As is often the case, the ability and willingness of households to spend will be an important determinant of the pace at which the economy expands in coming quarters.Only a Keynesian believes that consumption drives the economy rather than production.
Consumers are buying iPhones ONLY because Steve Jobs and his team designed and manufactured them. No production, no consumption.
Can you please help me better understand this point? I've heard free market Austrian economists make this point over and over again, but I'm not sure about the relevance or whether I agree or not...
ReplyDeleteFor example, I work in Marketing. When Apple created the iPod, is it your position that this product creation, that this manufacturing and marketing is what created demand for iPods? My humble opinion is that it's not... but rather there was already an internal demand for portable music, there was already an internal demand for quality user interfaces, there was already a demand for pocketable electronics... the iPod was jut the latest iteration of a company attempting to fulfill that existing demand.
I must be missing something, please help clarify!
Steve Jobs and his team designed and manufactured iPhones ONLY because they thought consumers would buy them. No consumption, no production.
ReplyDeleteIt's not consumption; it's called 'demand'. There is a big difference between 'demand' and 'consumption'. For example, you want to use (consume) an iPhone, so, you demand it in the market. This demand can only be satisfied and you can consume an iPhone only if Apple produces it. If they won't produce it, then, your demand remains unsatisfied and you can't consume an iPhone. So, no production, no consumption.
DeleteAnonymous - what you miss is Steve & Co could have been mistaken about what consumers will want in the future - for example made iCrapper nobody would buy (or made iGoldPlatedPhone which would be simply too expensive). The failures are usually "not seen" by the consumers (though they are painful to the investors and entrepreneurs).
ReplyDeleteThe whole consumption vs production debacle is nothing more than missing the point completely because of omission of the most important parts: at what price and when - now vs future.
Expectation of *future* consumption *at a price justifying expenditure* does, indeed drive production. But stuff which has been produced already is what causes consumption at the present time - at a price determined by supply and demand.
Avoiding the gross over-simplification and understanding the difference between now and the future immediately leads to understanding of ABCT - if Fed prints a batch of money, this money will enable its recipients to increase their consumption - which will cause entrepreneurs to adjust their estimates of the future consumption upwards, and start expanding the production correspondingly (the "boom" phase). But because monetary emission eventually causes prices of the production inputs (labor and materials) raise as well, the estimated future profitability won't materialize - i.e. the disposition of the capital as investment in expanded production turns out to be mistaken (aka "malinvestment"), and many or most of these expansion projects fail, causing resources to be wasted and people to lose jobs (aka "bust" phase). Because this scares the entrepreneurs into downward adjustment of their expectations of future profitability, the expansion stops and companies return to profitability (aka "liquidation of malinvestments"), eventually enabling accumulation of new capital necessary for gradual increase of production driven by increase of productivity.
Nowadays this process of post-bust liquidation and recovery is short-circuited by Fed printing even more money, causing another transient boom, further distorting the economy and causing more inflation and, in the end, causing even bigger bust.
(There are other, secondary effects of boom and bust - such as shifting between types of goods produced, but I'll ignore them in the interest of clarity).
No animal spirits are needed to explain the business cycle - it's all because of the man behind the curtain and his money printing machine.
Thanks avveros.
ReplyDelete