What gets consumed must have been produced

In my studies, I've found that understanding economics is made much harder by considering money.  It's often been very helpful to ignore the money, and concentrate just on the production and consumption of goods and services.

One immediate consequence for me of looking solely at the goods and services was that it became crystal clear that there is a fundamental law that in order for something to be consumed, it must first be produced.  Perhaps that seems obvious, or perhaps it just seems obvious in retrospect, but when the communiqué of the G20 talks in London was published, it seemed as though we were supposed to be impressed by the "$1.1 trillion dollar programme of support to help the world economy through the crisis and to restore credit, growth and jobs." But the G20 leaders were producing exactly nothing themselves.  At best, their actions would encourage others to produce more than they would otherwise have done.

The next step is to consider not just total world production and total world consumption, but what laws govern the production and consumption of individuals and groups. First I'll consider a situation where there is no coercion and no ability to store goods. Then I'll show how coercion affects the relationship between production and consumption. Finally, I'll introduce storage.

Production and consumption without coercion or storage

Any individual or group (family, organisation, town, public sector, private sector, nation, world, universe) can consume:

What they produce
minus what they give in trade
plus what they receive in trade
minus what they give away as a gift
plus what they are given as a gift

Pretty simple, but quite profound. Remember, this applies to any individual or group.

Production and consumption with coercion, but no storage

Once we introduce the idea that an individual or group can take from another individual or group, perhaps by force, deception or theft, we have a small modification - in bold.

Any individual or group can consume:

What they produce
minus what they give in trade
plus what they receive in trade
minus what they give away as a gift
plus what they are given as a gift
minus what is taken from them through coercion
plus what they take from others through coercion

Production and consumption with coercion and storage

Finally we consider storage. For example someone could decide to forgo consuming ripe strawberries now by making them into jam, thereby reducing current consumption below their level of production. But they can eat the jam later, thereby increasing consumption beyond their level of production. Again the modification is in bold.

Any individual or group can consume:

What they produce
minus what they give in trade
plus what they receive in trade
minus what they give away as a gift
plus what they are given as a gift
minus what is taken from them through coercion
plus what they take from others through coercion
minus what they set aside for storage
plus what they take from storage

Note that storage can never be negative - it is not possible to consume storage which has not yet been produced. I'll discuss debt (consume now, pay later) in another post.

And that's it. This is a fundamental law of economics, but one which needs to be kept constantly in mind when economists, politicians, bankers and journalists discuss policy. Borrowing money, setting interest rates, bailing out banks, taxing more or less, stimulation or austerity - not one of these monetary or fiscal measures can change this fundamental law by allowing the consumption of a good or service to occur in the absence of its having been produced.