Is it production or consumption that matter? In a sense, it is neither!

There has been a lot of ink spilled out there about whether it is production or consumption that matter.  Without production we have nothing to consume!  Without the urge to consume we wouldn’t produce anything!

People will talk about “Says Law” (supply creates its own demand), or jump around talking about Keynes or Malthus (effective demand can be too low, demand creating its own supply, underconsumption!).

This all sounds grand, and makes great soundbites as it lets us say one drives the other.  But I’m always struck by the question “who cares”.  Production, consumption, output, in our models none of this has any inherent value unless we “assume” value.  And in the world we want to make conclusions about, the inherent subjective value is something that exists that we can’t necessarily observe.

When looking at an economy as a whole, we are not a “large firm” trying to maximise output, or maximise consumption.  We are a series of individuals making choices for some reason.  Understanding the choices, how they relate to value, is the starting point of any thought.

This is the kicker.  When we turn around an apply models (either explicit or implict in our description and conclusion) we are apply our own value judgments.  If we haven’t separated them out, we will sneakingly include value judgments solely based on our own experience “because they seem natural”.  However, other individuals are inherently different beasts, rules we follow aren’t necessarily the same as the ones other follow, and the rules we have to understand the actions of a social group don’t necessarily have much relation to the true nature of those groups!

In this context, both production and consumption should be seen as a means to an end.  And we should analyse them in this context – in what ways does this impact on our view of “social value” or welfare.  This is a question we have to answer before concluding – and the assumptions involved can only be validated through the acceptance of a community, not by strict scientific measurement of value.

Overall, this is why economics is the study of trade-offs involved in scarcity, not the study of how we should allocate scarce resources.  Economists merely ask that lessons involved from our series of descriptions are taken into account when society gets together to try to discuss what they believe is “fair” and “just”.  And non-economists are merely asking economists to recognise that their framework allows description, but doesn’t give them a monopoly on understanding moral questions of value!

  • Paul Walker

    Adam Smith pointed out more than 240 years ago that “Consumption is the
    sole end and purpose of all production” and that the measure of a
    country’s true wealth, is the total of its production and commerce. That
    is, a country’s wealth is what the people of that country can consume.
    The great 19th century French economic pamphleteer Frédéric Bastiat
    wrote, “Consumption is the end, the final cause, of all economic
    phenomena, and it is consequently in consumption that their ultimate and
    definitive justification is to be found.” Seems clear enough.

    • Sure, that is a good direction to go in when arguing against merchantilists. But looking at the assumptions by themselves underplays:

      1) The cost from supply labour.

      2) An actual analysis of the value an individual places on things – or where value comes from.

      Admitting there is a moral and subjective value associated with consumption adds another layer – and is one of the key reasons why we have such a keen preference for individual choice instead of central planning 😉

      • Economists are always much too hasty to make pronouncements about what is ‘best for society’. We largely choose not to engage with serious moral philosophy or political science, but are still happy to tread clumsily all over their terrain. Sometimes we should take our own advice and have a bit of humility.

        PS. Advocating individual liberty and personal choice does not count as humility!

        • When I’m being a person, I prefer the rule of assuming whatever is, is for a reason. From there I try to understand why. If the only possible answers are uncomfortable, maybe there is a case for change.

        • Seamus Hogan

          I think you are attacking a straw man here. Not every member of the profession engages with serious moral philosophy or political science, any more than every member engages with serious mathematics, serious statistics, serious geography, or serious psychology. Nor could anyone engage with every relevant area. But there are economists who engage with each of those areas and who are in turn engaged with by the rest of the profession. For moral philosophy, think Amartya Sen, Tyler Cowen, Brad de Long, John Harsanyi, etc.

          • Would you two be able to have a debate on moral philosophy over skype, that I can record and put on the blog. Or even just watch.

            I like hearing people discuss issues that I find far too complicated 🙂

          • I agree with what you’re saying but I think it’s oblique to the point I tried to make. The best analogy that springs to mind is econophysics. Economists get grumpy about physicists charging around making pronouncements about things that economists have thought very carefully about. Not because the physicists have nothing to say, but because they act as if they know far more than they do and often have little humility. That’s how I feel about economists who act as if they should technocratically rule the world. I don’t expect them to read a lot of philosophy or political science but I do expect some humility when the tread in that territory.

            • Seamus Hogan

              I don’t think we are really disagreeing to much, but I would say the problem is too much humility! That is to say, I don’t see economists “treading clumsily over the terrain” of political philosophy and ethics. Rather I see them refusing to tread there at all with statements that “Economics can talk about Pareto efficiency but has nothing to say about interpersonal comparisons”, instead of non-humbly noticing that the Economics method has a lot to contribute in such areas. Matt, for instance, often quotes Rawls, but more often than not in doing so he is invoking the earlier work of economists Harsanyi and Vickrey. THat is, he is too humble to let our profession take the credit!

              • We’re clearly talking about different groups of people! As you said before, the overlap between people who read Harsanyi et al and those who ‘tread clumsily’ is probably small.

                I stand by my claim, but obviously there is a lot of heterogeneity. People who decline to talk about interpersonal comparisons because they lack the knowledge aren’t being unfair. I’d hold them up as an example of economists who are just humble enough, although it would be better if they didn’t attempt to talk on behalf of the profession. On the other hand, I’m sure you wouldn’t struggle to think of economists who go far beyond their field of expertise in their policy pronouncements. Of course, I wholly agree that Matt is far too humble in many respects 😉