We heard this mantra after the 9/11 attacks back in the year 2001: "Go spend money!" "Go shopping" "Go buy a lot of stuff to get this economy moving!" Whenever there is an economic downturn (like the one we are currently in), we are advised by mainstream economists and government officials that consumption is what is necessary for wealth to be created. But this is another Keynesian fallacy.
As Steve Horwitz explains:
Production, not consumption, is the source of wealth. If we want a healthy economy, we need to create the conditions under which producers can get on with the process of creating wealth for others to consume, and under which households and firms can engage in the saving necessary to finance that production.
But Keynesians will typically say that the economy is all about spending: that people don't need to save their money. Instead, they are admonished to get rid of all the money in their pockets at once. According to the mainstream Keynesian economists, this is all about the flow of money: that the simple act of spending gets the "circular flow" going. This allows them to make the argument that in order to "jump start" the economy in a downturn, all we need is more government spending.
Free-market economist Henry Hazlitt defended savings against the consumerism fallacy as follows:
Let us imagine two brothers, then, one a spendthrift and the other a prudent man, each of whom has inherited a sum to yield him an income of $50,000 a year. We shall disregard the income tax, and the question whether both brothers really ought to work for a living, because such questions are irrelevant to our present purpose.
Alvin, then, the first brother, is a lavish spender. He spends not only by temperament, but on principle. He is a disciple (to go no further back) of Rodbertus, who declared in the middle of the nineteenth century that capitalists "must expend their income to the last penny in comforts and luxuries," for if they "determine to save . . . goods accumulate, and part of the workmen will have no work.”* Alvin is always seen at the night clubs; he tips handsomely; he maintains a pretentious establishment, with plenty of servants; he has a couple of chauffeurs and doesn't stint himself in the number of cars he owns; he keeps a racing stable; he runs a yacht; he travels; he loads his wife down with diamond bracelets and fur coats; he gives expensive and useless presents to his friends.
To do all this he has to dig into his capital. But what of it? If saving is a sin, dissaving must be a virtue; and in any case he is simply making up for the harm being done by the saving of his pinchpenny brother Benjamin.
It need hardly be said that Alvin is a great favorite with the hat check girls, the waiters, the restaurateurs, the furriers, the jewelers, the luxury establishments of all kinds. They regard him as a public benefactor. Certainly it is obvious to everyone that he is giving employment and spreading his money around.
Compared with him brother Benjamin is much less popular. He is seldom seen at the jewelers, the furriers or the night clubs, and he does not call the head waiters by their first names. Whereas Alvin spends not only the full $50,000 income each year but is digging into capital besides, Benjamin lives much more modestly and spends only about $25,000. Obviously, think the people who see only what hits them in the eye, he is providing less than.) half as much employment as Alvin, and the other $25,000 is as useless as if it did not exist.
But let us see what Benjamin actually does with this other $25,000. On the average he gives $5,000 of it to charitable causes, including help to friends in need. The families who are helped by these funds in turn spend them on groceries or clothing or living quarters. So the funds create as much employment as if Benjamin had spent them directly on himself. The difference is that more people are made happy as consumers, and that production is going more into essential goods and less into luxuries and superfluities.
This last point is one that often gives Benjamin concern. His conscience sometimes troubles him even about the $25,000 he spends. The kind of vulgar display and reckless spending that Alvin indulges in, he thinks, not only helps to breed dissatisfaction and envy in those who find it hard to make a decent living, but actually increases their difficulties. At any given moment, as Benjamin sees it, the actual producing power of the nation is limited. The more of it that is diverted to producing frivolities and luxuries, the less there is left for producing the essentials of life for those who are in need of them.* The less he withdraws from the existing stock of wealth for his own use, the more he leaves for others. Prudence in consumptive spending, he feels, mitigates the problems raised by the inequalities of wealth and income. He realizes that this consumptive restraint can he carried too far; but there ought to be some of it, he feels, in everyone whose income is substantially above the average.
Now let us see, apart from Benjamin's ideas, what happens to the $20,000 that he neither spends nor gives away. He does not let it pile up in his pocketbook, his bureau drawers, or in his safe. He either deposits it in a bank or he invests it. If he puts it either into a commercial or a savings bank, the bank either lends it to going businesses on short term for working capital, or uses it to buy securities. In other words, Benjamin invests his money either directly or indirectly. But when money is invested it is used to buy capital goods–houses or office buildings or factories or ships or motor trucks or machines. Any one of these projects puts as much money into circulation and gives as much employment as the same amount of money spent directly on consumption.
Hazzlit continues:
"Saving," in short, in the modern world, is only another form of spending. The usual difference is that the money is turned over to someone else to spend on means to increase production. So far as giving employment is concerned, Benjamin's "saving" and spending combined give as much as Alvin's spending alone, and put as much money in circulation. The chief difference is that the employment provided by Alvin 's spending can be seen by anyone with one eye; but it is necessary to look a little more carefully, and to think a moment, to recognize that every dollar of Benjamin's saving gives as much employment as every dollar that Alvin throws around.
A dozen years roll by. Alvin is broke. He is no longer seen in the night clubs and at the fashionable shops; and those whom he formerly patronized, when they speak of him, refer to him as something of a fool. He writes begging letters to Benjamin. And Benjamin, who continues about the same ratio of spending to saving, provides more jobs than ever, because his income, through investment, has grown. His capital wealth is greater also. Moreover, because of his investments, the national wealth and income are greater; there are more factories and more production.
Economist J.B. Say concludes as follows:
[T]he encouragement of mere consumption is no benefit to commerce; for the difficulty lies in supplying the means, not in stimulating the desire of consumption; and we have seen that production alone furnishes those means. Thus it is the aim of good government to stimulate production, of bad government to encourage consumption.
Thus, stimulating consumption is not a path to prosperity. Rather, through the process of the free-market, savings and production will eventually lead to prosperity. But in order for this to happen, capital needs to come back into our country. Capital accumulation, which is necessary for a capitalist free-market economy to thrive and create prosperity, is unattractive in the United States due to the tax burdens, economic regulations, dollar devaluation through monetary inflation that robs the wallets of the American people.
As Steve Horwitz rightly puts it, a government stimulus program that puts money into the hands of consumers fails because the money comes from producers and other taxpayers. You also have to take inflation into account as well. As the money supply continually increase because the Federal Reserve keeps printing money, the currency is devalued. In fact, the dollar has lost approximately 98% of its' value since the creation of the Fed in 1913. All these factors, on top of the economic regulations, makes capital accumulation unattractive in America.
In order to bring capital back into America, most taxes need to be eliminated and reduced, the Federal Reserve needs to be abolished, currency competition must be legalized, and all economic regulations (at the Federal level at least) need to be phases out (i.e. abolished). Only then will capital start flowing into America again and thus give entrepreneurs the means to save money and invest in things that will increase production, leading to a greater creation of wealth for all Americans.
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