have to be paid back through taxes, borrowing or printing. It creates a dislocation of scarce resources, and these resources will eventually be liquidated, an example of this is Solyndra. It creates a temporary demand that can not be sustained once the stimulus dollars run out. These are a few of the economic reasons why stimulus won’t work.
The steady drip, drip, drip, of Keynseianism, over the past eighty years, in our education system, our media, and our politics, has brainwashed a majority of our society into believing a false ideology. The fact that economic realities aren’t even considered isn’t as bad as the fact that we have conceded the language and the truth to this false ideology, with no awareness that it happened.
For more in-depth analysis read “The Fallacy of Demand” by Frank Shostak at Mises.org.