As we head into Thanksgiving, many of the economic commentaries you hear on the radio or on the financial news media will be focusing on "Black Friday" (so named because retailers supposedly spend the entire year up to Thanksgiving "in the red," and then go "in the black" in a rush of post-Thanksgiving shopping).
Accompanying all this talk of Black Friday every year, and this year in particular, will be plenty of concern over the question of whether "the consumer" will be able to step up to the plate this year and at least get on base, or if he will strike out.
While the shopping appetite of "the consumer" is certainly important -- especially to retailers -- it is a mistake to believe that the consumer drives the economy. Yes, you've been conditioned to believe that the consumer drives the economy, and you've heard it endlessly repeated that 80% of the economy is driven by consumer spending, but it is actually not true that the consumer drives the economy. The consumer is able to spend (consume) because he has a job, and he has that job because of his part in the production side of the economy.
The reason most people believe that the consumer drives the economy is because most of the economists in the world are demand-side economists -- focused on consumption rather than production as the more important side of the supply-and-demand equation. The reason so many economists are demand-siders is not because demand-side economics leads to better conclusions (quite the opposite) but rather because the majority of economists are employed by the government and by academia, where demand-side thinking is entrenched, rather than in the sectors of the economy involved in actual production.
Economist and Professor Emeritus of Economics of Pepperdine University George Reisman outlines the vast philosophical divide between the demand-side approach to economics (which he calls "Consumptionism") and the opposite approach (which he calls "Productionism" but which is often called "supply-side" in the media and popular press) in an invaluable essay entitled "Production versus Consumption."
That essay, originally published in 1964, explains that the productionist sees "the fundamental problem of economic life as how to expand production" and takes for granted the desire to consume, focusing instead on "the ways and means by which production might be increased."
The positive aspects of the productionist approach are too numerous to detail in a blog post, but one very practical benefit is that the productionist approach is right much more often than the consumptionist approach. The last GDP figure was severely underestimated by the demand-side majority, while at least one "supply-side" economist, Brian Wesbury, nailed it within a tenth of a percentage point.
Another positive aspect of productionism (besides the fact that it is right and consumptionism is wrong) is that it sees that the integration of more people and more technology into the overall economy is beneficial and not harmful. Demand-side theory leads to the belief that if more people world-wide are working, they are taking jobs away from others. Thus it leads to a belief that foreigners, or people of other races, or women in the workforce, or people in other regions, or even robots, take away jobs and benefit one group at the expense of another. It is a "zero-sum" mentality -- a "fixed-pie" view of the world.
Production-side theory leads to the conclusion that the more people -- locally and worldwide -- who are able to join the economy, the better. It is not a zero-sum view of the world. As new value is added into the economy that wasn't there before (see this previous post discussing this subject), they will earn money (a place-holder for the value that they produce) and they will spend it, but the way they are enabled to spend is because they were first empowered to produce. In fact, their improved situation actually helps the entire system.
If robots working in Detroit enable more cars to be produced per worker, then there are now more cars per consumer than there were before. If workers in China are able to produce more goods more cheaply than were produced before, then there are now more goods per person available worldwide. More goods per person means that those goods become more affordable than before. If it used to take ten people to make one Corvette, and now it only takes one person to make one Corvette, then it stands to reason that you can now produce more Corvettes per person than you could before, and that more people can potentially acquire a Corvette. The pie has gotten bigger.
Regardless of whether you actually like Corvette cars (it was just a convenient mental example), this process is the story of the past century in the United States, and the reason behind the availability of a vastly greater supply of goods to a vastly greater percentage of society than were available in, say, November of 1907.
Something to be thankful for this year at Thanksgiving.
For later posts dealing with this same topic, see also:
- "Happy New Year!" 12/31/2007.
- "Economic ignorance hurts" 01/18/2008.
- "The production/consumption distinction with regard to stimulus plans" 01/15/2009.
- "The dark side of zero-sum thinking" 04/20/2009.
- "The Consumer" 10/19/2009.
- "Why can't we all just get along (on economic policy)?" 02/08/2010.
- "Happy Thanksgiving 2010" 11/24/2010.
- "Lawlessness in California" 12/16/2010.
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