To Consume or Not to Consume?


THAT is the question. In fact, it is the defining question for an exchange economy. Let’s dissect exactly what it means. “To consume” seems fairly obvious, like the question you ask your kid at the dinner table, “Are you gonna eat that?” But “Not to Consume” offers all kinds of confusing options. To not consume means to save. Save for what? To invest? Invest for what? More stuff? Yes, more stuff to consume in the future. There’s really no other option: “Not to consume now” merely means to defer consumption to some indefinite future time period. (If you die before then, your heirs will consume whatever you saved.)

The implications of this simple insight are broad and deep for understanding the economy. How do we know how to choose whether to consume or save? If we go by the simple human weakness of instant gratification, who would save at all? Why put off until tomorrow the pleasures we can enjoy today? Since in many cases we do exactly that, there must be a good reason. Saving has two payoffs: one, it helps us reduce the risk of not having enough consumption goods to survive in the future (that would be eating our seed corn); and two, saving and investing in future production gives us more tomorrow than we give up today (that would be interest on the savings or profits on the investment).

There are two factors that influence how we choose to save and invest. First is our life-cycle needs – when we are young we consume a lot because we are growing and haven’t yet learned how to produce; in middle age we’ve learned to produce in excess of our needs, leading to saving for old-age when we are no longer producing but still need to consume. This is why societies are most productive if they have a demographic bubble in their middle years, as the US has had with the baby boom generation in the 1980s, 90s and 2000s.

The second factor is technology and the opportunities it offers to make a greater return by saving and investing for the future. The recent computer chip/Internet/social media revolution is a good example of this. If one put aside $100 back in the 1980s to buy shares of Microsoft or Apple, one would be a millionaire several times over today. Not a bad return for putting off one nice dinner.

The key that unlocks the economics of this choice between saving and consuming is the interest rate that signals whether the future may give us more consumption than the present consumption we sacrifice. When interest rates are high, we should consume less to save and invest, and when they are low we should consume more, (given all other things equal). So, the interest rate is crucial to making correct economic choices.

The simple insight of choosing between consuming or saving also illuminates the problems we have in the global economy when countries try to consume or save too much. China’s growth rate is falling because the savings rate is too high and its economy depends on selling too much of its product through exports to other countries, like the US, which is discovering in turn that its consumption is too high and savings too low (reflected in our excessive private and public debt). In other words, to sustain economic growth, the Chinese will have to consume more of their own product and Americans will have to produce more of what they hope to consume. Export-driven economic policies have been very popular in helping developing countries like the Asian tigers to grow rapidly – but we can see by this simple insight that the policy is not sustainable over the long run.

This simple question – To consume or not to consume? – is helpful to understanding many of the complex economic issues we face today, especially sustainability. You see, THAT is the real question, because life is certainly not all about consuming more stuff. The most important consumption good we can enjoy is more free time and leisure to enjoy the short lives we have on this earth.

(Read about this topic in greater depth in the book Common Cent$: A Citizens’ Survival Guide. Available at Amazon in eBook or print.)

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