Savings Are the Foundation of Economic Growth

Source: Mises Institute.

I have often made the point that supply and demand do not drive an economy. They are not like hydraulic forces that cause an engine to spin.

The incredulous often attack the observation by sputtering something like, “But-but-but, the Law of Supply and Demand is a fundamental principle of economics!” Strictly speaking, however, this isn’t true. The so-called law was really just an early attempt to formulate a theory of prices — a failed attempt, as it turns out. You can use the Law of Supply and Demand to explain the price at which a certain good sells, but you can’t use it to explain why some goods sell at higher prices than others. A fundamental theory of prices should be able to do that.

More fundamental than supply and demand is the relationship between production and consumption, which the article explores. If there is a law of production and consumption it is: Production always comes before consumption.

16 thoughts on “Savings Are the Foundation of Economic Growth

  1. As a non-expert, it seems that production with little or no demand will create one of two options:

    Change the product.

    Change the demand.

    Then when demand returns, ramp up production.

    Changing demand is what marketing, branding and advertising are all about. Would you pay $5.00 for a stone I picked up on the side of the road? What if I packaged it nicely, gave it a name, a story line and lots of publicity just before the holiday season? Same product, new demand.

    It also seems important to consider the product. Everyone has to eat, need some kind of clothing and shelter. Few need brand new electron microscopes. Or more to the baker analogy, the market for day old bread is not the same as for fresh eclairs.

    Survival spending v. discretionary. Which brings up the simple idea that discretionary spending is sought after as wealthier people have more discretionary funds. But survival spending is more prevalent. (Sell to the masses, live with the classes.)

    Now if the debate is about government spending, ideally taxes should cover that. And in that case it is not money out of thin air. Production costs and consumer pricing have all included taxes in the pricing. And if some goes to extended unemployment, then at least some demand can be met with production, keeping the economy from collapsing.

    Liked by 1 person

    1. We certainly have those folks. And to show our appreciation, we don’t even tax them much. And we won’t even make compliance enforceable leaving hundreds of billions of tax obligations even under current low tax laws.

      Liked by 1 person

      1. Good. The less we tax them, the more bulldozers they can buy.

        There is nothing the government can do with their money that does as much good as their investments.

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          1. How do we know if they evaded taxes or not. The IRS has been decimated. The average taxpayer can’t get through to them and the top earners just ignore them.

            Just about a decade ago one of the largest accounting firms in the world was caught selling illegal tax evasion plans to the wealthy. Not much happened.

            No need to raise taxes if what we are owed is not even collected.

            Liked by 1 person

    2. RE: “You have to have rich people with excess capital they can risk for society to prosper.”

      Yes. You need profit, or production in excess of consumption.

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      1. Profit is critical to operate a business. A no-brainer.

        How does production excess become profitable? Millions of unsold widgets are a drain.

        Liked by 1 person

        1. RE: “How does production excess become profitable?”

          When you can trade the excess for goods you want and those goods are available to be had. The point is that profit serves the same function as Dr. Tabor’s rich people.

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          1. This seems pretty obvious. Profit is critical and also part of the source for wealth accumulation. So, yes, wealth can be reinvested.

            Who is going to accept the goods you made but no one wants? And if they do, it will not be for profit but rather a loss. In our tax code, the loss can be “profitable” in a paper fashion as it reduces tax liabilities.

            But are you debating tax intricacies or economic principles that somehow turns unwanted goods into profit. Someone has to end up standing when the music stops.

            Liked by 1 person

          2. RE: “But are you debating tax intricacies or economic principles that somehow turns unwanted goods into profit.”

            I am pointing out that goods which are not produced cannot be consumed. This is a basic framework for understanding economics.

            Goods that are unwanted are by definition unprofitable. You can’t trade them for anything.

            It is, however, often possible to produce more goods than will be consumed in a given time period. So long as those goods can be preserved in a consumable form, they can be used to offset future production/consumption. They represent profit, or wealth, or savings.

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  2. I admit that my expertise is more f-stop (Fitzgerald?😎) than economics.

    Yes it is possible to hold onto products that are unsellable with the possibility of gaining value in the future. Perhaps siloed grains can be held until markets improve. Or oil can be capped until prices rise. Or chips might find a future use. As a long time business owner, I am well aware of microeconomic “rules” that determine the success or failure of the enterprise.

    Inventory can be your friend or enemy. However, the just in time system used by Toyota demonstrates the value of meeting market demand, not just wishing for it. And it keeps inventories manageable with the bonus of pressuring suppliers to keep the production running and prices low. And it spreads the risk of over production across the network. One and two year old cars that didn’t sell will be dumped at a probable loss of profit. You can bet that the market guru who overestimated the sales would be looking for other employment.

    Liked by 1 person

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