This thread is in response to NAB’s and Irish’s request to discuss why consumer spending does not drive the economy.
The easiest way to illustrate this is by imagining a simple economy. Toward that end, I’ve concocted a little story, with apologies to Sherwood Schwarz.
If you’ve ever watched Gilligan's Island, you might remember an episode where the castaways believe they've become allergic to Gilligan, so they banish him to the far side of the island. Let's imagine what happens to Gilligan; he now becomes a simple economic system, consisting of one producer and one consumer: himself.
Gilligan has the clothes on his back, and one capital good: his pocketknife. For the sake of illustration, suppose he finds a cave to sleep in for shelter. During the day, he manages to catch 3 fish, which he must also clean and cook, gather wood for his fire, forage for nuts, berries, roots, and fruit, and hike to a freshwater spring for drinking and bathing water. These activities consume his daylight
hours. Since his fishing poles constantly break, he spends his evening hours sitting by his fire and making new poles until it is time to sleep.
Now the question is: Is Gilligan's one-man economy driven by spending?
The answer is no. Under present circumstances, it is literally impossible for him to spend more than he produces. He is surviving--but not thriving, because he is living hand to mouth, consuming what he produces on a daily basis. In fact, his situation is precarious. During the monsoon season, he might be unable to fish or gather roots and berries for several days. During a drought, his drinking water would dry up. If he broke his ankle, he'd be unable to forage much and might get scurvy. This is to say nothing of possible debilitating illnesses he might catch like malaria.
It dawns on Gilligan that he must prepare for the inevitable rainy day, and the only way to do this is by SAVING, or by consuming less than he produces. And also importantly, he must invest what he saves.
After examining his daily activities, Gilligan decides that while he is comfortable living on 3 fish a day, he could get by on 2 for a while. So for one week, he consumes 2 fish a day and salts the other to store in his cave. In a short while, he is able to rotate a constant supply of fish that will sustain him in the event of an emergency.
While fish is a tangible good that can be saved, there are also intangible goods such as time. Gilligan realizes that in addition to fish, he will also need a supply of fresh water in an emergency. He continues living on 2 fish a day, and invests the time normally spent on fishing for a third into hollowing out gourds for storing water. Soon he has a constantly rotating supply of fresh water.
With some supplies saved, he is now in a position to spend more than he produces. Will his economy progress if he chooses to increase his spending? The answer is no, he'll simply be right back where he started with no emergency supplies. To his credit, Gilligan realizes that in order to progress, he must continue to consume less than he produces. He again decides to cut back to 2 fish a day. He uses the time normally devoted to catching a third fish toward the construction of a fish net. With a net, Gilligan will be able to catch as many as 6 fish a day.
With the new net, Gilligan finds that he only has to fish every other day. On his non-fishing days, he devotes himself to digging a well so that he will no long have to hike to get fresh water. With more water available, he can now easily boil some plants for eating which would have been inedible if eaten raw. With more water available, he can plant a garden so that he no longer has to forage as much in the jungle. With less time devoted to getting food and water, Gilligan can devote himself to building a raft. This enables him catch different kinds of fish that live farther out from the island's shore. At night, Gilligan finds he can now indulge in some entertainment. He carves a primitive flute from bamboo and entertains himself by playing it.
At this point, we can say that Gilligan's economy is progressing. The key factor in making progress is Gilligan‘s lowered consumption time preference. This is a fancy way of saying that Gilligan has chosen to forego consuming some goods in the present in order to consume more goods in the future. Everyone does this, like choosing to eat at home rather than eat out in order to save money for a more reliable car, which will in turn save us money on future car repairs, which will in turn allow us to spend money for night school, which will in turn enable us to get a higher paying job, which will in turn allow us to afford better housing, etc., ad infinitim.
The importance of saving is that it is deferred consumption. In other words, Gilligan’s economy could only begin to progress when he made the decision to consume less in the present in order to invest in a new capital good (the fishing net) which would allow him to produce more, and thereby consume more in the future.
A society that saves and invests will not just have an advancing economy, it will have an advancing civilization. The amenities we associate with civilization such as art, literature, movies, music, science, and research are all made possible because we produce goods in quantities large enough that people have the leisure to devote themselves to these things.
Americans are discouraged from saving in the backward belief that it is spending that brings progress. This and a monetary policy that encourages inflationary spending in order to pay for things the Feds would rather not have to tax us for.
I find it highly ironic that with all the money being spent in foreign adventures to make us “secure,” it is the printing press cranking out that money that will destroy us in the end, and it will do so much more thoroughly than any bombs or hijacked planes in the hands of terrorists.
