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Spend, spend, spend and spend some more!

The real engine of economic growth is production, made possible by saving

Spend, spend, spend and spend some more!

If economists had their way, there would be a gun to your head forcing you to open up your wallet more. According to economists, recessions are caused by lack of 'aggregate demand'. In simpler words, people are not spending enough. If we could just get them to start spending again, the economy would grow. So goes their war cry. And the cry is heard all over the place, from Nobel laureate Paul Krugman to the humble Keynesian blogger.

China should focus less on investment and more on consumption to avoid a hard landing.

Seventh Pay Commission salary hikes will cause economic growth due to increased consumer spending.

Consumer spending accounts for nearly 70% of US GDP. The world needs the US consumer.

This is all one giant lie, a deluge of intellectual sounding talk. As Morpheus tells Neo in The Matrix, "It is the world that has been pulled over your eyes to blind you from the truth." And the truth is...

The real engine of economic growth is production, made possible by saving.
Let's understand this with a simple construct. Picture Robinson Crusoe marooned on a deserted island, with nothing but the tattered clothes on his back. He explores the island and comes across a grove of berries. Luckily for him, they are edible and satisfy his hunger. Hunger satisfied, he now looks for shelter but there's none. He could build a shack for himself using some driftwood and a sharp stone he found, but that would be a week's effort and he is already occupied just gathering berries for his daily food. He can either work longer hours gathering berries and building the shack or go hungry for a week and finish construction.

That's when he gets an idea. If he makes a stick, he can gather berries from the upper branches where they are more abundant. He can use the time saved towards building his shack. So he works harder for a day and makes the stick and finds that he has cut his berry gathering time in half. He then gathers seven days worth of berries for his food and starts working on the shack. A week later, he has shelter.

Starting from scratch, he now has:

  1. A stick, making him more efficient in gathering berries
  2. A shack for shelter
  3. More free time

Crusoe saved a week's worth of berries and produced the shack. Production is made possible only by saving, whether we are talking berries or money. Spending is made possible because we have savings and production. Merely spending money does not cause any economic growth; real growth always comes from increased production.

Parting thought:
"At the outset of every step forward on the road to a more plentiful existence is saving--the provisionment of products that makes it possible to prolong the average period of time elapsing between the beginning of the production process and its turning out of a product ready for use and consumption....Without saving and capital accumulation there could not be any striving toward nonmaterial ends." - Ludwig von Mises