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Wednesday, December 1, 2010

On overconsumption

Karl Smith of "Modeled behavior" opines that the theory of 'overconsumption' doesn't make sense.

This 'theory' (I am reluctant to say this is a very formal theory) says that  a society that has a period of high spending relative to saving and/or production falters will often have to 'pay' for their habits by a succeeding period of low employment and economic well-being.

I might agree with Karl at least by saying that this so-called theory is an over-simplification.  But, I disagree with him that the idea in general has no basis in logic, or even economics.  

Basic mainstream economics teaches that there are tradeoffs.  Specifically, in the macro sense, there is a tradeoff between consumption today or consumption tomorrow, or stated another way, consumption today and saving/investment today.  That of course is by itself an over-simplification but none-the-less has basis in truth.   For a given level of resources, the more you use in consumption today - especially that financed by expectations of future production as opposed to actual real wealth, the worse off you may be tomorrow. 

From a pluralist / heterodox perspective, the fact is we spent the better part of a decade (or more) borrowing on credit (from banks and from foreigners) in order to spend beyond our level of sustainable production.   This, in conjunction with the Fed's accommodation of this, inevitably and logically, led to a bust and recession.   Smith makes it seem like people have the choice to work more today in order to make up for their over-consumption of the past.  But that is the absurd logical fallacy.  If employees had that choice, we wouldn't be in the situation we are in.  The point is that recessions aren't about present choices, they are about paying for past choices.   We'd like to work but we can't because our employers and their financial supporters are in debt and in a climate of uncertainty and can't afford to hire us.  We can't afford this unemployment because we ourselves are in debt from our luxurious expenses on credit.  Where does Mr. Smith think that debt came from? 


Sean said...

I agree, people are not working right now because the jobs just simply are not there. I work in a grocery store, a chain store, in what is effectively a smaller suburban area and we get, if I had to make a rough estimate, between 50 to 100 applications for employment every week so the demand for jobs is there but the supply is not

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