As Black Friday (the day after Thanksgiving) approaches, we will get to hear all of the economic analysis surrounding this one day, along with expectations of the rest of the Christmas shopping season.

We will hear reports about whether sales are as strong as expected.  We will hear about whether consumers are spending more or less than last year.  We will hear about whether consumer spending will lead to a stronger overall economy.

Along with all of this, we will hear some really bad economic analysis.

How many times do I have to hear that two-thirds of the U.S. economy is based on consumer spending?

The so-called professionals can talk about this as much as they want, but it doesn’t change the reality.  Spending does not help economic growth or lead to economic growth no matter how often the Keynesian economists say it.

Actually, it isn’t just the hardcore Keynesian economists that believe this.  Unfortunately, most people believe this major economic fallacy.

Consumer spending does not cause economic growth.  If you can understand this one point, you are ahead of 99% of the population.

A society gets richer based on production.  To be clear, this must be production in accordance with consumer demand.  Production does no good if people do not want the things that are being produced.

This is why government spending is so wasteful.  Even if politicians were noble in their attempts to better society, it is impossible for them to do so through government spending.  There is no way anyone can know what other people want.  The only way is to let the market process work and for people to vote with their money.

The government could set up a program to have Apple produce 250 million iPads so that every American adult could own one.  This would be “production”, but it would be a massive misallocation of resources.  The problem is that not everyone wants an iPad.  The people who really want one probably already own one.

Some people may want an iPad but don’t buy one because it is not a high enough priority on their list of wants and needs.  If your air conditioner isn’t working in the middle of summer and you have to pay to get it fixed, this is likely going to be a higher priority for most people over buying a new iPad.  Only a free market can properly allocate resources in accordance with consumer demand.

We hear so often about the supposed need for government to encourage consumer spending.  But consumer spending does not drive economic growth any more than eating vegetables makes more vegetables grow out of the ground.

Consumer spending can be a reflection of production.  It can also be a reflection of consumer sentiment and whether people feel the need to save more money.  But we should never confuse cause and effect.  We should never confuse correlation with causation.

Spending does not drive overall production.  In a free market, consumer spending can direct resources into certain sectors.  If a lot of people are buying iPads, then Apple may choose to direct more resources towards making more iPads in anticipation that the demand will continue.

But here is the key fact that must always be acknowledged.  You can only consume what has first been produced.  It is impossible to consume something that hasn’t been produced.

If people wanting to spend money is all it took for economic growth, then why would the United States be so much richer than many other countries on the planet?  Do people not think that those living in Ethiopia or Cambodia want more?  I’m sure that most Ethiopians would like to have a big screen television, a smartphone, and a nice new car.  Do they just need to spend more to get all of this stuff?

When it is put in those terms, it is easier to see the ridiculousness of the argument.  Wanting things does not make them appear.  Buying things does not automatically make us richer.  It is the savings and capital investment that lead to increased production that makes us richer.

Think about consumer spending for a family.  If you look at consumer spending only, it can tell you something about a family, but it is a very incomplete picture.

Imagine two families that each spend $100,000 per year.  If you knew this fact alone, it doesn’t tell you that much.  It does tell you that they are probably relatively rich by world standards.  The families are probably not from a third-world country.  They are likely to be making an income that is at least close to the amount they are spending.

But maybe one family earns $95,000 per year and is going deeper into debt.  This family has no savings and the interest payments on the credit cards keep building.  This spending is unsustainable.

Maybe the other family earns $150,000 after taxes and is saving $50,000 per year.  Maybe they already have a net worth over a million dollars.  This family will get to a point where they can live off of their assets and not worry about working any more.  Or they can increase their consumption well beyond $100,000 per year.

We certainly would never say that a family is rich because they are spending $100,000 per year.  It might be one sign that they are potentially well off, but that is about all that can be said.

Spending does not lead to economic growth.  It is more of a reflection of past productivity.  It is also impacted by expectations for future productivity.

If sales on Black Friday are higher than expected, maybe it is an indication that we will not have a recession in the near future.  It doesn’t really tell us if economic growth is strong or not though.  Maybe people are spending based on credit card debt.  Maybe they are spending based on expectations of a higher income in the future. Maybe some are spending money based on prior savings.

The same can be said if Black Friday and overall holiday sales are lower than expected.  It might indicate a coming recession, as more people are being conservative with their money.  Many people may be trying to pay down debt or save up more emergency money.

In some ways, decreased sales has a positive aspect.  It means more people are likely being responsible with their money.  It hopefully means that some people are saving money for a rainy day instead of spending it all on Christmas gifts.

That is the problem with looking at spending though.  We don’t know if the spending is depleting resources or if there is still adequate saving occurring even with the spending.

It is ultimately savings and capital investment that leads to greater productivity and a higher standard of living.  If greater productivity leads to greater consumption, then that is the reward for people in a society.  They can consume what has been produced, because you can only consume what is first produced.  Even Santa Claus can only deliver gifts that have been produced.