Spending your way to penury

The governments’ economists are reciting the Keynesian mantra of the “paradox of thrift.”  Saving, they say, causes money to “leak out of the system.”  They’re reciting the mantra that consumption drives the economy.  Consumption, they say, drives more than two-thirds of the overall economy. What the politicians need to do to “rescue” the economy, they say, is to limit private saving and spend, spend, spend!

That’s a command that every politician likes to hear.

So governments are spending. Governments and their economists are exhorting you to spend.  Australian Kevin Rudd is giving Australians shopping subsidies, and he’s insisting that you spend it. The Obamessiah doesn’t trust you to buy up large, so he’s spending nearly a trillion on your behalf

The governments’ economists keep insisting that spending is good, and saving is bad. They’ll tell you that it’s consumption that drives the economy.  But what they’re doing is reversing cause and effect, and even a US$787 billion dollar bar tab can’t change that.  As Amit Ghate points out,

production must ultimately be understood as being for the sake of consumption...  But this of course does not mean that consumption makes production possible, manifestly it’s the other way around

The fact is that consumption spending directs productive expenditure to particular areas of the economy, but it's productive expenditure that drives it.

Here’s a model of the economy*.  See for yourself what drives it:

It sure as hell ain’t consumption.

And to answer the obvious objection: Yes, government spending is always consumption spending.

As Murray Rothbard used to say [hat tip Anti Dismal],

"It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a "dismal science." But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance."

* Figure produced by Paul Ekins & Manfred Max-Neef, and pinched from Mark Skousen’s book Structure of Production.)