All Commentary
Friday, March 6, 2009

Free to Consume, Or Not


As someone who is rather less eager to consume than previously, I feel harassed by the government, mainstream economists, and news media. You may feel the same way. Apparently, we aren’t consuming enough to suit them. At least that’s what they want us to think. More than that, they want us to feel guilty and do something about it–such as going into debt. Hence the Fed and Treasury’s $200 billion program to make it easier for us to borrow.

Why aren’t we buying more? If it’s because we don’t have the money, then why aren’t we borrowing more? Don’t we realize that people will lose their jobs, and companies will go out of business if we don’t start buying stuff? And since we aren’t spending, the government is going to do it for us. Hence, the huge spending bill passed by Congress recently. We have only ourselves to blame.

Well, excuse me, but something is screwy here. In my naiveté I’ve long been under the impression that an economic system is supposed to serve consumers and not the other way around. I thought that producers cater to them and not vice versa. If producers and consumers are out of sync—for whatever reason—it isn’t up to consumers to adjust themselves to suit the producers. It is the producers’ job to realize they forecasted the future incorrectly, learn from their mistakes, try again. So I thought. Boy, was I wrong.

That’s what I get for not studying economics in college. Had I done so, I would know what all those television commentators and editorialists seem to know: that consumers exist for the sake of business owners and workers. Shame on us for letting them down.

Not!

Let’s get something straight. We produce so that we may consume. We don’t consume so that we may produce. Jobs aren’t ends in themselves. If we could have what we wanted by twitching our noses Samantha-style, then great! Jobs would be lost, but that would be something to celebrate not mourn.

If goods aren’t moving off shelves or car lots, maybe the wrong products are being offered. Maybe the prices are too high. It’s up to producers to figure out what’s wrong and do it right.

Or maybe unwise government policies have made us nervous about the future, prompting caution about spending. If so, the answer is not for us to rush out and spend anyway. Rather, the government should stop creating the conditions that make us nervous, such as prompting asset bubbles, which eventually burst, or inflationary booms, which must eventually bust.

Let It Be

When these things do happen, the only smart thing to do is to let the marketplace readjust to consumers’ real preferences, that is, their preferences undistorted by government social engineering. That adjustment is not painless or costless, but it’s necessary given the earlier distortions. Government can try to delay the reallocation of resources, but it can’t obviate the need for it. Delay only makes the adjustment more severe later.

This misunderstanding of the consumer-producer relationship is pervasive. We’re constantly reminded that consumer purchases are 70 percent of economic activity. The implication is that if we buy at a slower pace than producers expected or if we change our minds about what we want, we have failed the country and are doomed to long-term depression. But let’s take a closer look at that.

First, that percentage is misleading. Even if final consumer purchases are 70 percent of GDP, in fact all private economic activity is ultimately for the sake of consumers. (I’m excluding production for government purchase.) Every stage of the structure of production gets its value according to its contribution to a final consumer good. Carl Menger, the first “Austrian” economist, taught us that. No one would bother to build a bagel maker and no baker would buy it if no consumers wanted bagels. When producers buy machines, raw materials, and semi-finished goods in order to add value to them, they are in fact buying consumer-goods-in-process so they can advance them toward a form in which consumers will find them useful.

The Right to Buy Less

Second, it’s the consumers’ business how much they buy. If for years they bought X million new cars a year but one day decided they didn’t want a new car so often and reduced that number by half, what of it? True, car prices would fall; some autoworkers would have to find new jobs; and some dealerships and factories would close. Should the government do something about this? Of course not. Producers—that includes workers—have a responsibility to try to forecast future demand. No one said it would be easy. If consumer tastes change, then those who took an entrepreneurial risk on their not changing will lose. Those who guessed right will profit. The last thing we should want is a government bailout for the struggling firms. If they are turning scarce capital into something consumers don’t want, the firms are destroying value. Capital is too scarce to tolerate that. Better that it be released to more competent entrepreneurs for purposes more preferred by consumers. That’s what bankruptcy accomplishes.

So courage, my fellow reluctant consumers. Withstand the pressure to borrow and buy. Holding money—not spending—is no shame if that best suits your perceptions and plans. It’s not an irrational impulse that wise government must overcome. Money is not just for spending. It renders services other than simply bringing goods into our possession. It provides security and opportunities to consume more in the future. We have no need to apologize for partaking of those services. And if it makes you feel any better, saving is a form of spending that will create the demand for labor.

Admittedly, producers have it tough. They have to anticipate what we consumers will want–and we ourselves often don’t know what we want. Government can’t make things easier on producers (by, say, pushing us one way or another) without creating regrettable consequences. But it can stop making things harder: by ceasing to debauch the currency and otherwise distorting investment and production.

We consumers can take care of ourselves, thank you.


  • Sheldon Richman is the former editor of The Freeman and a contributor to The Concise Encyclopedia of Economics. He is the author of Separating School and State: How to Liberate America's Families and thousands of articles.