Tuesday, July 30, 2013

Re-orienting to a Saver & Producer Mindset

In America, and indeed most of the world now, the ideas of consumerism, materialism, Keynesianism, etc have been sold and swallowed by most people in one way or another.  Granted, terms like “consumerism” and “materialism” are loaded words that can carry different connotations to different people depending on worldview and context, so let’s just say that I’m speaking to the macro idea that “consumers drive the economy” or “consumer spending is 70% of the American economy” and notions advanced by the current American president that the middle-class best contributes to economic growth by spending all their income on consumer goods.  There is much that can be said about this from an Austrian (see: mises.org) economics standpoint, but consider the matter in the simplest of logical terms:  how is it logically possible for consumption to make up a larger part of the economy than production?  Are not the two, by physical necessity, in very near equilibrium (other than extenuating circumstances such as large-scale war where pre-existing and surplus capital is destroyed/consumed and not immediately replaced)?  And furthermore, is it not logically impossible for consumption – the using up of goods and resources – to “grow” the economy if production remains the same?  Wouldn’t this lead to shortages and higher prices rather than growth?  Everyone knows the “consumer mindset” is destructive to the individual or family balance sheet, but there is the myth that, in the aggregate, its a good thing for people to fritter their money away on non-productive assets like TV, boats, sports cars, second homes, jewelry, etc.

Consider a second logical problem.  Imagine an economy that is 100% service sector.  We’ll say for purposes of example that there are six people in the economy, a barber, a teacher, a retail shopkeeper, a doctor, a lawyer, and an accountant.  The barber keeps everyone looking good, the teacher educates the doctor lawyer and accountant, the shopkeeper sells them their necessities, the doctor treats the sick, the lawyer settles disputes, and the accountant keeps everyone’s books.  Let’s say there is 1 million dollars in this little economy that shifts from party to party as the services are provided.  Everyone has access to the other service providers and everyone’s immediate needs seem to be met.  Its perfect, right?  Well, eventually the barber will need a new pair of scissors, the teacher will need a new computer, the shopkeeper will need a new roof, the doctor will need a new CAT scan machine, the lawyer will need a new fancy car, and the accountant will need a new calculator.  Their economy, which was humming along trading 1 million dollar amongst themselves without any production, must now import new capital goods and export dollars, leaving everyone still trading amongst themselves but with fewer dollars.  After a few cycles of this there will be no money left in their economy unless people from productive economies visit them and use their services while in town (tourism).  Or they can delay and mask the decline of their service economy by printing their own money to replace that which they lost to import capital goods.  But this will only lead to the money becoming diluted; in the long-run its of no use because if you double the number of money units without an increase in production, you are merely going to double prices.

Now consider on the other hand a producer economy.  You have a steelmaker, an electronics manufacturer, and a farmer.  The steelmaker takes coal and iron, very cheap goods, and turns them into steel, a more expensive good.  The electronics manufacturer takes plastic, silicon, and copper (cheap goods) and turns them into high-dollar widgets.  The farmer takes inexpensive seeds and free rain water and turns them into valuable corn.  In all three of these cases, the economy has more valuable goods than it started with, rather than merely recycling the same amount of money amongst each other like the barber, teacher, and lawyer.  This increase of valuable goods from production is true economic growth, which is properly supplemented and complimented by the service sector lawyers and doctors who can help it run more efficiently by enforcing producers’ contracts and keeping producers healthy.  Thus, capital is the fuel, production is the engine, services are the lubricant, and partial consumption is the end reward (total consumption would prevent future production, since re-investment is constantly needed to replace worn out capital goods, as with the example of the barber who needs new scissors – this is where “saving” comes into the equation).   It is because we have this equation almost entirely backwards that the American economy is in so much trouble.

(This article was originally published on my other blog, urbansaving.org on July 26, 2013)

An abandoned factory in Cincinnati, Ohio:

PS – It is no coincidence that Germany, the most manufacturing and export-oriented country in the Euro-zone, is the best performing economy in Europe with the lowest unemployment.

PSS - I've noticed that I'm getting a lot of hits on Silver Squirrel from Germany in the last couple months.  Thanks!

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