Monday, December 1, 2008

Two-thirds of Economists Don't Understand Economics

I keep hearing a statistic being thrown around on the business shows and now in print. Here is an example where the concept appears twice in one article:

According to preliminary figures released by ShopperTrak RCT , a research firm that tracks total retail sales at more than 50,000 outlets, sales over the Thanksgiving weekend rose only modestly. Investors are worried that this portends a disastrous holiday season, which would be troubling not only for retailers, but for an economy that depends on consumers for more than two-thirds of its growth.

..."Unfortunately, two-thirds of the American economy is based on the spending of the American consumer," said Mike Stanfield, chief executive of VSR Financial Services. "When the consumer pulls back, it's very hard for the economy to gain much traction."

What does it mean to say that “two-thirds of the American economy” is based on “consumer spending”?

How does the act of “consuming” lead to “growth” at least in real terms? What is “growth” in this context? If I buy a pet rock, does that “grow” the economy or does it just get me a rock and the guy who sold it to me some money which he will probably use to find more rocks? If a lot of people buy pet rocks will it grow the economy? Would if they buy them really fast? Will this lead to even faster growth?

If a bunch of cavemen 10,000 years ago used dirt as money and traded it with one another for such items as leaves, rocks, and bark - would that have helped to “grow” their economy? On the other hand, what if one of the cavemen discovered fire, or invented the wheel, the spear, or the gun? As a result of these inventions, wouldn't other cavemen have more time to invent more things rather than wasting time trying to kill squirrels with bark or rocks? Would such productivity truly grow their economy and improve their lives?

Therefore, what is more important to an economy: "consumer spending" or saving, capital investment, and productivity?

5 comments:

Beth said...

Hi

I think you have hit on a key part of the problem: the belief that consumption drives the economy. I do think that trying to understand why basically reasonable people find that idea plausible is a key part of making headway toward constructive conversations.
One place that helped my understanding is George Reisman's article "Production vs. Consumption" at http://www.capitalism.net/articles/Production_v_Consumption.html.
Thank you for the time and effort you put into your blog. It's refreshing to find allies.

Doug Reich said...

Beth,

Thanks for the comment. You are absolutely right in identifying the issue as the theory of "productionism vs. consumptionism" and thanks also for this excellent link. As you may know, I quote and link to Dr. Reisman frequently. I am going to do a follow up post on this.

Thanks again.

Per-Olof Samuelsson said...

Another place where Reisman covers this is in Chapter 15 of "Capitalism". There he shows that the contemporary way of counting GNP makes it appear as if most of what goes on in economic life is consumption, whereas, in actual fact, most of what goes on is saving and investing.

But maybe you already knew this...

Doug Reich said...

Per-Olof,

Thanks so much for pointing out Chapter 15. It is a brilliant exposition of the issue and I am working on a follow post based on this and the Production vs. Consumption piece.

Beth said...

Hi

I too have been working to expand my understanding of this very central issue. Several of my blog posts and comments aim at this, but in particular here: http://tinyurl.com/Concumption-v-Production
(Oops. I blew my spelling on making the tiny-url).
I am gathering my thoughts on this and Says Law for a future post.
I look forward to reading your efforts.