Wednesday, 17 August 2011

Production vs. Consumption Economy?

O noy weech shud I chooz??

I got bored of reading this 160 paged report on my organization's Strategic Plan so I wandered off on the net and found this really interesting argument on Production-based Economy and Consumption-based Economy. So it started getting my brain running; which is better? Production-based, Consumption-based, (what about Export-based?) or a mixed form of both?

The way I see it, each of the two articles had their own valid points; when it comes to production based economy, you produce goods - which either directly or inadvertently generates jobs and economic activity. The Pro-Production-based cited that the economic slowdown is due to the fact that Americans have developed a sense of debt-funded consumer spending, and have been gearing towards too much spending while moving their productions overseas; resulting in a slowdown of economic activity. So the issue here to him is; they need to increase investments (in production of goods) and get back producing goods rather than outsourcing everything and not encourage consumer spending as that alone is insufficient in getting back an economy on track.

For the consumption based argument the author disagrees by stating that the whole point of moving your manufacturing overseas is so that goods can be manufactured at a cheaper rate - saving consumers money to spend on something else. As manufacturing jobs involve low-skilled workers, this would allow companies in America to focus more on high-skilled jobs and innovation; a much more value producing activity. To put it simply, outsourcing manufacturing jobs overseas actually benefits the economy, and the whole point of economic activity is so that consumers can consume.

Now, I don't really know much about economics but I must say I do enjoy reading about it. These two authors do have their own valid points but the fact right now is simple; America is much more of a Consumption or Domestic based economy rather than a producer - with certain exceptions such as Defense Equipment & Machines, Aerospace Machineries etc. Apart from this, I don't think its such a good thing (intuitively) if a country were to run a straight trade deficit for 40 years. Its a good thing if you move low-skilled workers overseas in order to focus on high-value jobs locally, but that means there won't be any jobs for low-skilled workers (more could be argued on the importance of low skilled workers from countries like Japan where it is heavily automated and Singapore). Although the production aspect of the economic activity is moved overseas, the financial benefits is retained domestically through increased profits; to which could be spent on more investment in other high-value or innovation-based areas.

So it's a bit of a trade-off, I think the best mix is, to mix it. Production driven may result in over-production, which may lead to an export based economy which has its own drawback. Consumption driven squeezes the lower end of the social hiearchy due to lack of jobs, and primarily focuses on benefiting the higher echelons of society. A mixture of both would be perfect however, in a globalized world, specialization is the key to a country's success.

So which would we better?

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