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Blog

    Rothbard on Consumer Spending

    03/02/2009

    A report released on Monday by the Commerce Department said spending rose by .6 percent in January.  The article reminded me of a chapter in Murray Rothbard's Man, Economy, and State.  Rothbard writes in Chapter 6

    There is, in fact, never any need to worry about the maintenance of consumer spending.  There must always be consumption; as we have seen, after a certain amount of monetary saving, there is always an irreducible minimum of his monetary assets that every man will spend on current consumption. The fact of human action insures such an irreducible minimum. And as long as there is a monetary economy and money is in use, it will be spent on the purchase of consumers’ goods.

    An individual can only do two things with their money - spend it or save it.  Obama's economic team that championed the stimulus bill, however, is very concerned with consumer spending.  If economists followed Rothbard's advice, then they would not be nearly as concerned with driving the interest rate lower, which reduces savings and increases spending.  Rothbard continues, 

    The important consideration, therefore, is time preferences and the resultant proportion between expenditure on consumers’ and producers’ goods (investment). The lower the proportion of the former, the heavier will be the investment in capital structure, and, after a while, the more abundant the supply of consumers’ goods and the more productive the economy.

    In economics, time preference describes the premium consumers are willing to pay to consume goods nearer in time rather than later in time.  For example, if I could have one ice cream cone today, I would gladly trade it for two ice cream cones five years from now.  If consumers prefer to save more today than consume more today, then that signals that they are willing to put off having something now for having more later.