Producers vs consumers

Too often, economists inadvertently fall into the trap of promoting the interests of producers, rather than the welfare of consumers.

Adam Smith once wrote, “The interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer.”

A good example of economists ignoring this basic principle is their gloomy views of slow growth in retail spending.

The Australian Bureau of Statistics reported earlier this month that the value of retail trade in Australia fell by 0.5% in December. In other words, you and I are spending less on goods like clothing, electronics and café meals than previously.

Economists would have you believe this is a problem, but is it really? Only if it reflects weak underlying economic conditions, like unemployment or low consumer confidence.

But these fundamentals have been positive in recent months. Consumer sentiment is at a four-year high and employment has grown at a healthy rate of 3.3 per cent in the last year.

In that case, why is lower retail spending reported as bad news? It is because economists expect us, as consumers, to support the economy by propping up local retailers who are struggling under the weight of competition.

In fact, commentary often comes with a disapproving tone for consumers, as in ‘How can you let your local retailers down, by spending less? Don’t you know that retailers need your business, to keep workers employed and shopfronts open?’

This is muddled economic thinking. Consumers do not exist to support jobs in a particular sector or to save struggling businesses.

Less spending by consumers might actually be positive news. For example, Australian households are starting to save more — a good thing, as many are dangerously over-leveraged.

The effects of competition are also evident in cheaper household goods and improvements in quality, which can mean fewer repeat purchases. Consumers also have more choice now because they can purchase from overseas.

But from the attitude of some economists, you would be convinced our appointed purpose, as consumers, is to serve the interests of producers — not the other way round.