What if Everyone Became Frugal?

In the ongoing debate over early retirement, frugality, investing, and simple living, one point is often brought up by our detractors. It usually goes something like this:

Well, maybe spending less and investing more works for you, but if everybody did it, society would collapse! Our economy is driven by consumers – without them, we are nothing!

And from our own side of the wealth divide, I often get half-joking notes like this:

Don’t get too popular, MMM. I need those millions of consumer drones out there to continue mindlessly consuming so my stock investments in America’s largest companies can continue to pay me reliable dividends.

I can see the point that both sides are making, and on a superficial and short-term level, they are right.

But in the long run, I believe the picture is much brighter: society as a whole will be much better off  once we manage to convert them all to a huge army of Badass Mustachians. And here is why:

Newspaper reporters often repeat the phrase that consumers are the engine of economic growth in the United States. They say it so often that most people believe it, as witnessed by the quotes above. But when you read books written by economists (who in general know more about economics than newspaper reporters), they tell you that consumers are not the engine of economic growth. They are actually the caboose.

What is the engine of growth, then? It is the savers and investors. Only by sacrificing current consumption, can people put money into banks or share offerings, which end up in the hands of new and existing businesses who can then use that money to create new technology, factories, or human capital, allowing them to increase their productivity. Capital creates productivity, and productivity is the driver of our standard of living.

To express the same ideas on a smaller scale: Imagine an ancient fisherman who catches five fish per day with a spear. If he eats all the fish each day,  he is saving and investing none. But if he can survive on four, and use the body of the fifth one to invent a fishing hook (or trade it with someone else in exchange for a net), he has invested in capital instead of current consumption – this builds his future productivity.

As it works for the fisherman, so it works for the whole country: investment is good for building a nation’s productivity. A shortage of national investment (collectively called the “national savings rate”) can lead to a complicated spiral of international trade conditions much like the ones we are seeing now: a current account deficit, a trade deficit, and eventually a gigantic depreciation of the value of a country’s currency, and some say hyperinflation as well.

The details of that are interesting (I’m currently reading a hyperbolic book on the subject called “Crash Proof 2.0 ” by a grumpy news commentator named Peter Schiff). But they’re not necessary for our discussion here. Suffice it to say that “Saving and investment are GOOD for a country, not bad”.

This brings up the next question: “But if we’re so productive, and yet we’re not buying very much stuff, what will we do with all the stuff we make?”

It turns out that’s a great problem to have. Through the natural action of free markets, we’d end up doing a mixture of two things:
a) Exporting way more stuff and importing less
b) Choosing to work less and having shorter working hours.

To understand why that would happen, you just have to look at the actions of individuals again. If you’re working alone on an island, you only need to produce whatever you want to consume. If an entire society gradually decides that it wants to consume less, then it needs to produce less as well.

If there is less stuff that needs to be produced, then people don’t have to work as many hours to create it. That’s perfect, because many people will be dropping out of the workforce much earlier as they finish earning the money they need to get going on their early retirement. The shortage of available work will be balanced by the reduced number of people willing to do that work.

The last issue is, “but how will they pay for their early retirement, when all stock investments have collapsed due to the shrinking economy?”

I believe that’s just a misunderstanding of the effects of market forces. When a society decides it needs to earn less money, it can happen in a mixture of two ways:
1) people can work shorter work weeks, but similar career lengths
2) people can continue to work long work weeks, but save and invest the extra income for earlier retirement

Either way, there will always be young people looking to get ahead quickly and companies looking for cash to finance productivity improvements – these people will still need loans to start and fund companies. Similarly, there will always be mobile people in need of housing – and so real estate (just another form of capital) will continue to provide returns in the form of rent payments. Capital will always have some value, and thus the concept of investment will remain valid.

So, frugality as a whole would work very well for society. We’d produce less, and we’d earn less, but that is perfect since we would consume less as well.

With the basic economics out of the way, now we can get really idealistic. This growing group of newly-frugal people probably wouldn’t just sit around and gaze into the oak trees all day. A certain portion of them would actually be even more motivated to produce new things than they were when under forced employment.

So, they’d start working again. But without much demand for consumer products, society would probably value different things. Some people would be willing to spend more to buy all-renewable energy. This would create market opportunities to build more of the stuff. And it turns out that there are many trillions of dollars of work to be done in that area. Other people might be willing to spend on better health developments, building up developing countries, or improved educational opportunities.

If you check in on what Bill and Melinda Gates are up to these days, you’ll see a perfect example in large scale: people who no longer need to work for money, keep on working with the goal of helping the world instead. I want you to do the same thing once we’re finished getting rich together here.

All of these new desires would create more market demand, pulling workers into new fields and causing further growth of humankind’s capital. The free market would do its usual job of allocating resources efficiently, and it would feel much like it does today.

So you see, there is really no magic to the fact that we are currently buying and throwing away a lot of junk. Far from being a boon to our society, it’s really an enormous tax we place on ourselves, because it diverts our energy away from more beneficial efforts like the ones noted above.

In the short term, a massive switch to frugality would cause an economic depression, as the free market struggled to reallocate everything. Many people would suffer. But by creating a small and constant shift to a new way of living, the system will have time to adjust gracefully over time.

Luckily, there are only a few tens of thousands of Mustachians so far. The world isn’t in a rush to bend to our ways.  But together we’ll get this thing fixed, if we just keep the pressure on, slow and steady, until the job is done.