Abstract
The concept of consumption is a major one in economics and is best explained as the end purchase of goods and services by individuals. A large number of economists and financial experts have lain before Americans that consumption behavior has a lot to do with economic growth for it constitutes 70% of GDP. Now this is subjected to debate for few experts have their own set of ideas about the economy whereas many others feel that inequality is responsible for the economic slump. If the most popular consumption theory, the Keynesian one is to be believed, it clearly states that ‘current real income determines consumption in the short run’ (John Maynard Keynes, ‘General Theory of Employment, Interest and Money’, 1936). However, believers of the theory failed to differentiate between consuming and producing value that caused a misconception in economic thinking. Much like economy and consumer behavior are vital aspects here, savings and investment are relevant too.
A Historical Perspective on Macro Follies
A major dissension prevails between the historical records and the consumption theory. If seen carefully, economic improvement or failure has always been brought about by major business changes and durable goods investments; for example, The Great Depression. In this context, it will be wise to mention the famous words of John Stuart Mill when he said, “demand for commodities is not the demand for labor” (Principles of Political Economy, 1848)
It should be noted that it’s not the consumers, but businesses that employ people. Hiring new people is definitely a risky and expensive move and that makes employers weigh their decisions carefully before implementing.
What is indeed sad is that America has witnessed a major crumble of real savings in the last few decades coupled with a sudden growth in government expenditures. All these brought about devastating consequences for the nation.
It might be easy to say that stagnation is largely because of the lack of consumer demand, but that is just based on unreliable data.
Production Must Precede Consumption
When it comes to understanding the role of consumption in the economy, one must have an idea of GDP. Gross Domestic product (GDP) considers the market value of all final goods and services, but not economic activity as a whole. Here, raw materials or manpower costs are not included here, but capital equipments or sudden new purchases definitely constitute ‘investment’.
This brings one to the next part that consumers need money to spend. Even before that, the production is vital. Paychecks are a good way of ensuring production or value creation. However, much like employees view paychecks as income, employers consider them as the ‘single largest expense’. Since GDP is more like an accounting gist, consumption and investment spending are collaborated, which unfortunately disregards the fact that both are opposite to each other. Hence, GDP discloses little about the growth of the economy, but only the expanse and its’ current state.
If reports are to be believed, government data indicate that 70% of Americans derive their income from domestic business enterprises. For example, the retail sector contributed no less than 6% of GDP. All this means that a large percentage of economic activity rests with the ‘business to business sector, where the bulk of the real economy is present.
There has been an immense structure of businesses and employees beginning with basic products and expending considerable time, so that value-adding activities grow with time. Every stage was marked by a combination of investment and savings like company’s restored earnings and not ‘consumer spending’. Since employment covers a wide spectrum with few involved in final retail stage, modifications in savings and investment can exert drastic effects on it.
Putting Things in Order
It must be understood that anything that speeds consumption of value or even destruction of it renders the society poor. It is for this reason the Keynesian doctrine fails here. Unemployment might seem necessary when seen from a humanitarian standpoint but the economy suffers for it. Disincentives might reduce unemployment but also output and growth. Much like Europe, America also had its share of economic crises for following Keynesian principles.
Conclusion
For productivity to increase, savings and investment go hand in hand. In a similar way, economic growth is guaranteed by employment and trade. The reason why there is an increased consumption is because of the growth and not the cause. Every human being must contribute in his or her own way to bring about growth. And to make it happen, one must concentrate on offering prior to receiving.
References
http://www.forbes.com/sites/beltway/2013/01/30/think-consumption-is-the-engine-of-our-economy-think-again/
General Theory Of Employment, Interest And Money, Keynes John Maynard, Atlantic Publishers & Dist, 2006
Principles of Political Economy, Mill John Stuart, Library of Alexandria
