Consumptionism Disproved Two Centuries Ago |
According to Jean-Baptiste Say (1767-1832), the original supply-sider, wealth is
created by production and not by consumption. Consumption actually uses up
utility or wealth. Demand (i.e., consumption) follows from the production of
wealth. People's demand is based on the wealth their production created. What a
person demands is predicated upon what he supplies. Say thus recognized that all
men are both producers and consumers and that if a person wants to obtain a good
he must provide something in return that is desirable to another. Money is the
necessary means to acquire the goods that one desires. However, in order to
procure money, a person must first produce a good or service that will exchange
for money. No one can legitimately demand something before first supplying a
product or service of value to others.
According to Say, it was possible to have a surplus or a shortage of any
specific commodity. Production can be misdirected, producing too much of some
products for which there is insufficient demand. He said that gluts of
production did not occur through general overproduction, but instead through
overproduction of certain goods in proportion to others which were under-produced.
Say thus admits that there can be short-term gluts of particular commodities.
The market, left to its own devices, permits such imbalances to be corrected
through adjustments of prices and costs. Any disequilibrium in the economy
exists only because the internal proportions of output differ from the
proportions preferred by consumers, not because production is excessive in the
aggregate. It follows that Say's Law in no way implies that all products will
ultimately be demanded in the market. The supply of a good does not guarantee an
effective demand by the producer of that good for other goods. If inventory does
not sell, prices will be cut until, and if, it does. It follows that lower
prices of some goods means that people have more money to spend on other goods
and services. Through the price system, supply and demand adjust and markets
clear if the market system is left free to perform the balancing and
proportioning functions. It is through changes in prices that today's supplies
are rationed among today's demanders. Prices bring about proper proportions and
price signals communicate information for future allocation and supply decisions.
Say understood human
nature and the fact that people tend to be rational but are not omniscient. Overproduction of particular commodities by individual firms and
producers is possible when mistakes have been made. The glut of a specific
commodity can arise from its production in excessive abundance outrunning the
total demand for it, or from the shortfall in the production of other
commodities. A glut can only take place temporarily when too many means of
production are applied to one type of product and not enough to others. This
type of disequilibrium is normally quickly remedied in a free market economy as
market incentives and rational self-interest lead to adjustments in production,
prices, marketing strategies, and so on. People have a rational self-interest in
correcting their errors.
What about savings?
People do not spend all of the wealth that their production creates. The demand
for current goods and services fails to match the value of what has been
produced as people choose to hold some of it in monetary form. According to Say,
savings is beneficial and better than consumption because it is used in the
production of capital goods or in additional production. Contrariwise,
consumption does not provide a stimulus to wealth. When production exceeds
consumption, the difference is savings, which goes toward the production of
investment goods, and investment is the basis for future growth. Such a
reinvestment process is fueled by entrepreneurs. If money is stored in the form
of bank-created money such as checking accounts, the held-back consumption power
will be transferred to borrowers from the bank that created it. In other words,
the power to consume is shifted to the borrower. There will be no deficiency in
aggregate demand as long as the banking system is free to carry out the process
of transforming depositors' savings into borrowers' spending. As long as savings
are reinvested in productive uses in the aggregate, there need be no decreases
in income, production, or consumption. Say argued that savings searching for
profits goes quickly into investments for production.
Higher rates of savings
bring about higher rates of subsequent growth in aggregate output. This takes
place because someone else borrows the money that will produce an even greater
number of goods. It follows that people need incentives for working, saving,
investing, and risk-taking. Say's insight was that incomes are always totally
spent on commodities satisfying current wants (i.e., consumption) or on
commodities satisfying future wants (i.e., savings accumulation) and that
savings are essential if the economy is to grow. Demand thus comes from supply
whenever you demand it. People save in order to expand their production or to
live on their savings when and as they need them. Savings buy time for people to
do more than just work. It could be said that consumption is the final cause of
production and that saving is the efficient cause of production. Say taught that
income not devoted to consumption will be spent on investment and that the
market would automatically and fairly rapidly return toward equilibrium.
John
Maynard Keynes, the underconsumptionist, unlike Say, thought that production and
consumption are disconnected activities. In addition, in the Keynesian system,
saving and investment are not two perspectives on the same phenomenon. Instead,
he saw them as two separate, unequal, and often discoordinated activities. For
Keynes, the decision to save is not automatically coordinated with the amount of
investment needed and desired by businessmen. He says that whether or not
entrepreneurs and businessmen invest depends upon a number of subjective and
irrational psychological factors instead of simply depending on the availability
of savings at a low interest rate. According to Keynes, too much savings in the
economy is the cause of the unemployment of resources. He contended that the
Saysian system is only true in the special case when savings equals investment.
He says that since this is rarely the case, economists need a general theory to
explain unemployment. Keynes believed that the breakdown of Say's Law came about
because of a lack of aggregate demand which results from the disequilibrium of
planned savings and planned investment. For Keynes, savings can be too high or
too low. Either way, he considers savings to be dangerous, self-defeating, and
the source of the problem. According to Keynes, savings represent a destructive
"leakage" from the economy. In the end, after a series of convoluted discourses,
Keynes concludes that (1) when savings are less than investment, government
action is necessary to stimulate investment, and (2) when savings are greater
than investment, government action is needed to encourage consumption
expenditures. In both cases, it is up to the government to step in.
Keynes's solution to
unemployment is an increase in government spending. His theory thus shifts from
the classical economists' concern with production to a concern with consumption.
He said that when supply outstrips demand some goods will not be sold and, as a
result, production and employment will be cut back. His proposed solution is to
increase consumption through government spending. Keynes says that general
overproduction is the problem and that men are unemployed because they have
produced too much. His proposed solution is to stimulate consumption and beat
down production. He says that "aggregate demand" can be too low relative to "aggregate
supply" and that government spending is needed to fill the gap left by private-sector
demand to ensure full employment. For Keynes, spendthrifts, rather than savers,
are virtuous. He holds that both consumer spending and government spending are
the means to economic growth. His spending theory has enjoyed great popularity
with statists who equate government spending with economic stimulus.
Keynes's solution for
stimulating the economy is to have the government spend money, thus bridging the
gap between savings and investment. He advocates government schemes to pump up
consumption such as printing and spending new money (which debases the currency
and results in inflation), deficit spending, public works projects, higher taxes
on producers, and the punitive graduated income tax which puts more money in the
hands of the poor, who are said to spend a greater portion of their income.
|