Frugality is an important factor of personal finance. That’s not hard to see at all, especially if you value the role that investments and savings play in long-term financial success. Finance blog Mr. Money Mustache is a huge advocate of this philosophy. But, as he reveals in this latest post, he faces some criticism for his financial proselytizing.
Some decry the gospel of frugality. They claim that if everyone were everyone to become a frugal consumer, then the economy would come to a screeching halt. After all, consumption of production is what keeps the economy running smoothly. On the other side, some are unhappy that the secrets of frugality are being divulged on such an enormous and readily available public platform. They would prefer frugality to remain a cabalistic secret because the elect need drone like consumers to buy, buy, buy! Their consumption keeps their stock investments healthy.
Mr. Money Mustache concedes that there are some points to be made here– albeit superficial ones. But the bigger problem here, is that it rests on the assumption that consumers drive the economy. However, we couldn’t be more wrong. It is the savings and investments in capital that dictates production, not the speed at which we consume. Hear that? It’s all about the savers and investors. It’s not hard to see why– the investors delay their own consumption-based gratitude and kick back capital into business and institutions, effectively funding their research and production of better and more advanced consumer goods and technologies.
A high national savings rate actually increases our per capita productivity. And what happens if that rate remains low? The economy becomes more susceptible to trade gaps, depreciation of currency, and hyperinflation. A common rebuttal to this point is that increased production but decreased consumption leads to an excess of supply. If no one is buying it, what’s the point of making it?
Good point, except when this situation arises, what is most likely to happen is an increase in national exports and/or decreased work hours! The latter scenario would occur because less consumption overall would naturally lead to fewer man-hours being needed to produce fewer goods. Furthermore, earlier retirement would free up job shortage. After all, more people would be willing to work less.
If you’re worried about the implications that less consumption would have, don’t worry. It balances out. We’d produce less and earn less in turn.
Jump over to the original post, to learn about the ways in which shifting towards a more frugal economy could help out the world economy at large.