Consumption Is the Purpose of Production

– November 30, 2017

Just about every argument opposing the unfettered freedom to exchange goods and services across all borders rests on the failure to appreciate that, as Adam Smith put it, “consumption is the sole end and purpose of all production.”

For example, Kevin L. Kearns, president of the protectionist U.S. Business and Industry Council, says, “America must adopt new policies and strategies based upon a unified national industrial/technology strategy, one that favors producers over consumers” (quoted here). These policies, according to Eamonn Fingleton’s summary, include “tariffs, quotas, domestic content requirements, government incentives for domestic production and technology development, and ‘buy American’ requirements.” (Kearns outlines his “comprehensive plan” here.)

Such thinking could not more clearly embrace the mercantile system Smith demolished in The Wealth of Nations over two centuries ago — that is, the system that “seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce.”

Judging by much business news, you’d forget that the consumer is the raison d’être for economic activity. If consumer goods fell free from the sky, many people would happily quit their jobs and devote themselves to the things they love more. But goods don’t come free, so people work to earn money to pay for the things they want. Competition delivers attractive bargains, and it doesn’t matter if those things are made across a political boundary.

In his discussion of competition in Economic Harmonies (1848), Frédéric Bastiat noted that people in their capacity as producers dislike competition because it drives down prices and evaporates profits. But people do like competition in their capacity as consumers because it lowers prices and expands and improves the array of products and services. Thus if we judge competition from the producers’ rather than from the consumers’ perspective, we are likely to judge it negatively. Bastiat wrote:

Political economy … has expended its efforts, with little scientific justification, in analyzing the phenomena of production. Even its terminology, convenient as it is, is not in keeping with its object of study. “Agriculture,” “manufacture,” “commerce,” make excellent classifications, perhaps, when the intention is to describe the techniques followed in these arts; but this description, though ideally suited for technology, hardly contributes to an understanding of social economy. I may add that it is positively dangerous. When we have classified men as farmers, manufacturers, and businessmen, what can we talk to them about except their special class interests, which are made antagonistic by competition and are in conflict with the general welfare? Agriculture does not exist for the sake of the farmers, manufacturing for the manufacturers, or trade for the businessmen, but in order that all men may have at their disposal the greatest possible number of commodities of all descriptions.

Bastiat, like Smith, would scoff at policy that “favors producers over consumers” because he put a premium on social cooperation in the service of general prosperity. Bastiat continued:

The laws of consumption, what is good for it and makes it equitable and moral — these are the really important matters from the social and humanitarian point of view; these are the real objects of the science of political economy; these are the questions on which the clear light of its understanding needs to be focused, for therein lies the bond between classes, nations, and races, the principle and the explanation of the brotherhood of man.

As he makes clear, economics got off track well before our own time:

It is, therefore, with regret that we see economists expending their great talents and lavishing their wisdom on the problem of production, while they reserve a little space at the end of their books, in the supplementary chapters, for a few brief commonplaces on the phenomena of consumption. Recently a justly celebrated professor was known to have entirely suppressed this aspect of our science, to have concerned himself with the means to the exclusion of the ends, and to have banished from his course all reference to the consumption of wealth, on the ground, he said, that this was a subject that belonged to ethics and not to political economy! Can we be surprised that the general public is more concerned with the disadvantages of competition than with its advantages, since the former affect the public from the particular point of view of production, which is always being talked about, and the latter only from the general point of view of consumption, which is never mentioned?

Defenders of protectionism try to frighten the public over the trade deficit, which is merely the counterpart of the surplus in foreign investment in the United States. But Adam Smith was much wiser: “Nothing … can be more absurd than this whole doctrine of the balance of trade.”

Bottom line: the U.S. government should not harm American consumers to “retaliate” for the harm foreign governments do to theirs.