Rule #1: Consumption = Production (in the aggregate)

by Ms. M

So after some reflection I have decided the purpose of this blog is to organize my economic and financial thoughts. So let’s start at the top.

Economics tends to get boiled down to supply and demand curves. Which tend to be taken as given and knowable. These curves are vastly complicated and not easily knowable. But more on them later.

The most important economic relationship is:*

PRODUCTION = CONSUMPTION

In a simple, barter-based economy this is very obvious. If you want a wagon, you either make it yourself or produce something of equivalent value to trade with a wagon maker.

With a fiat currency, this is slightly less obvious, but it still is easy to see that there can only be as many wagons “consumed” in the world as have have been wagons produced. Not even the cleverest 21st century investment banker can lever or hedge his way out of that reality.

This rule must only hold true in the aggregate. It can be violated at the individual level. That is, I can consume a wagon without having produced the equivalent if I:

  1. Steal one from the wagon producer or a wagon consumer, or
  2. Receive one as a gift from either a wagon producer who has decided to forego receiving something of value in return or from a third party who has decided to forego some consumption for herself and gives the wagon producer something of value on my behalf, or
  3. Promise to produce something of value in the future in return for the wagon now

The first case is illegal. The second case is likely rare … for most. And the third case is what you would call “credit” or “debt”. The third case can be very useful, or very dangerous, depending on the circumstances (but more on that later) but it doesn’t create wagons. Only people can create wagons. And only wagons that have been produced can be consumed.

*Or more specifically Production >= Consumption. As not everything that is produced need be consumed/utilized. Also, I am ignoring the investment/consumption distinction for the moment. The basic point is that in the aggregate, consumption cannot exceed production but it can at the individual level.