6 ms·

This idea of consumption being the indicator of health for an economy is troubling to me. Less consumption certainly appears troubling to shareholders, and as s

This idea of consumption being the indicator of health for an economy is troubling to me. Less consumption certainly appears troubling to shareholders, and as some have pointed it should be viewed as a positive thing re: environmentalism - less consumption means less resource utilization. But from a purely economic standpoint - saving is not a bad thing. Murray Rothbard wrote the following (fairly obvious statement): "To increase production, man must form capital. To create it, he must restrict his consumption and transfer his labor for that period to producing immediately-satisfying consumers’ goods." The article explicitly mentions the -goals- of those who are saving - to buy homes or raise children. Henry Hazlitt writes: "But when money is invested it is used to buy capital goods–houses or office buildings or factories or ships or motor trucks or machines. Any one of these projects puts as much money into circulation and gives as much employment as the same amount of money spent directly on consumption. “Saving,” in short, in the modern world, is only another form of spending." In other words - Why would it ever be bad that people are -expanding- the time horizon of their goals (favoring long term investments over short term ones - ie: houses instead of lattes)? If anything, this ought to be an indicator of a strengthening economy, even if it means "slumping" share prices in the meantime.

hendzen 8y ago
Where does the capital come from that flows in to savings? - From wages, which are paid by enterprises that create the goods that are consumed - From investment gains in enterprises that create the goods that are consumed Its consumption all the way down.
- quadrangle 8y ago
  Nonsense. Capital is ownership of raw materials and means of production, even if we use money to track that effectively. Capital comes from natural resources more than anything else. Consuming those resources destroys capital rather than generating it — except when the consumption is an investment that increases our access to more resources (i.e. using oil to run equipment to get more oil as well as examples that aren't the same resource). If we live more consuming lifestyles, we drive up the demand for resources which could increase the motivation of people to get them and thus drive economic growth short-term, until/unless we use up the resources entirely. And that all still ignores externalized costs (pollution and other harms) that can come from the extra consumption.
- adventured 8y ago
  Try consuming something before it's produced. There is an order to things. It all begins with first producing/making something, no matter what segment of the economy you're talking about. Sure, you can start by borrowing (from someone else that has produced something), and eventually you still have to produce to pay for that front loaded consumption.
  - redahs 8y ago
    Humans, animals, plants, and single cell organisms directly consume sunlight as an input factor of production for various biological processes without paying the sun anything for it.
    - adventured 8y ago
      The sun (not sunlight) isn't part of the global economy and isn't a tradeable good. You can't sell me the sun. As such it - the sun itself - exists outside the bounds of human economy and trade (for now). It's a neutral good in the form you're talking about, generically speaking we all possess it, and that cancels out accordingly. There are edge exceptions to the concept, such as for air that is polluted (in that case we don't all equally possess eg clean air). For the most part air and sunlight are neutral, canceling goods with how you're referring to it. Further, how do you plan to continue consuming sunlight on your skin, without producing something to then get food and shelter to survive another day or week of absorbing sunlight? How did you buy that living time in the first place, without producing anything to get you food and shelter to be alive in the present? Someone had to produce first. And if you want to go more elaborately into the concept economically (sunlight based energy generation), you need land and technology to turn that sunlight into consequential electricity. You must produce first to generate and consume the sun-based electricity.
      - redahs 8y ago
        The value the sunlight provides, like all positive externalities, is capitalized in the value of land. The benefits of sunlight can only be acquired if one has acquired a place on Earth to stand, suitable places to stand have been enclosed by land titles, and land rent or profits which can be acquired from ownership of these titles without having to produce anything make up at minimum 20% of national GDP. Land and sunlight are consumed by virtue of occupying a physical space on Earth, and play an extremely large role in the economy, but land and sunlight were never produced by the economy or as a result of economic processes. They are instead the product of natural physical processes which pre-existed the evolution of humans. All goods are certainly not the result of economic production, as this would create a chicken-and-egg problem where human civilization could not exist unless another human civilization was around to produce it.
deleted 8y ago
[deleted]
JamesBarney 8y ago
But the problem is if everyone is waiting for tomorrow to spend who is working today? P.s. Houses are a consumer
mid 8y ago
> Some people joke about eating meat instead of tofu, as American tariffs have made imported soybeans more expensive. When the imports get more expensive because of tariffs it's by definition the tariffs imposed by importing country, i.e. China in this case.
quadrangle 8y ago
You're so understated!! It's troubling to you. Wow. I tend to celebrate such fair, intellectual posts! But in this case… consumption as economic indicator isn't just troubling, it's horrific. Our economic measures are not just mediocre, but actually destructively backwards. They are measures that actively push us to catastrophes, unhappiness, destruction… GDP etc. would triple instantly if we just paid our neighbors to do one another's housework.
- contingencies 8y ago
  The two main problems with classic models of economics are: (1) the tragedy of the commons: the tendency of the environment, biology, sustainability, public space and other shared concerns to be ignored until monetized/privatized to the general detriment; and (2) the false 'equilibrium' analogy used to justify supply and demand with newtonian physics (and to a lesser extent, to wrap the whole thing in a shroud of self-serving ivory tower rationalism): needless to say there is no such equilibrium - market behavior at the macro level is actually driven by mass psychology. [1] https://en.wikipedia.org/wiki/Tragedy_of_the_commons https://en.wikipedia.org/wiki/Tragedy_of_the_commons [2] https://www.georgesoros.com/2012/06/02/remarks_at_the_festival_of_economics_trento_italy/ https://www.georgesoros.com/2012/06/02/remarks_at_the_festiv... Edit: I agree with you. If you'd dropped the lead sentences you wouldn't have been downvoted. HN as a whole seems to react badly to hyperbole, but positively to unjustified, broad, faux-intellectual claims. Haha :)
  - quadrangle 8y ago
    Hah! It's SO ironic in this case. :) My hyperbolic-seeming opening line was actually emphasizing that it's not even hyperbole. AND I CAN'T EDIT to emphasize that I was NOT being sarcastic! (I realize now people probably guessed I was sarcastic when I was actually sincere). The classic models of economics really are that bad, no exaggeration. The post I was replying to was both correct and truly understated. I think the tragedy of the commons is just an example of a whole class of similar phenomena that exist and that classic economic models ignore. And you're plainly right about the "mass psychology" macro-level stuff, but that's also not the whole picture. The core issue is that macro level phenomena are real. So much economics today actually claims that macro is nothing more than aggregate micro (and they get micro wrong too, with simplistic understanding of psychology when considered at all and so much else). I heard this analogy from a friend (don't know the original source though): assuming we can understand macro by studying micro is like saying we can understand the behavior of a gas by simply tracking the isolated locations and movements of single molecules!
briandear 8y ago
Hazlitt is one of the most under-appreciated writers in Economics. His “Economics in One Lesson” is brilliantly simple.
redahs 8y ago
> "But when money is invested it is used to buy capital goods–houses or office buildings or factories or ships or motor trucks or machines. Any one of these projects puts as much money into circulation and gives as much employment as the same amount of money spent directly on consumption. This is nice in theory but certainly false in practice. In practice much of the price paid for capital-goods is not for capital at all, but for land and monopoly priviliges. In real estate, the land share of real estate value can be 60% of the total investment. Payments for land and investment in land purchases are always surplus payments beyond what is necessary to bring land into use as a factor of production, because land is a fixed natural resource which does not have a labor cost of production. When investment in land increases through land banking, this increases the opportunity cost of investing in businesses which employ labor to produce goods and services, which decreases the demand for labor and lowers wages. Policies which are designed to increase investment and savings over consumption typically decrease economic output and slow growth, because while increased consumption of labor produced goods and services increases the profits for investing in productive businesses supplying these services and the demand for labor, increased investment does not necessarily increase the demand for labor or the supply of labor produced goods and services at all. It's possible for policies promoting increased investment and savings to promote nothing more than land banking and investors holding empty parking lots while waiting for a speculative increase in price.
- erulabs 8y ago
  You’re not wrong - certainly land is one of the long term investments - but I have a hard time saying land purchases from other humans is more or less “productive” than latte-purchases - for varying definitions of productivity of course. I also fully agree waste to curription, monopolies, violence, etc etc are real things, but again I’m not sure how to measure that between land and coffee (just to keep the mental experiment going). If all land was owned by one evil monopoly, and it was slowly being sold, even at insane prices - is that not productive in the sense that land in the future is more distributed than land in the past? Certainly it seems to me to be at least as worthy as short term entertainment and luxury - particularly ecologicaly - but purely economically too? Anyhow - you’re not wrong at all - investment in land is certainly one of the things being favored instead of coffee - but this seems exclusively like a value judgment to me (who is to say what the price of land ought to be but the owners of the land?)
cryptonector 8y ago
Yes, sure, but! in order to save you also have to have people who will later be willing to provide goods and services in exchange for your savings, and that requires having children. No, I don't mean that everyone must have children, but that in a world where population pyramids are inverted, older people will have a hard time getting much value for their savings. Taking this to an absurd extreme, the last human alive could have all the money in the world and it would do them no good at all -- all that money would have exactly zero value (well, the cash could be used as fuel or toilet paper, but that's it, and most money isn't and wouldn't be cash anyways). Now, a society might be able to survive having an inverted population pyramid for a while, or even a very long time (generations) but e.g., dedicating more of its economy and people to elder care, by automating more of elder care, and so on. So it's exactly not all bad. Nor am I saying that fertility rates should be above replacement rates -- we all know that we can't have exponential population (or even economic) growth without end on Earth. But do note that an economy with a long-term inverted population pyramid tends to be inflationary: the elderly will have a lot of money (as usual), yes, but it will be chasing a smaller population of service providers. Talk about Childhood's End. Sustainability yes, self-destruction no. In the long-term I do assume -perhaps wrongly!- that countries with negative population growth will eventually stabilize their fertility rates at replacement rate (probably with an overshoot on the upswing).
airstrike 8y ago
You're just shifting profits from the Retail industry to the Real Estate industry, but ceteris paribus the amount of GDP remains unchanged. I'm not an economist, but from what little I know, the Neoclassical / Solow-Swan model¹ ² defines output as a function of Labor, Capital and Productivity. Long story short, consumption doesn't drive economic growth. __________ 1. https://en.wikipedia.org/wiki/Solow%E2%80%93Swan_model https://en.wikipedia.org/wiki/Solow%E2%80%93Swan_model 2. https://slideplayer.com/slide/4812968/ https://slideplayer.com/slide/4812968/
- redahs 8y ago
  Consumption taxes have substantially decreased economic growth in Eurozone in practice. The Neo-classical models of economic growth are inferior to classical models of economic growth, as the exclude Land and natural resources as an independent factor of production. The primary impetus of the development of neo-classical theories economics excluded was United States government land grants to railroad companies during the westward expansion of the 19th century. The railroad barons took over the economics departments of private universities which were previously controlled by the clergy, began firing professors which held to classical economic theories, as there was no tenure for professors at the time. They instead began funding professors such as John Bates Clarke, who repckaged Marxist economist theory that capital was 'jelly' and land and natural resources no longer exist. "Neo-Classical Economics as a Strategem against Henry George" documents how land and natural resources were removed from classical economic theories during the development of neo-classical economics in order to promote the interests of wealthy land owners in the United States during the 18th century: http://www.masongaffney.org/publications/K1Neo-classical_Stratagem.CV.pdf http://www.masongaffney.org/publications/K1Neo-classical_Str...
  - airstrike 8y ago
    That's just one criticism based on Henry George's view, but far from consensus.
RikNieu 8y ago
> "To increase production, man must form capital. To create it, he must restrict his consumption and transfer his labor for that period to producing immediately-satisfying consumers’ goods." Well, the problem with using that statement to downplay consumption is that it starts with the objective of wanting to increase production. But why would one want to increase production? Because demand(consumption) demands it.
malloryerik 8y ago
These lines are unhelpful and dreadfully misleading in this case. If savings always meant good investment, there'd nary be debt crises yet the history of capitalism is a history of debt crises. Saving is also not the same as spending because the person or group using the money has changed, the location has changed, the purchases have changed. As for good and bad investment, let's take an absurdist example for fun and clarification. A savings bank lends individuals' savings to two farmers for their yearly crops. Farmer A plants a 10,000 seeds of barley, and his neighbor Farmer B plants what are essentially small stones, 10,000 sterile seeds (perhaps he's been duped by someone or by his own misguided ideas into believing that they're fertile). Both farmers will spend the same on labor, water, perhaps the same on the seeds, and so on, so the savings will be turned into spending as Hazlitt says, but their harvests will clearly be different. Farmer A will reap a growth in total value, while the planter of sterile seeds -- Farmer B -- has created no new value despite having spent the savings lent by the bank, which he now must repay. Because of his bad investment he can't repay the bank and must sell his farm. If it turns out that many other farmers also planted these sterile seeds and can't repay their loans (other people's savings) the bank will default and great harm will be done to the community (who, if this is an idealized small and local economy, must also deal with a reduced supply of grains). Instead of farmers planting sterile seeds, in China you have local governments planting sterile infrastructure projects and borrowing heavily to do so. The debt on these and other projects is mounting at an alarming rate. Why are these sterile seeds being planted? Because the easy infrastructure investments have already been made, and there is little other means to create 6% GDP growth without either increasing exports (ahem) or increasing demand, in other words increasing consumer spending so that savings could be invested in the creation of products and services to be sold to households rather than in sterile infrastructure projects. The best explainer of this stuff that I know of is Michael Pettis, who teaches finance at Peking University. Here's a relevant article from his excellent blog: http://carnegieendowment.org/chinafinancialmarkets/72997 http://carnegieendowment.org/chinafinancialmarkets/72997 EDIT: By the way, increasing household income is the best justification I've heard for Xi Jinping's extreme and otherwise frightening power grab, because a shift like that (increasing household income) requires going against mighty interests: local governments and the wealthy.
zaro 8y ago
> This idea of consumption being the indicator of health for an economy is troubling to me. And rightly so. It's basically an indicator of how fast a society is turning resources in trash for profit. Probably it wasn't always like this, but nowadays I think that's the only metric it represents.

hendzen 8y ago

Where does the capital come from that flows in to savings? - From wages, which are paid by enterprises that create the goods that are consumed - From investment gains in enterprises that create the goods that are consumed Its consumption all the way down.

quadrangle 8y ago
Nonsense. Capital is ownership of raw materials and means of production, even if we use money to track that effectively. Capital comes from natural resources more than anything else. Consuming those resources destroys capital rather than generating it — except when the consumption is an investment that increases our access to more resources (i.e. using oil to run equipment to get more oil as well as examples that aren't the same resource). If we live more consuming lifestyles, we drive up the demand for resources which could increase the motivation of people to get them and thus drive economic growth short-term, until/unless we use up the resources entirely. And that all still ignores externalized costs (pollution and other harms) that can come from the extra consumption.
adventured 8y ago
Try consuming something before it's produced. There is an order to things. It all begins with first producing/making something, no matter what segment of the economy you're talking about. Sure, you can start by borrowing (from someone else that has produced something), and eventually you still have to produce to pay for that front loaded consumption.
- redahs 8y ago
  Humans, animals, plants, and single cell organisms directly consume sunlight as an input factor of production for various biological processes without paying the sun anything for it.
  - adventured 8y ago
    The sun (not sunlight) isn't part of the global economy and isn't a tradeable good. You can't sell me the sun. As such it - the sun itself - exists outside the bounds of human economy and trade (for now). It's a neutral good in the form you're talking about, generically speaking we all possess it, and that cancels out accordingly. There are edge exceptions to the concept, such as for air that is polluted (in that case we don't all equally possess eg clean air). For the most part air and sunlight are neutral, canceling goods with how you're referring to it. Further, how do you plan to continue consuming sunlight on your skin, without producing something to then get food and shelter to survive another day or week of absorbing sunlight? How did you buy that living time in the first place, without producing anything to get you food and shelter to be alive in the present? Someone had to produce first. And if you want to go more elaborately into the concept economically (sunlight based energy generation), you need land and technology to turn that sunlight into consequential electricity. You must produce first to generate and consume the sun-based electricity.
    - redahs 8y ago
      The value the sunlight provides, like all positive externalities, is capitalized in the value of land. The benefits of sunlight can only be acquired if one has acquired a place on Earth to stand, suitable places to stand have been enclosed by land titles, and land rent or profits which can be acquired from ownership of these titles without having to produce anything make up at minimum 20% of national GDP. Land and sunlight are consumed by virtue of occupying a physical space on Earth, and play an extremely large role in the economy, but land and sunlight were never produced by the economy or as a result of economic processes. They are instead the product of natural physical processes which pre-existed the evolution of humans. All goods are certainly not the result of economic production, as this would create a chicken-and-egg problem where human civilization could not exist unless another human civilization was around to produce it.

deleted 8y ago

[deleted]

JamesBarney 8y ago

But the problem is if everyone is waiting for tomorrow to spend who is working today? P.s. Houses are a consumer

mid 8y ago

> Some people joke about eating meat instead of tofu, as American tariffs have made imported soybeans more expensive. When the imports get more expensive because of tariffs it's by definition the tariffs imposed by importing country, i.e. China in this case.

quadrangle 8y ago

You're so understated!! It's troubling to you. Wow. I tend to celebrate such fair, intellectual posts! But in this case… consumption as economic indicator isn't just troubling, it's horrific. Our economic measures are not just mediocre, but actually destructively backwards. They are measures that actively push us to catastrophes, unhappiness, destruction… GDP etc. would triple instantly if we just paid our neighbors to do one another's housework.

contingencies 8y ago
The two main problems with classic models of economics are: (1) the tragedy of the commons: the tendency of the environment, biology, sustainability, public space and other shared concerns to be ignored until monetized/privatized to the general detriment; and (2) the false 'equilibrium' analogy used to justify supply and demand with newtonian physics (and to a lesser extent, to wrap the whole thing in a shroud of self-serving ivory tower rationalism): needless to say there is no such equilibrium - market behavior at the macro level is actually driven by mass psychology. [1] https://en.wikipedia.org/wiki/Tragedy_of_the_commons https://en.wikipedia.org/wiki/Tragedy_of_the_commons [2] https://www.georgesoros.com/2012/06/02/remarks_at_the_festival_of_economics_trento_italy/ https://www.georgesoros.com/2012/06/02/remarks_at_the_festiv... Edit: I agree with you. If you'd dropped the lead sentences you wouldn't have been downvoted. HN as a whole seems to react badly to hyperbole, but positively to unjustified, broad, faux-intellectual claims. Haha :)
- quadrangle 8y ago
  Hah! It's SO ironic in this case. :) My hyperbolic-seeming opening line was actually emphasizing that it's not even hyperbole. AND I CAN'T EDIT to emphasize that I was NOT being sarcastic! (I realize now people probably guessed I was sarcastic when I was actually sincere). The classic models of economics really are that bad, no exaggeration. The post I was replying to was both correct and truly understated. I think the tragedy of the commons is just an example of a whole class of similar phenomena that exist and that classic economic models ignore. And you're plainly right about the "mass psychology" macro-level stuff, but that's also not the whole picture. The core issue is that macro level phenomena are real. So much economics today actually claims that macro is nothing more than aggregate micro (and they get micro wrong too, with simplistic understanding of psychology when considered at all and so much else). I heard this analogy from a friend (don't know the original source though): assuming we can understand macro by studying micro is like saying we can understand the behavior of a gas by simply tracking the isolated locations and movements of single molecules!

briandear 8y ago

Hazlitt is one of the most under-appreciated writers in Economics. His “Economics in One Lesson” is brilliantly simple.

redahs 8y ago

> "But when money is invested it is used to buy capital goods–houses or office buildings or factories or ships or motor trucks or machines. Any one of these projects puts as much money into circulation and gives as much employment as the same amount of money spent directly on consumption. This is nice in theory but certainly false in practice. In practice much of the price paid for capital-goods is not for capital at all, but for land and monopoly priviliges. In real estate, the land share of real estate value can be 60% of the total investment. Payments for land and investment in land purchases are always surplus payments beyond what is necessary to bring land into use as a factor of production, because land is a fixed natural resource which does not have a labor cost of production. When investment in land increases through land banking, this increases the opportunity cost of investing in businesses which employ labor to produce goods and services, which decreases the demand for labor and lowers wages. Policies which are designed to increase investment and savings over consumption typically decrease economic output and slow growth, because while increased consumption of labor produced goods and services increases the profits for investing in productive businesses supplying these services and the demand for labor, increased investment does not necessarily increase the demand for labor or the supply of labor produced goods and services at all. It's possible for policies promoting increased investment and savings to promote nothing more than land banking and investors holding empty parking lots while waiting for a speculative increase in price.

erulabs 8y ago
You’re not wrong - certainly land is one of the long term investments - but I have a hard time saying land purchases from other humans is more or less “productive” than latte-purchases - for varying definitions of productivity of course. I also fully agree waste to curription, monopolies, violence, etc etc are real things, but again I’m not sure how to measure that between land and coffee (just to keep the mental experiment going). If all land was owned by one evil monopoly, and it was slowly being sold, even at insane prices - is that not productive in the sense that land in the future is more distributed than land in the past? Certainly it seems to me to be at least as worthy as short term entertainment and luxury - particularly ecologicaly - but purely economically too? Anyhow - you’re not wrong at all - investment in land is certainly one of the things being favored instead of coffee - but this seems exclusively like a value judgment to me (who is to say what the price of land ought to be but the owners of the land?)

cryptonector 8y ago

Yes, sure, but! in order to save you also have to have people who will later be willing to provide goods and services in exchange for your savings, and that requires having children. No, I don't mean that everyone must have children, but that in a world where population pyramids are inverted, older people will have a hard time getting much value for their savings. Taking this to an absurd extreme, the last human alive could have all the money in the world and it would do them no good at all -- all that money would have exactly zero value (well, the cash could be used as fuel or toilet paper, but that's it, and most money isn't and wouldn't be cash anyways). Now, a society might be able to survive having an inverted population pyramid for a while, or even a very long time (generations) but e.g., dedicating more of its economy and people to elder care, by automating more of elder care, and so on. So it's exactly not all bad. Nor am I saying that fertility rates should be above replacement rates -- we all know that we can't have exponential population (or even economic) growth without end on Earth. But do note that an economy with a long-term inverted population pyramid tends to be inflationary: the elderly will have a lot of money (as usual), yes, but it will be chasing a smaller population of service providers. Talk about Childhood's End. Sustainability yes, self-destruction no. In the long-term I do assume -perhaps wrongly!- that countries with negative population growth will eventually stabilize their fertility rates at replacement rate (probably with an overshoot on the upswing).

airstrike 8y ago

You're just shifting profits from the Retail industry to the Real Estate industry, but ceteris paribus the amount of GDP remains unchanged. I'm not an economist, but from what little I know, the Neoclassical / Solow-Swan model¹ ² defines output as a function of Labor, Capital and Productivity. Long story short, consumption doesn't drive economic growth. __________ 1. https://en.wikipedia.org/wiki/Solow%E2%80%93Swan_model https://en.wikipedia.org/wiki/Solow%E2%80%93Swan_model 2. https://slideplayer.com/slide/4812968/ https://slideplayer.com/slide/4812968/

redahs 8y ago
Consumption taxes have substantially decreased economic growth in Eurozone in practice. The Neo-classical models of economic growth are inferior to classical models of economic growth, as the exclude Land and natural resources as an independent factor of production. The primary impetus of the development of neo-classical theories economics excluded was United States government land grants to railroad companies during the westward expansion of the 19th century. The railroad barons took over the economics departments of private universities which were previously controlled by the clergy, began firing professors which held to classical economic theories, as there was no tenure for professors at the time. They instead began funding professors such as John Bates Clarke, who repckaged Marxist economist theory that capital was 'jelly' and land and natural resources no longer exist. "Neo-Classical Economics as a Strategem against Henry George" documents how land and natural resources were removed from classical economic theories during the development of neo-classical economics in order to promote the interests of wealthy land owners in the United States during the 18th century: http://www.masongaffney.org/publications/K1Neo-classical_Stratagem.CV.pdf http://www.masongaffney.org/publications/K1Neo-classical_Str...
- airstrike 8y ago
  That's just one criticism based on Henry George's view, but far from consensus.

RikNieu 8y ago

> "To increase production, man must form capital. To create it, he must restrict his consumption and transfer his labor for that period to producing immediately-satisfying consumers’ goods." Well, the problem with using that statement to downplay consumption is that it starts with the objective of wanting to increase production. But why would one want to increase production? Because demand(consumption) demands it.

malloryerik 8y ago

These lines are unhelpful and dreadfully misleading in this case. If savings always meant good investment, there'd nary be debt crises yet the history of capitalism is a history of debt crises. Saving is also not the same as spending because the person or group using the money has changed, the location has changed, the purchases have changed. As for good and bad investment, let's take an absurdist example for fun and clarification. A savings bank lends individuals' savings to two farmers for their yearly crops. Farmer A plants a 10,000 seeds of barley, and his neighbor Farmer B plants what are essentially small stones, 10,000 sterile seeds (perhaps he's been duped by someone or by his own misguided ideas into believing that they're fertile). Both farmers will spend the same on labor, water, perhaps the same on the seeds, and so on, so the savings will be turned into spending as Hazlitt says, but their harvests will clearly be different. Farmer A will reap a growth in total value, while the planter of sterile seeds -- Farmer B -- has created no new value despite having spent the savings lent by the bank, which he now must repay. Because of his bad investment he can't repay the bank and must sell his farm. If it turns out that many other farmers also planted these sterile seeds and can't repay their loans (other people's savings) the bank will default and great harm will be done to the community (who, if this is an idealized small and local economy, must also deal with a reduced supply of grains). Instead of farmers planting sterile seeds, in China you have local governments planting sterile infrastructure projects and borrowing heavily to do so. The debt on these and other projects is mounting at an alarming rate. Why are these sterile seeds being planted? Because the easy infrastructure investments have already been made, and there is little other means to create 6% GDP growth without either increasing exports (ahem) or increasing demand, in other words increasing consumer spending so that savings could be invested in the creation of products and services to be sold to households rather than in sterile infrastructure projects. The best explainer of this stuff that I know of is Michael Pettis, who teaches finance at Peking University. Here's a relevant article from his excellent blog: http://carnegieendowment.org/chinafinancialmarkets/72997 http://carnegieendowment.org/chinafinancialmarkets/72997 EDIT: By the way, increasing household income is the best justification I've heard for Xi Jinping's extreme and otherwise frightening power grab, because a shift like that (increasing household income) requires going against mighty interests: local governments and the wealthy.

zaro 8y ago

> This idea of consumption being the indicator of health for an economy is troubling to me. And rightly so. It's basically an indicator of how fast a society is turning resources in trash for profit. Probably it wasn't always like this, but nowadays I think that's the only metric it represents.