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Production and savings are what drives an economy

Production and savings are what drives an economy

The South African economy is facing a savings crisis. Citizens cannot afford to save enough money to drive the necessary capital generation for investment because of the suffocating effects of the government’s economic policies, such as high tax rates and levies on certain products like fuel.

A lot of things in economics are debatable, but certain concepts are incontrovertible. Two such concepts, or laws, form the foundation of economics: supply creates demand, or Say’s Law, and savings drive growth.

Say’s Law does not mean that merely supplying something creates a demand for that specific good or service. What Say’s Law means is that you have to produce goods and/or services to generate an income that can be spent on other goods and services. In laymen’s terms, it merely means that you have to serve others in the market so your own needs can be met.
Income generated through productive activity is not used only for consumption to meet needs. It is also used for something even more crucial, which is saving.

Savings provide the capital available for investment. Investment is needed to produce. Growth, at its very core, is an improvement in the capability to meet people’s wants as well as to do so more efficiently. Saving drives economic growth because it makes higher levels of production possible and makes it easier to meet people’s needs.

The importance of production and saving was best illustrated in American tax resistance advocate Irwin Schiff’s 1985 comic book How an Economy Grows and Why It Doesn’t.
Imagine a primitive society where people spend all their time fishing for food with their bare hands. Every person can catch a fish a day. This is all they have time for, as any time spent doing anything else would mean they would be less likely to catch a fish to eat. Their total daily production (catching the fish and preparing it for consumption) is thus one fish per person per day. Their daily consumption is also a fish a day. In essence, they consume all that is produced.

One day, one person decides to eat only half of the single fish they catch and save the other half for tomorrow, because tomorrow they want to spend time constructing a net to catch more fish. They thus decide to forego consumption of a consumer good and save some of it so they can use it to invest in the production of a capital good. The capital good produced increases their productive capabilities because by using the net they can now catch five fish per day instead of only one.

At the end of the day, foregoing some consumption, thus saving and investing in a capital good, meant that they are better off than they were. They now have various options on what to do with the excess fish. They can keep some of the fish in the net and forego immediate consumption to spend time doing something other than fishing, like a leisurely activity or producing something else like growing vegetables. Or, they can ‘lend’ the surplus fish to other people for a return on the investment, so that those borrowers can go off and engage in different productive activities.

The moral of the story is that foregoing some consumption in the present and engaging in saving makes it possible to invest in the production of capital goods and improve the ability of individuals to meet not just their own needs but that of others as well.

Saving, not spending, is what enables an economy to keep moving forward and growing at the same time. Yet, neither saving nor spending is possible without productive activity. At the end of the day, it is crucial that economic actors engage in productive activity that generates real goods and services. More crucially, they must produce what is in demand, otherwise it is just misdirected and wasted capital. It is also important that they do not consume all that is produced immediately. Some of it needs to be saved and rerouted to the production of capital goods, which are a prerequisite for future prosperity. If the sociopolitical culture in an economy is one of receiving without producing, and of consuming without some level of self-restraint, then that economy is doomed.

Principled arguments against the concept of taxation aside, the overwhelming majority of the populace can agree that taxing people at ridiculous rates, whilst giving barely anything but waste and looting of resources in return, is an injustice.

One can only hope that Minister of Finance Tito Mboweni puts the interests of ordinary citizens first in his budget speech on 26 February, and implements substantial decreases in not only income tax rates but other taxes and levies such as VAT and levies on fuel.

South Africans need to be allowed to keep more of their hard-earned money so that they can save it for future use. It will also relieve the pressure on many citizens to incur debt simply to try and make ends meet. It is important that we increase the capacity of the domestic pool of savings to fund investment, which is the fuel of any process of production. This can only happen if the state seriously reduces its extravagant spending along with its tax rates and gives back the economic freedom it took from citizens through interventionist and paternalistic economic policies.

By Jacques Jonker an intern at the Free Market Foundation. The views expressed in this article are those of the author and not necessarily those of the Free Market Foundation.

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