There are so many things wrong with this Steve Horowitz post its hard to know where to begin. However, I must note that Matt Yglesias does an excellent job responding to the claim that we should focus on increasing production not consumption.

People talk about demand during downturns because in a downturn you have an unusually large number of unemployed people. That’s people producing nothing who the year before were producing something. If there were more demand, they’d produce something.

Now if you look around the world, you can find lots of examples of countries with lower unemployment rates than the United States that are nonetheless poorer than the United States. How does that happen? That happens because when you’re not in a downturn, the only way for a country to improve its living standards is to actually get better at producing stuff. When almost everyone who wants a job has one, the only way to get richer is for people to start being more productive. Productive capacity matters—a lot. But when lots of people who want jobs aren’t doing hobs, you’ve got a different problem. A failure to mobilize the productive people you already have.

There is a certain “click” when a concept becomes more than a set of principles or equations but is imbedded into your fundamental understanding of reality. You can see that business cycle macro has “clicked” in what Yglesias writes.

I still want to address another claim that Horowitz makes

The great irony is that leftists frequently argue that capitalism equals “consumerism.”  They think defenders of free markets believe that more consumption promotes economic growth; thus we are charged with providing the ideological cover that justifies the consumerism they see as deadening lives and wasting resources.  What the leftist critics miss is that economists never saw consumption as the driving force of economic growth and prosperity until the Keynesian criticisms of free markets became ascendant.

So first off obviously the desire to consume is the beating heart of all economies. Remember

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.

What is that “own interest” exactly? It is their interest in consuming, in using resources to satisfy their wants and needs. These need not be personal wants and needs. If I buy a doll for my niece or books for poor girl who can’t afford then I am consuming. I am using the resources of the universe to satisfy something that I want and what I want is to help these kids.

That having been said there is a difference between consumption and investment. Investment – which is perfectly good Keynesian demand by the way – is using the resources of the universe to create tools that will allow me to make even more stuff in the future.

However, I don’t just do this for the hell of it. I hope that one day this investment will lead to a world of even greater consumption. Consumption is still the ultimate goal.

Nor does consumption equate with “consumerism”. Though we don’t add up GDP figures this way, taking time off to spend with your kids is consumption. It uses up resources. In this case the resource is time. Its time that you are not spending making other stuff, including investment stuff.

Just like other consumption, investment can also allow us to have more of it in the future. I might not see my kids for two weeks while I build a machine that automatically grades papers for me. I forewent consumption, spending time with my kids, for investment, building a machine. However, once the machine is built I can spend even more time with my kids as the machine does my work for me. That’s the essence of economic growth.

Leisure, as economist call things like spending time with your kids, will even solve the problem of inadequate demand. Suppose that because of a super massive tax cut Joe decides to switch to working part time. His tax cut allows him to purchase the same things he did before, but now he is  spending more time with his kids.

Because of the tax cut he increased his consumption but he took all the extra consumption in the form of time with his family.

What happens in the economy?

The demand for labor stays the same, but the supply of labor falls – because Joe is only working part time. Thus the excess supply of labor, that is unemployment, falls.

So to wrap up

  • The desire to provide the things we want for our loved ones and community -  the desire to consume -  is the entire point of the economic exercise and the ultimate source of all of our motivations.
  • Consumption doesn’t mean consumerism. Walks in the park are perfectly good consumption. As is flying kites with your grandkids.
  • Deficit financed consumption in all its forms lowers unemployment. And, unemployment is the problem of recession.