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Digital Communities
Industry Members
Digital Economies
January 10, 2012 By Ulf Wolf
A good friend of mine majored in Economics at the University of Glasgow. Although this was some time ago, I am sure his experience holds true to this day.
My friend relates that in the opening lecture, his Economics professor, referring to national or broader economies, mockingly challenged the class: “I am sure most of you assume that large economies are simply big versions of plain household finance, along the lines of spending less than you make, et cetera.
“Nothing,” he went onto say after a pregnant pause, “could be further for the truth.”
And nothing, I would like to add, could be further from the truth than this economist’s statement. For economies, no matter how small, or how large, cannot violate the basic financial law that income has to supersede outgo for you to remain financially viable.
There is simply no way around that.
Problems (such as non-performing economies) tend to grow complex to the degree they are not faced head on. Of course, by the same token all problems are basically simple, especially when faced and viewed directly, and without bias.
1984-ism
That is why my hackles have always risen, and continue to rise, whenever I come across one of the biggest perversions of logic our government (and its many financial gurus and advisors) perpetrates as a matter or habit.
For these days, this notion that spending is more important than production has found a dangerously firm foothold in our national economy.
This is the problem: the U.S. real gross domestic product (real GDP), as reported by the U.S. Bureau of Economic Analysis (BEA), is determined by the following factors:
Personal consumption expenditures, plus private investment, plus government spending and investment, and net exports.
Common sense—that household simplicity laughed out of the room by teaching economists—would not only strongly suggest but outright dictate that out of these factors Net Exports would be the key one to determine how well the country is producing. Not so.
Therefore, please read the next sentence very carefully.
Personal consumption expenditures make-up about 70 percent of total GDP.
And again: Personal consumption expenditures make-up about 70 percent of total GDP.
This, in my view, is such a flagrant standing of truth on its head as to make George Orwell read it twice just to make sure it’s the sentence itself and not his misreading it. For it says, in the true spirit of 1984 that consumption is production.
Up there among: War is Peace, Freedom is Slavery, Ignorance is Strength, and Love is Hate.
A couple of years ago, just as the economic downturn was settling in, I came across an article that reported that we, as a population, were now tightening our belts and saving more. This was presented as bad news.
Consumerism
It is hard to get your wits around how saving your money rather than spending it makes for bad economic news.
To be honest, at the time I did come across one article that did point out the value of consumer saving, and that went on to say that over the long term consumer savings was in fact good news. This, however, was a lone voice trying to make itself heard in the storm of negative analyses.
At around the same time, Wiley’s Non Sequitur cartoon strip highlighted that different cultures do what they’re best at. It shows drawings of industrious Germans building (and exporting) things, of brilliant Chinese students solving math problems and innovating, a few other frames of other cultures putting their best foot forward, with the last frame showing the American consumer with his loan officer: “I’d like to get a third mortgage on my house so that I can buy stuff.”
As the cartoon points out (and ridicules), we have an undisputed knack for buying stuff—though I would not call it a knack; affliction or sickness is probably closer to the mark.
An economy is not as healthy as it consumes, especially if that consumption is financed not by your own productive efforts but by those of your trade partners, especially China. Rather, consumption by means of borrowed capital—to me—is a sure sign of weakness, an indicator of future disaster.
Eventually, we will have to wake up to this fact. Wake up or perish. Those are the options.
Eventually, we will take David Thoreau to heart when he offers that “A man is rich in proportion to the number of things he can afford to let alone.”
You are not as happy as you possess. You are in fact as happy as you produce. We should let our nation’s economic measurements reflect this. We refuse to see this at our peril.
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I would like to defend the Economics teacher, at least in part. Production and consumption are both important in their own right, and need not balance at any given level. Take a farming community that can (and does) produce far more than it can possible eat. The farmers lack non-food items, while the food rots on the vine or in the warehouse. Now add someone who inherited a pile of money, (or won the lottery) and has never done a lick of work in her life. But she starts throwing lavish dinner parties, inviting the entire community and outsiders, and buying the "over-produced" food from the farmers for that purpose. Production has not increased one iota; but consumption has gone way up, and everyone is better off. If actual consumption (goods consumed, services accepted) tries to become greater than actual production, we get inflation, which is bad (on balance, some benefit from it). If actual consumption is "too much" less than actual production we get a death spiral of deflation/recession/depression. This production/consumption balance has little to do with income per se, except that most of us are paid for what we produce (or help produce) and pay for what we consume. But not everyone -- a celebrity endorser, for instance, is in some sense paid for what she consumes, and providers of "free" services are often paid for what others consume -- a rock star, for instance, who gets paid for more the same two hours of performance the more people attend that performance.
Thanks for your thoughtful comment; and of course it makes sense: as you outline, there are scenarios where non-producing consumption can logically be tied to the economic welfare of those involved. My fear, and observation, however, is that, broadly, consumption has taken on a life of its own, not only as an indicator of economic welfare, but as a reason to live, and that, in my view, spells disaster. It is said that it is nobler to give than to take. I think this translates into "It is healthier to produce than consume." And I believe that this law is very close to natural, and that we violate it at our own peril.