What drives an economy...consumption or production?

[Guitarzan]

I'm in a bit of a debate with a friend who states that the economy is driven by consumption or demand. (Sounds aweful Keynesian to me)

I believe that an economy is driven by production, because, in short, demand (wants or needs) is always there regardless.

I've stated that in order for one to consume something, they must first produce something of value to someone else in order to receive the thing that they want (or "money" to buy that thing), be it food, clothing or whatever. In other words, in order to consume something, one must have or produce something first in order to trade, as nothing in this world is free.

I know this is short, but am I on the right track?

[acptulsa]

Demand for goods seems to me to be pretty meaningless without goods.

Ask them what demand there was for Tommy Hilfiger shirts or Pet Rocks without the supply.

[TNforPaul45]

Simple, the economy is driven by the free and unrestricted allowance of both, and by the ad-hoc subjective valuations that consumers make of the producers products.

[Diurdi]

Just because people wish to have alot of stuff doesn't mean the economy gets stronger.

[freshjiva]

Production.

One cannot consume without first producing that which can be consumed.

Of course your question is perhaps the most hotly debated topics of economics. Keynes argued consumption (demand-side), while the Austrian School argue production (supply-side).

[Stary Hickory]

Production always comes first. Without production demand is meaningless as their is nothing to consume.

[brandon]

I would take a step back and ask yourself what is an economy? Can it be driven? Does this metaphor presuppose central planning? Does this metaphor we are arguing about even make any sense?

It all really come down to this: People trade things when they can come to an agreement that benefits both of them. There are a million things that could influence this, including "supply" and "demand"

[ChaosControl]

Both are needed. The more equal, the better.
Production without a demand is useless, demand without a product is also useless.

In our economy though, I am going to say that we need more demand/consumption at the moment. There is already plenty produced that needs to be consumed. It is pointless producing more when there is already an abundance of product. We need production so that we can satisfy demand and so we can provide jobs so there is a resources for the demand to be acted upon. Uncertainty about jobs and money have people consuming less which in turn creates a self fulfilling prophecy of a down turn economy as the less consumption causes less production which leads to even less jobs. I'd say we need the masses to consume more to jump start the economy more than anything else could and to do that they need to be more certain about their jobs and personal wealth. I am not sure the best method towards that. Although I personally dislike the over-consumption our economy is built on and would rather see it rebuilt on a less materialistic basis.

[Guitarzan]

Yeah...pretty much how I see it. But the two are very intertwined. I believe at the most basic level, though, production has to come first, as demand is there, regardless.

The guy said he's been in manufacturing his whole life, and they don't sell or build if there's no demand.

I said, sure...but asked him where the demand comes from.

He then says, it comes from people with money to spend on it.

I asked him how then, did they get the money to spend on it...

He hasn't answered in about 30 mins lol.

[ds21089]

http://www.guardian.co.uk/world/2011/mar/14/germany-new-boom-making-stuff

[nobody's_hero]

Just because people wish to have alot of stuff doesn't mean the economy gets stronger.

Thread winner :D

[Guitarzan]

I would take a step back and ask yourself what is an economy? Can it be driven? Does this metaphor presuppose central planning? Does this metaphor we are arguing about even make any sense?

It all really come down to this: People trade things when they can come to an agreement that benefits both of them. There are a million things that could influence this, including "supply" and "demand"

I'm not presupposing a planned "driver" for the economy lol. I'm asking what makes an economy grow and flourish. I'm interested in the intricacies. Sure, people trade things when they can to an agreement that benefits both, but how do they first get those things? My answer is that they would've had to produce something first.

[jkr]

the real demand comes from you (the producer) to survive, all extra trade is based on bounty beyond your needs vs. the desire for something you cant do or have (want).


but we seem a little to specialized nowadays for that gem...

[dannno]

The guy said he's been in manufacturing his whole life, and they don't sell or build if there's no demand.

I said, sure...but asked him where the demand comes from.

He then says, it comes from people with money to spend on it.

I asked him how then, did they get the money to spend on it...

He hasn't answered in about 30 mins lol.

Ya, lol, they had to produce something first.. you're on the right track. If everybody got to just buy stuff willie nilly, then there wouldn't be enough stuff produced to fill the demand.. so people have to produce in order to trade for money, and in turn for other goods.

[Fox McCloud]

Neither: savings drives the economy.

[dannno]

Neither: savings drives the economy.

Savings can and does drive production, but you could save without driving production, by keeping it under the mattress.. so saving in and of itself doesn't drive the economy, but investing savings drives production, and savings is a large component that needs to be considered.

[Guitarzan]

Ya, lol, they had to produce something first.. you're on the right track. If everybody got to just buy stuff willie nilly, then there wouldn't be enough stuff produced to fill the demand.. so people have to produce in order to trade for money, and in turn for other goods.

Ha...yep...and he knew that's what the answer was...so he disappeared lol.

[Guitarzan]

Savings = Capital

[anaconda]

Supply and demand existed long before Keynes.

http://en.wikipedia.org/wiki/Say%27s_law

http://www.answers.com/topic/say-s-law

[Southron]

Our economy? Debt. :p

[specsaregood]

Neither: savings drives the economy.

The richest SOBs I know are also the cheapest penny pinching SOBs.

[heavenlyboy34]

Simple, the economy is driven by the free and unrestricted allowance of both, and by the ad-hoc subjective valuations that consumers make of the producers products.

This^^ as well as savings (because savings begets wealth, which allows for both production and consumption).

[MN Patriot]

Yeah...pretty much how I see it. But the two are very intertwined. I believe at the most basic level, though, production has to come first, as demand is there, regardless.

The guy said he's been in manufacturing his whole life, and they don't sell or build if there's no demand.

I said, sure...but asked him where the demand comes from.

He then says, it comes from people with money to spend on it.

I asked him how then, did they get the money to spend on it...

He hasn't answered in about 30 mins lol.

The government, in conjunction with the Federal Reserve, creates money out of thin air. They can create all the money they need to spend, plus what they extort from us.
According to the Keynesians, this will get the economy going. Production will increase because government has the money to spend, people will have more jobs and more money (until inflation kicks in) to tax, more tax revenues means more government spending, lower interest rates means more building, more government spending means more handouts to people who don't produce, fewer people producing, more people with not enough money, loans go bad, back to square one, etc, etc.
What a self perpetuating circle of exploitation.
I would rather have honest money, no income taxes, small government, few regulations, free markets. Let the market regulate itself. Supply and demand will keep things working just fine.

[Anti Federalist]

The richest SOBs I know are also the cheapest penny pinching SOBs.

They didn't get rich by writing a bunch of checks, now, did they? :p

[Anti Federalist]

To answer the question, I'd say it was both.

Demand is there at first, for the necessary goods of survival, food, water, shelter, clothing.

Once those are satisfied, to a greater or lesser degree depending on tastes, culture, time frame, personal choices, then demand can be driven by production.

Advertising serves this function well.

[Carehn]

What drives an economy is human action. People can act for there own happiness or if they have problems in the head needing worked out for someone else's happiness.
You must produce in order to consume and you must have a perpose for consumption. Be it need or fun or what have you. The "NEED" is up to every individual.

[awake]

The whole idea of production is consumption. It is inseparable.

[johnrocks]

It's called supply and demand for a reason. Both are needed.

[Occam's Banana]

Both are needed. The more equal, the better.

In regard to production vs. consumption, I disagree with the idea "the more equal, the better." Production should always exceed consumption. There is no other way for an economy to be genuinely prosperous & wealthy. Consider:

A) Over the long term, when production exceeds consumption, wealth is the result. Think of this in terms of your household economy. When your production (your "take-home" pay, for example) exceeds your consumption (food, rent, clothes, etc.), you have money left over. You are that much wealthier. You can save &/or invest, making future consumption possible/easier. You open up options. This is a good thing.

B) Over the long term, when consumption exceeds production, the destruction of wealth is the result. If your consumption exceeds your production, chronic debt is the result. You are that much less wealthy. You can spend (or borrow & go even deeper into debt), but you can't save &/or invest. You close off options. This is not a good thing.

C) When consumption equals production, neither wealth nor debt is the result. You are breaking even & "living paycheck-to-paycheck." You're not in debt, but you can't save &/or invest either. This is better than B, but not as good as A.

I used the example of a household economy, but the same principles apply to the economy at large. Option C isn't sustainable over the long term because you have no wiggle room. Any serious setback could put you firmly in option B. And option B is the road to ruin. The only viable option is option A.


Production without a demand is useless, demand without a product is also useless.

I am also dubious about this.

You say that "production without demand is useless." If you mean that the creation of something that no one wants or needs (now or in the future) is useless, then I would agree. But that isn't "production" - it's just a pointless waste of time & effort. On the other hand, if you mean "production without demand" in the sense of production that is not immediately wanted or needed (i.e., consumed), then I very much disagree, for that is the essence & source of all true wealth (see option A above).

You also say that "demand without a product is also useless." I strongly disagree with this. An unfilled want or need - a "demand without a product" - is the very thing that makes production possible in the first place! After all, why should anyone produce anything if there isn't any "demand without a product" out there somewhere?

[MozoVote]

While you do need both, I favor saying demand drives production. For example, an agricultural community can be self sufficient in food, and it produces all that it needs to survive. One day a trader passes through the area with some colorful hats. The people are thrilled with this new fad and everyone wants them... more than can be sold. Demand is set in motion, and people start trying to think up how to create the dyes and the fabric, to make more of the hats they want so badly.

Yes, the first contact with the good introduced the desire (demand) into the community. But demand is needed to support the conditions for continued production.

[AFPVet]

Speaking of production, many car companies based here in the states have to order parts from places like Japan. Perhaps we need to spark new companies which produce components.... It is high time that America brings manufacturing back.

[anaconda]

Speaking of production, many car companies based here in the states have to order parts from places like Japan. Perhaps we need to spark new companies which produce components.... It is high time that America brings manufacturing back.

It's high time that we innovate and educate our labor force. We should be happy to export the crappy low paying jobs overseas. Many of which are likely manufacturing jobs.

[Sentient Void]

If consumption in and of itself drove an economy, then you could charge everyone for air and they would then be all wealthier. You could pay people to dig ditches all day and fill them back up, and that would be their profession (dig a hole, fill it back up), and this would create wealth and expand an economy.

Unfortunately, this (keynesian) notion is not based in reality. Your friend is a jackoff.

[JCLibertarian]

Our economy? Debt. :p Well, I would say all "mixed" economies throughout the world are driven by debt as most countries practice fractional reserve banking, that certainly isn't mutually exclusive to America. Though I think the recent findings about the Fed printing out tens of billions of dollars to foreign banks just shows how intertwined our fractional reserve banking system is. Through the Federal reserve essentially acting as an IMF or World Bank for private Institutions and the USD being the World Reserve Currency, our Central Bank has exacerbated the financial crisis throughout the World and sparked social unrest. The most notable example of which is in Egypt, where Egypt has been forced to inflated their currency to protect emerging export industries against a USD devaluation which was caused by quantitative easing and fiat loans to banks throughout the world. You can't have long run supply without demand, and can't have demand for a good that is not being produced. But I agree with previous posters, savings is what drives an economy because savings allow for capital formation, and result in long term investment and consumption. The Austrian School is not really supply side or demand side, that is what makes them unique, it forms a more holistic view of the market.

[Zippyjuan]

Increasing supply is helpful- if the demand for the good exists. If people are not buying cars, you cannot sell more cars by producing more. Will they be able to sell twice as many houses today if they start building tons of new ones? Right now most producers are not expanding their production because they do not see sufficient demand for the additional goods to merit increasing production.

[tangent4ronpaul]

Speaking of production, many car companies based here in the states have to order parts from places like Japan. Perhaps we need to spark new companies which produce components.... It is high time that America brings manufacturing back.

+1

[Carehn]

Now what drives human action (an economy is many humans acting) Consuming Production dieing and other stuff, What drives all that is a will to reach a new state of being. If you where perfect you would not move act or even breath. Humans move to achieve something. That movement is the cause witch hopefully has the effect the individual was hoping for but also has the unintended effect of becoming a very small part of what people like to call the economy. This post is part of the economy because its an idea. It could be wrong but it is a free trade of thoughts witch are always the beginning of the creation of a light bulb or what have you.

[brandon]

Now what drives human action (an economy is many humans acting) Consuming Production dieing and other stuff, What drives all that is a will to reach a new state of being. If you where perfect you would not move act or even breath. Humans move to achieve something. That movement is the cause witch hopefully has the effect the individual was hoping for but also has the unintended effect of becoming a very small part of what people like to call the economy. This post is part of the economy because its an idea. It could be wrong but it is a free trade of thoughts witch are always the beginning of the creation of a light bulb or what have you.

I agree my good man. Well said.

Supply and demand are just factors that effect prices of goods and services. Human action is what drives an economy.

[YumYum]

Good marketing drives an economy; matching the producers with the consumers. I grow the greatest chilies in the world. Now, if I can find a buyer, I'll be set!

[malkusm]

Think of it this way: Everyone wants to consume nearly unlimited amounts. Everyone faces a budget constraint which confines them to only certain bundles of goods which they could consume within that constraint.

Production of goods doesn't change this budget constraint per se all by itself; what production does is to foster innovative ways to drive down costs and/or capitalize on underdeveloped areas of the market in order to bring in temporary profits. When firms do this, technology (a vague term employed here to mean the methods of production as well as the number of goods available) expands, making any given person's nominal budget constraint higher in real terms. This is how capitalism gives rise to a higher quality of living.

[pcosmar]

This seems rather "Chicken or Egg" Which came first?

Both are necessary for a healthy economy.
What will hurt an economy is interference on either end.

[Seraphim]

Production. As stated before: demands are unlimited- essentially to a level of deluded fantasy. The only thing that begins to satisfy said demand is PRODUCTION. Getting up and building, growing, thinking...action.

Now, can a lack of demand for a certain good/service quell it's production? Absolutely. But that's a good thing. Why waste the resources for something we don't want/need?

In terms of the overall economic capacity however, production trumps demand. A high consumption economy can only consume at such a level so long as the production continues- the demand will always be there.

[Travlyr]

Both. Producers can get wealthy but consumers cannot. Americans will be learning this lesson first hand soon.

[MelissaWV]

Since I doubt you are talking about a global economic measure, I would say production is more vital. Even in an economy where domestic demand is down, production allows the exportation of goods which can support a company's growth, additional hiring, and eventually fuel domestic demand/spending.

Demand without domestic production means that we are importing more and more to meet that demand, and the jobs at home are largely service jobs or mostly meaningless cubicle farms. It's one part of how we got to where we are today. We have been a nation of voracious demanders, but not so much suppliers. We demanded, and were given access to credit, which allowed us (as a nation) to demand without the dollars to back it up. We continue to demand, and it's mostly foreign things we crave. "Made in the USA" is a joke. I'm not strict about it; I know that international companies still employ a good number of people in the US. I do, however, think it's dangerous for every sector to be so tied in with every other industrialized nation. Not good.

[Guitarzan]

Reading through this now...thanks to everyone for the comments. Very impressive and appreciated.

+ Rep for everyone! Although I don't think (because of low post count?) it counts much for you, other than a show of gratitude.

[Guitarzan]

Just found out one cannot give out too much rep at once. LOL I'm all empty.

I'll catch most of you later with it. Again, thanks for the input.