There’s a theory about what drives the US economy that you hear all the time. This financial expert says it’s completely wrong. (Audio)

If you listen to the news on the economy or financial markets, you have probably heard statements like “consumption drives the American economy,” or “consumption is 70% of the economy.”

But in a new book out that follows in the footsteps of Henry Hazlitt’s classic “Economics in One Lesson” — though in a much more fun package — titled “Popular Economics: What the Rolling Stones, Downton Abbey, and LeBron James Can Teach You about Economics,” Forbes and RealClearMarkets Editor, and senior economic advisor to Toreador Research and Trading John Tamny challenges this and much other “conventional wisdom” on taxes, regulations, trade and money.

In an in-depth interview with Mr. Tamny, I asked him in particular about the notion that consumption drives economic growth, to which he responded:

[sharequote align=”center”]”Consumption is zero percent of our economy. It’s always production.”[/sharequote]

Consumption is zero percent of our economy. It’s always production.

If you don’t believe that, decide one day that you’re just going to consume and do nothing else. If so, you will very quickly die an unclothed, unfed death.

You must produce first in order to consume. And so it is production that drives the economy forward.

And so, when you think about … economists love to say “We want everyone to consume, consume, consume.”

Well how are we more productive?

We’re productive precisely because people save, and their savings flow toward more productive ways to build cars, to manufacture computers.

It is thanks to savings that we enjoy cell phones that we can watch tv on; that we increasingly have a good chance of winning the battle against cancer; that we get to drive cars that will at some point drive us around.

That’s because of savings.

Savings are what power the economy forward.

Consumption is the easy part. We all want to consume. But saving is what allows us to eventually consume.

During the interview, which you can listen to in full below, we also discussed several other topics including:

  • Why progressive tax rates hurts low income earners disproportionately
  • The competition between government and the people for capital
  • The story of America’s experiment with central planning in Arthurdale, WV
  • Why deficits don’t matter
  • Why inequality is beneficial
  • Why we should not be worried about reports of millions of jobs being destroyed in coming years
  • The function of money in an economy
  • How and why U.S. government debt is still so highly in demand
  • And much more

 

Note: The links to the book in this post will give you an option to elect to donate a percentage of the proceeds from the sale to a charity of your choice. Mercury One, the charity founded by TheBlaze’s Glenn Beck, is one of the options. Donations to Mercury One go towards efforts such as disaster relief, support for education, support for Israel and support for veterans and our military. You can read more about Amazon Smile and Mercury One here.

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