My econ teacher drew a circular flow diagram of money, goods, and factors of production. He then said that if spending slowed down, that it would start a chain reaction and cause a recession. But then, I said, if that was true, the economy would be destroyed. But then, the teacher said, goods and services would be so cheap that people would start buying them again.
What is the best critique of this common economic myth out there, that consumption creates economic prosperity? What would happen, in a free market economy, if people wanted to save and invest and consume more? Would my teacher in the public schools even be hired if he wanted to teach Austrian Economics?
What happens to the money not spent? Keep in mind, neoclassicals do not not usually incorporate an analysis of time and the capital structure in their theories of production. Austrians do - and so we can show how misleading it is to argue that consumption is all there is to it.
Oh, that you have to bake a cake before you can eat it. You have to save in order to be able to spend/invest. Consuming all the time without producing or saving leads to no longer being able to consume because you’ve nothing left to consume.
Slowing of spending doesn’t cause a recession any more than a cough causes the flu; it’s a symptom.
Woah, awesome example. But don’t mainstream economists atomatically assume that if the people clamor for more cakes, the cakebaker can make a higher profit, and this boosts the economy?
If they want more cakes and he can’t deliver, he’ll raise his prices to clear the market and then use his savings to purchase more ovens/labor. It’s not the spending/consuming itself that has driven things; it’s the demand, supply, and the savings, coupled with the time it takes to get everything together.
Savings are manifested as deferred consumption or productive gains. So in a sense, savings and consumption can be on opposite ends of the spectrum. If you want an example of that cycle, let me know.
Didn’t Rothbard say that any theory of the buisness cycle had to account for the fact that depressions hit the producer goods industries far worse than they do the consumer goods industries, and that if underconsumption did cause depressions it would be the other way around?