The Deception of Consumption

January 25, 2008 by Stephen Palmer

If anyone ever tries to tell you that the economy is driven by consumer spending, I have one piece of advice–RUN! This one fallacy alone has arguably caused more damage to our nation than any other, and a person who believes it is either deceived, or is using it to be deceptive, or both.

I walked out of an investing seminar recently because the speaker used this fallacy–that consumer spending is the basis of the economy–as a foundational argument for his thesis. His thesis was that America is headed toward a serious economic downturn based on future reduction of consumer spending, and that if we want to survive the rough times ahead then we need to amass as much money as possible, because money is what will save us.

These destructive fallacies have their roots in the Great Depression. When the Great Depression hit, the intellectuals and power elite of the period intervened in the failing economy by forcing entrepreneurs to maintain the high wage rates of the Roaring 20’s.

The reasoning was, as Henry Ford put it, “If we can distribute high wages, then that money is going to be spent and it will serve to make storekeepers and distributors and manufacturers and workers in other lines more prosperous and their prosperity will be reflected in our sales. Country-wide high wages spells country-wide prosperity.”

The truth about economics is the exact opposite of what this paradigm of scarcity and consumption would have you believe. High wages do not lead to prosperity; prosperity leads to high wages. Wages are simply a byproduct of production; when production increases, so do wages because they represent an increase in value to the economy. Conversely, as productivity decreases, so must wage rates.

In a free market, our ability to consume is entirely dependent on our ability to produce value for others. Free markets award those who produce according to their level of production; were it not so we would have no incentive to produce.

I challenge anyone who believes that consumption drives the economy to accrue as much debt and consume as much as possible, regardless of your level of production, and see how long your home economy lasts. Consumption removed from production leads to nothing but bankruptcy and insolvency.

The funny thing about the seminar that I left was that the speaker set up his thesis on a foundation of consumption, and then proceeded to tell us that we must learn to save and invest. If it’s true that consumption drives the economy, then it must follow that when hard economic times come we must spend more, not save more (which by the way is exactly what our leaders encourage any time there is an economic downturn). His conclusion was at direct odds with his beginning premise.

Our ability to consume is based on our ability to produce. If we wish to consume more, there is only one way to do it without bankrupting ourselves or stealing from another, and that is to produce more; to increase our value to others.

The relationship between consumption and production is not a chicken-and-egg circular conundrum. Production always comes first in any economy, whether it be on an individual or national level. Keeping up wages artificially, or taking from those who produce more to those who produce less, are both recipes for mediocrity, stagnation, and ultimately bankruptcy and failure. If we focus on consumption at the expense of production we will ultimately end up with nothing to consume.

To base our economic understanding on consumption is like saying that birds have wings because they fly. But wings are not a product of flying. The truth is that birds fly because they have wings; flying is a product of having and using wings. One can imagine a socialist ornithologist clipping the wings of birds so that they can fly higher and faster, only to see them lose their ability to fly.

Perhaps a better analogy would be that of a horse pulling a cart. To place consumption above or even at the same level as production is to see the horse and the cart moving and hypothesize that, because they both move together, the order in which they are placed is irrelevant. But try putting the cart before the horse and see how much ability the cart has to pull the horse.

Another way to see it is to consider the statement, “If I stifle Microsoft’s ability to produce computers by taking their profits, I will have more money with which to buy a computer.” But by stifling their ability to produce you cut off the exact thing that provides you with a computer to buy! If, on the other hand, you contribute to the production of computers, the market will compensate you for the value that you provide, and you will then increase your ability to purchase a computer.

The conclusion of the thesis that we’re discussing was that we should do everything in our power to accumulate as much money as possible before the crisis hits. But currency is nothing but worthless pieces of paper without the knowledge and education of how to produce. Calvin Coolidge once said, “Prosperity is only an instrument to be used, not a deity to be worshiped.”

Money, like consumption, is simply a byproduct and a symptom of production. Therefore, what needs to happen is that we need to fill our minds with true principles, which leads to knowing how to produce value for others in any given set of circumstances. Knowledge of principles and living according to them is the only thing that can save us from any crisis.

In fact, without this applied knowledge, increased amounts of money may even contribute to quickening and deepening crises. A good example of this is the belief that more money is the solution to our public school woes. Although extensive studies have shown that there is absolutely no correlation between increased spending and graduation rates and achievement scores, we continue to pour money into a defective system; we hack at the leaves and completely ignore the roots. Meanwhile, our public educational system continues to fail.

Money is a representation of human life value. Paper currency could become meaningless and the human life value would still remain. Therefore, we must not focus on increasing our amounts of green scraps of paper; we must learn how to increase our human life value, or our ability to serve others. This is how to prepare for the coming hard times. Forget the paper money, and begin working on the gap between your ears.

Whatever the future holds for us can only be faced by finding and following correct principles. Entrepreneurial production is what drives economies–not consumption. The only solution to failing economies is to eliminate all external forces that inhibit our ability to produce. And we as individuals must take the responsibility to learn how to produce as effectively as possible.

Money does not have the power to save; in fact, it has no intrinsic power whatsoever. The only guaranteed way to maintain profitability in the face of economic depressions is to create value for others; everything else flows naturally.

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