Market Purpose: Consumption

To eat, you must first work.

Introduction

The noise about tariffs has become nearly deafening. Some people think the US should impose tariffs. Others think the US should reduce or eliminate tariffs. A lot of this debate surrounds the question of whether trade deficits harm the US economy or not.

So, what’s the truth?

With this publication, I begin a series in which I will not attempt to convince you one way or the other: we should raise tariffs, or we should lower tariffs. I will introduce you to the factors that influence the tariff debate.

I begin by discussing the underlying purpose for the existence of markets (or “economies.”) Markets exist for the singular purpose of supporting consumption.

Please don’t stop reading here because you think this article deals with a topic too elementary to provide any great insight. Elemental understanding creates the base for higher-level understanding.

Consumption vs. Production

Let me restate: markets exist for the sole purpose of providing for consumption. People generally don’t say I will work harder just because I enjoy working harder. However, if a person does say that, they get to “consume“ the enjoyment of the process or the after-effects in the form of a healthier body.

Production, even in these cases, exists for consumption. Let me use a stock and flow model to demonstrate the relationship between production and consumption.

A Model

You can see that the processes of this system move in one direction (from production through consumption.) Even in an autarkic (self-sufficient) economy, production must happen before consumption. A hunter cannot hunt until he has completed a successful hunt.

From left to right:

Source: within the boundaries of the system, the raw materials for production have no limit.

Production: the “valve” controls the rate of production (a flow.)

Market: all production enters a market (stock) before consumption. The quantity in the market at any one time amounts to “saving.” In economic terms, “saving” consists of a passive act.

Consumption: this “valve” controls the rate of consumption (a flow.)

Sink: within the boundaries of the system, consumption has no limit

Note: Within any system, a person cannot measure rates of inflow and outflow directly. An observer can only determine those rates by changes in the stock (market or inventory).

Feedback: by measuring the change in the market (stock) levels, the control person or mechanism determines whether to increase, decrease, or not change the production rate. (I’ve included no feedback from the market to consumption to keep this model simple. I have based this model on the assumption that consumers will consume all product left in the market.

This model presents an accurate depiction of markets large and small. Production always flows into a market. And all consumption comes from the market.

Work Harder

Since the concern for all market systems focuses on consumption the only way, in this simple system, to increase consumption consists of working harder. The worker determines the amount of work based on his desire to consume. If he wants to consume more, he must work harder.

But there is another way.

Work Smarter

The consumer can consume more by working smarter. I have used the term “work smarter” to include anything used to reduce the amount of effort required to produce the same amount of output. Generally, working smarter includes creating some sort of mechanism or tool. Economists would refer to these devices as “capital.”

A Consumption Economy

In the end, all economies consist of “consumption economies.” No such thing exists that we would call a “production economy,” for there is no reason to produce for production alone. At every level, even in the most sophisticated and complex economies, production occurs for the sole reason of providing consumption.

Conclusion

Using an extremely simple model and explanation, I have explained how all markets exist for consumption.

In future articles, I will discuss market intervention, whether trade deficits matter, and, ultimately, the effects of taxation, including tariffs.