Consuming, No Way To Create Wealth

A renegade economist saw very early trends of consumerism as being dangerous

Kurt Richebächer died recently at his home in Cannes, France, at 88 years old. One of our greatest complaints is the way the modern world pays homage to its dead. When a good man finally has the mud tossed on his face, he is almost instantly forgotten; so little notice is taken, it hardly seems worth dying.
We pause to remember Kurt here, as practically he alone, understood the worldwide economic boom for what it really is – a sham.

The classical economics texts Kurt read described not merely the world as it was, but the world as it ought to be. They emphasised discipline, hard work, and capital formation as the essential elements of wealth creation. And they warned against excess credit and inflation as if they were loose women and demon rum; both were sure to lead to ruin.

The seventies saw economists upgrade their trade. Instead of merely reminding people of the old, un-yielding truths they began offering new tricks. They promised not merely to explain how the world works, but to make it work better…by taking the devil out of it and making it a more agreeable place. Kurt saw the new trends in his profession as dangerous.

“You anglo-saxons…” he said to us once… “you just have no concept of financial discipline. Just look what you are doing – at every level. In Europe, we have high levels of state debt, but at the individual and business level, our balance sheets are pretty strong. But in almost every English-speaking country, people borrow for everything.

“All this emphasis on statistics and calculations…,” he went on, rapping his silver-handled cane on the table for emphasis, “without a proper theory, it is all nonsense. And your economists seem to have no theory at all…they just think they can manipulate the system in order to get whatever outcome they want. They think economic growth comes from consumer spending and that they can control consumer spending by adjusting lending rates. It is unbelievable that anyone takes this seriously. It is capital formation that really matters. A rich society is one with a great stock of capital…one that builds capital and puts it to work to create more capital. A rich society is not one where people consume. Just the opposite. It is not what is consumed that creates wealth; it is what is NOT consumed. Yet, all the Anglo-Saxons focus on motivating consumers to consume. And now they are consuming more than they make. I tell you, in 70 years of studying economics, I have never seen such nonsense.

“I have always thought it was the duty of each generation to leave the next one a little better off. That means, each generation has to consume less than it produces. It has to leave a little something extra. The problem, you see, is not an economic one…what we are doing to our children with this use of credit and debt is deeply immoral. It is wrong. It is wrong to burden the future with our mistakes, our conceits, our ambitions. This is what we are doing, and it is shameful.”

Paul Volker once remarked that the challenge of modern central bankers “is to prove Kurt Richebächer wrong”. Instead, they are proving him right.

- A blog posted by Bill Bonner in www.dailyreckoning.com.au