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Diametrically Opposite Views About Consumption …
Once upon a time, the views of economists and businessmen about the nature (and causes of the fructification) of wealth were both congruent and straightforward. These views were grounded upon long experience with and direct observation of human action; and they were justified with common sense, logical reasoning and a variety of evidence. Wealth, in short, flowed from capital; and capital, in turn, was the result of saving, investment, entrepreneurial risk-taking and production.
During the Great Depression, judging from the pronouncements of politicians and bureaucrats, academics and finance journalists, these “classical” views were roundly attacked and largely displaced; and since the end of the Second World War they have been ignored – or, if considered at all, treated derisively and contemptuously (Gene Smiley, Rethinking the Great Depression: A New View of Its Causes and Consequences, Ivan R Dee, Inc., 2002, ISBN: 1566634725). Today, in sharp contrast to the nineteenth and early twentieth centuries, production seems to be taken for granted and all and sundry obsess about consumption. According to prevalent opinion, business activity must be “encouraged” by governments. The great end of legislation is and ought to be the “creation” of jobs and consumers; and if it is deemed that these consumers are consuming insufficiently, or if their consumption might subsequently relent, then the great objective of policy must be to underwrite ever-growing amounts of consumption. Not just governments of all partisan stripes but also businessmen in all sectors desire a large amount and rapid rate of growth of consumption. It is encouraged not least of all because mainstream economics tells us that consumption is a necessary – and, according to some, sufficient – condition of prosperity.
This series of circulars reasons from first principles that our forebears understood towards conclusions that our contemporaries have either forgotten or misconceived. It shows first that consumption (as it is conventionally defined) is not wealth; second, by this definition consumption destroys rather than produces wealth; and third, consumption never needs encouragement. It recalls a variant of Say’s Law, namely that it is human nature that the desire to consume necessarily exceeds the ability to produce. Accordingly, all that is produced is, either for purposes of intermediate consumption (i.e., production) or final consumption, also consumed. Yet production logically precedes consumption: in order to consume, in other words, that which is consumed must first be produced.
… Have Important Consequences
These classical axioms and their lowly contemporary status highlight the egregious and grievous errors of thinking and policy that are presently manifesting themselves in financial markets. He who saves is no less a consumer than he who spends. Indeed, it is savers – and not end-consumers of goods and services – who are a necessary condition for the creation of wealth, maintenance of prosperity and advance of civilisation. It is savers and not consumers who supply the means to produce more raw materials and better tools; and it is also savers who ultimately employ more people and train and equip them such that they are more productive. In so doing, savers underwrite a structure of production that produces more, better and cheaper food, clothing, housing, transport, medical care and entertainment. Savers thus consume – but they do so indirectly, productively and over extended periods of time. Even more fundamentally, to produce implies both a desire and a means to consume. Alas, the converse is not true: to consume, in other words, implies neither the desire nor the means to produce. The producer seldom wishes to consume all that he produces, and his motive for production is the desire to buy what others produce. There will never, therefore, be a overall “overproduction” or glut of all commodities; but there may be – and usually is – plenty of people who wish to consume some commodity but are unable to satisfy their wish because they do not have the means to produce anything of equivalent or greater value that they can exchange for it.
The extent of feasible final consumption thus depends upon the extent of intermediate consumption (i.e., production); and of the two types of consumption, intermediate production generates wealth (i.e., the means to produce and thus consume more goods and services) and final consumption dissipates it. What is consumed at the final stage of consumption is thus enjoyed and is then gone; but what is consumed during the intermediate stages of consumption – what, in other words, is transformed for the purpose of further production – generates commodities of equal or greater value. It follows that governments’ many, varied and strenuous attempts to encourage final consumption (whether of motor cars, residential real estate or countless other commodities) merely disrupt and derange savings, intermediate consumption and the structure of production. These policies promote self-indulgent speculation, an obsession with the present and final consumption at the expense of savings, investment, regard to the future and productive intermediate consumption. Their perverse and unintended consequence of the obsession with consumption, whatever the protestations of politicians and modern economists, is therefore to dissipate rather than create wealth.
...continued in Part II
 
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