Thursday, April 26, 2007

Consumers are confident .... is this always a good thing? (amv)

I just finished a paper (trying to appease the concepts of equilibrium and history), so I am back at the Thank you fg for posting for two! Yet, I have some doubts if we can always be happy about higher consumer spending. Why? More demand for consumer goods may raise consumer good prices relative to the prices of higher order goods. This of course is an incentive to redirect production towards less productive production processes. Thus, while investments certainly do increase due to increased consumer demand, the economy's capital structure may become shorter, that is, less productive. In the long run, investment may even decline, because the capital stock has to be adjusted to the higher time preference of the society. Disinvestment has to take place to reduce the capital stock to the less capital intensive requirements of a consumption driven economy. I do not think that the current increase in consumer demand will have such consequences, but it is important to keep in mind that consumption is no panacea! Consumption is the final cause of production, but most resources are scarce and to use them for the production of consumption goods like a bottle of wheat beer comes to the price that they cannot be used to produce electricity, transportation services, etc. There is no such thing as a free lunch! Of course, some resources are unemployed. Yet, not all of them are abundant (otherwise none of them would be an economic good and thus none of them would have a price). Thus, scarcity cannot be 'spend away.' Only capital accumulation allows to relax the boundaries of scarcity! Real savings (i.e., savings in terms of goods and services) and technological change are the major sources of wealth. Consumption serves 'merely' as the final cause, the ultimate reason why production takes place at all. But if we consume more today, we may have less for tomorrow.