NCPA - National Center for Policy Analysis

Consumerism Is Keynesianism

December 13, 2010

One of the most pernicious and widespread economic fallacies is the belief that consumption is the key to a healthy economy.  This belief is an inheritance of misguided Keynesian thinking.  Production, not consumption, is the source of wealth.  If we want a healthy economy, we need to create the conditions under which producers can get on with the process of creating wealth for others to consume, and under which households and firms can engage in the saving necessary to finance that production, says Steven Horwitz, the Charles A. Dana Professor of Economics at St. Lawrence University.

  • 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.
  • Putting more resources in the hands of consumers through a government stimulus package fails precisely because the wealth transferred ultimately hasto come from producers.
  • This is obvious when the spending is financed by taxation, but it's equally true for deficit spending and inflation.

Before the Keynesian revolution the standard belief among economists was that production was the source of demand and that encouraging saving and production was the way to generate economic growth, says Horwitz.

Thanks to Keynesianism, manipulating the elements of total income (consumption, investment and government spending) became the focus of macroeconomic policy and economic development.  It was the Keynesians' theoretical framework that led to the development of the relevant national income statistics and that implicitly informs the popular arguments for more consumption.

For over 150 years defenders of free markets saw consumption as destroying wealth, and saving and production as creating it.  They never argued that "stimulating consumption" was the path toward prosperity, says Horwitz.

Souce: Steven Horwitz, "Consumerism Is Keynesianism," Freeman Online, December 9, 2010.

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