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Production and Consumption: The Yin and Yang of an Economy — 6 Comments

  1. Gordon,

    Your fundamental thesis that the problems facing the US, and the European economies for that matter, arise because we are consuming more than we are producing is correct.

    A nation, like an individual, that consumes more than it produces must pay for the difference by depleting its wealth. In times gone by, gold would have been transferred from one country’s vaults to another. With todays sophisticated global financial systems and capital flows, we have a host of more convoluted mechanisms to accomplish the same end.

    It is not inevitable that wealth must shift from the West to the East. If Western economies were producing more and the Chinese yuan was allowed to appreciate, then the Chinese could still enjoy a rapid rise in their standard of living (through internal demand) without the continued transfer of wealth from the West. Perhaps one reason the Chinese are reluctant to do this is because they hold a huge amount of dollar-denominated debt. But with or without an appreciation of the yuan, pressures in their labour market are resulting in rapid wage rises and change in relative costs vis-a-vis the West. As costs in the East start to rise, then over time Western nations will have more opportunities to produce and sell their goods in the global marketplace.

    Your conclusion that all societies should produce more than they consume, like your earlier assertion that supply creates demand, is questionable. When production exceeds consumption, the difference generally results in an increase in stocks of unsold goods.

    My personal view is that if you were to refocus your attention on issues of inequality, both within and between nations, you would find a more fertile field to plough.

  2. Gordon,
    I agree with much of your analysis. I am especially pleased with your agriculture-industry-leisure sequence. Years ago I wrote books in the area of leisure studies, describing – and hoping – for such a Maslowian future, when man would self-actualize his higher needs, having satisfied his basic material needs. Alas, it doesn ‘t look like we are getting there (yet). I was being utopian. Instead, France, Germany, the US and others are raising the retirement age. So, it’s back to the grindstone, not to the leisure society – for now.

    I agree with you that we have entered an era of decline, instead of a bright leisure future.
    …And that it is due to the imbalance between production and consumption. And that we (and Europe) are going down, whereas China is on the right tract.
    …And that this does NOT represent a desirable redistribution of wealth on a global scale, as the previous commentator seems to feel.

    However, I am not sure that we can continue to blame “the government” for everything. “The government” is an abstraction. It is a reflection of us. Wasn’t it Thomas Jefferson who said that the people get the government they deserve? And Pogo who said that we have met the enemy, and it is us?
    Like Rome’s decline, ours may be more cultural and psychological than structural….

    • that the pepole get the government they deserve? And Pogo who said that we have met the enemy, and it is us?Like Rome’s decline, ours may be more cultural and psychological than structural….

  3. Tom,

    Perhaps you read more into my comments than I intended. I certainly don’t recollect saying anything about excessive consumption in the West representing “a desirable redistribution of wealth on a global scale.”

    All I said was that if you consume more than you produce, then in the end you have to pay for it by depleting your wealth. Surely, that’s axiomatic.

    As to my concern about inequality between nations… I just happen to believe that economic development in poor countries is generally desirable and that the richer nations should do what they can to foster it. But that does NOT imply that I think economic decline in rich countries is also desirable. We are not talking about a zero-sum game here.

    Since poorer economies in the earlier stages of industrialisation are capable of growing much faster than mature economies, ideally, a narrowing of GDP per capita among countries can occur naturally in an open and fair global economy. That’s the theory. Whether this will happen is a different question.

  4. I appreciate your comments. You both help me to sharpen my ideas. Graham questioned whether a society should produce more than it consumes. It seems that producing exactly what you consume would be “sustainable,” but that producing more than you consume would allow an opportunity to address problems of on economic development and injustice. You could use surplus capital accumulated to help others who need help to develop their financial productivity, and to provide some welfare to those who for reasons of age or health cannot be income producers.

    I think economic injustice is a better term than “inequality” because people are not equal, do not desire to be equal, and should be rich in diversity of life choices and talents. However, injustice is when someone gets rich off of someone else, or uses his position to hold another down. I agree this needs to be worked on, but having a just economy is secondary to having an economy suitable to create a just society; just like digging a well in a desert is prior to just distribution of water.

  5. Hi gordon
    what i find missing is the systems view. Most economics ignores the ecosystem in building its models. Most of those variables are dismissed as externalities. That is the current problem with the planet if one worries about sustainability, climate change, pollution wrt the environment, or the exploitation of humans in the developing world and build your model within the boundaries of the United States, for example. It is the principle reason for the break with neoclassical economics by the heterodox economists. Also, if you go over to your Values Knowledge Foundation website which is based on post modern thought, then you understand that static models based on classical newtonian mathematics which works for science and technology fails when the human element is mixed in creating a dynamic, open and far from equilibrium complex model.

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