Economic Myths #2: Consumption Boosts Growth

[First published on Free Life]

The belief that economic progress is boosted by consumption is based upon the kind of misunderstanding that could be made only by intellectuals – the product of theorising that is completely detached from the common sense that everyone else possesses.

The misunderstanding is based on a conflation of the desire to consume on the one hand with the act of consumption on the other – or, in other words, it confuses motive with cause.

All economic progress is motivated by the desire to achieve consumption – in other words, to satisfy as many of our ends as possible. Without any desire to consume or to satisfy any ends there would never be any economic activity whatsoever. Thus, the bigger our desire for consumption then the greater will be our efforts to speed up economic progress.

However, economic progress is not caused, or brought into being, by the act of consumption. Rather, the act of consumption is the result of economic progress (i.e. of increased production). Actually consuming is what we to do in order to reward ourselves once we have produced something – it is not what we do in order to start production in the first place. Indeed, as is so often the case with realities that are hidden by myths, this truth is intuitive – you cannot consume a good unless it has first been brought into existence by production.

At any one moment in time there is an array of produced goods available to us. Each of us faces a basic choice as to what to do with these goods – consume them now, or turn them into productive capital goods that will yield a greater output of consumption goods in the future. The latter is the path to economic progress. If, however, we choose the first path – consumption – all we do is reduce the number of goods available to us and we are left with less. We may have achieved immediate satisfaction but we now have fewer resources left with which to produce more in the future.

For example, if I burn a log of wood to keep warm I cannot then use that log to build a fishing boat later on. Rather that log is gone forever and I will now have to labour in order to search for fresh building materials if I am to make good this loss. A farmer who decides to eat the seeds for crops in the spring will then have nothing to sow come harvest time, and will be left with barren and empty fields rather than lush acres full of wheat. Beyond the point of providing nourishment and sustenance to the human body the act of consuming of these goods will not provide any economic progress.

Consumption, for the most part, is the destruction of what we have. Economic progress is the transformation of what we have into something that will produce more for us in the future. If we choose the second option – that of turning our goods into productive resources – rather than destroying the resources available to us we will invest them in productive enterprises that raises the yield of consumer goods in the future.

The key to promoting economic progress, therefore, is not to encourage the act of consumption, which equates with an act of destruction. Rather it is to encourage production and a direction of a greater proportion of our resources available today towards saving and investment so that we may consume more in the future.

This is particularly important following a bust that results from a boom or bubble inflated by credit expansion. With so many malinvestments left starved of resources the best thing we can do to minimise the pain is to increase the proportion of saving and investing so that at least some of the doomed projects may realise a degree of viability. Instead our economic lords and masters misdiagnose the problem as a “lack of demand” and encourage us to borrow, spend and consume which only exacerbates the losses experienced by those projects that were started in the boom.

Nothing that has been said here should be taken as a condemnation of consumption or an exaltation of saving and investment. We all have to consume in order to live and it is ultimately up to the individual how much he desires to consume and how much he desires to save. However, once one has made the choice to achieve more wealth then this must begin with production, saving, and sound investment which is rewarded by greater consumption later on. Consumption will never lead to growth, and it is important for Austro-libertarians to point out this grave fallacy.