Here’s another letter to a listener who heard Ross Kaminsky’s radio interview with me on Thursday.
Mr. Kevin Klimek:
Dear Mr. Klimek:
You ask: “In a ‘consumption based’ economy, wouldn’t simple math require increased salaries, to increase consumption, to increase GDP?”
The phrase “consumption-based economy” as commonly interpreted is bass-ackwards. Consumption in an economy no more fuels that economy than does success at driving a car fuel that car. Just as success at driving a car is the result of a working engine that is properly fueled with gasoline and accurately steered by a driver, success at consumption is the result of a working economy properly fueled by competition and accurately steered by market prices.
Put differently, ability to consume as lavishly as we Americans consume is the result rather than the cause of our prosperity. The economy must enable and encourage us first to produce things before we can consume things. Trying to consume greater quantities simply by increasing spending does no more to create the economic wherewithal to produce these greater quantities than does trying to travel further in a car simply by pressing harder on the accelerator create the fuel necessary for the longer journey.
Yet in a very important sense our economy is – and should be – consumption-based. It is and should be consumption-based in the sense that it is geared to satisfy the demands of consumers rather than the interests of producers. As Adam Smith said, “[c]onsumption is the sole end and purpose of all production; and the interests of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer.”* It follows that Mr. Trump and others who would forcibly obstruct consumers’ ability to trade with foreigners are enemies of the consumption-based economy, properly understood, and, hence, enemies also of the widespread prosperity that respect for such consumer sovereignty generates.
Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030