by Frank Shostak
Most experts regard consumer’s psychological disposition as the driving force of an economy. If consumers are optimistic and happy with the economy, no recession can occur — so it is believed. According to the popular way of thinking, if consumers are active, this is said to be a good sign for economic health. If consumers do not spend enough then it is seen as bad news. Indeed surveys of business activity show that during a recession, businesses emphasize a lack of consumer demand as the major factor behind their poor performances.
In the real world, consumer optimism is important, but by itself it will achieve nothing. Production must precede consumption. It is necessary to produce useful goods that can be exchanged for other goods.
When a baker produces bread, he doesn’t produce everything for his own consumption. Most of the bread he produces is exchanged for the goods and services of other producers, implying that through the production of bread, the baker exercises his demand for other goods.