Consumption results from production, not the other way around

I recommend reading this column from Steve Horowitz.  It reminds me of this post of mine on wealth and where it comes from.

Here are some key sentences from Horowitz’s article:

One of the most pernicious and widespread economic fallacies is the belief that consumption is the key to a healthy economy.

…we only have the power to consume if we have produced and sold something in order to acquire the means to engage in consumption. Starting the analysis with consumption assumes one has already acquired means.  Contrary to that analysis, wealth is created through acts of production that rearrange resources in ways people value more than alternative arrangements. These acts are financed with savings that come from households refraining from consumption.

Folks often skip right past the true source of consumption and skip right to the consumption. They mistake consumption for wealth. Wealth first had to be created somewhere.

Even the wealth acquired by rent-seeking bureaucrat was created somewhere merit-worthy before being directed into his pocket.

The health of the economy isn’t economic activity, rather it’s value creation. There’s an old saying   that what matters most can’t be measured, but what can be measured will be managed. We measure economic activity with GDP. That’s not value creation. Much damage has been caused trying to manage GDP.


1 thought on “Consumption results from production, not the other way around

  1. The left could never buy into this argument as it implicitly argues against all they believe. The only reason that government has funds for any purpose, e.g. to build the infrastructure, is because they consume (or specify who will be allowed to consume) what someone else has first produced. Yeah, I know that’s what Seth said, but we all don’t understand “rent-seeking.” However, it bear repeating, “You can’t spend that which is not first saved.”


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