Nigerians love clichés, and in recent months consumption to production has rented the wave, with each trying to outdo one another’s use of the cliché. I’ve been paying close attention to see if I can find someone who can clearly explain their understanding of the cliché. I’ve been waiting and have yet to find out.
I am an economist by training; Production and consumption are integral parts of what I encounter in the course of my academic education and professional career.
In theory, a simple open economy model is represented as NI = C + I + G + (XM)
Where NI = national income
C=consumer spending
I = investments (savings)
G= government spending
XM= net export (difference between export and import.
A very important determinant of the size of an economy is the level of its consumer spending. A simple consumption function is a linear equation represented as C = a + byd, where a is autonomous consumption, which gives your level of consumption at zero income (which must always be positive). Yd is disposable income and b is the slope of the function.
In principle, everyone has to consume, regardless of income. In fact, to be considered a large economy, the magnitude of its consumption and production must be enormous. High consumption indicates a higher disposable income and thus a higher willingness to spend. If people don’t consume, the economy will experience deflation, which is the opposite of inflation we’ve seen in Japan over the past decade. But the problem is: What is the composition of consumption and where do you get most of your consumption from: is it domestic or imported?
On the other hand, the production function in economics expresses as an equation the relationship between the amount of productive factors used (such as labor and capital) and the amount of product obtained. The general production function formula is Q = f(K,L), where Q is the output, L is the labor employed, and K is the capital invested in the production of the goods.
Producers create goods to meet people’s consumption needs. If nobody consumes, nobody will produce. Consumption is therefore the end of all productive activity. Consumption and production are two processes that must take place in any economy. One cannot yield to the other. They are not mutually exclusive, as the cliché would have us believe.
In addition, consumption, together with investment, determines the level of income and employment in the economy. If the consumption of goods and services does not increase, the demand for such goods and services will decrease and production will fall.
I can talk endlessly about consumption hypotheses and different models of the production function. However, what I think is important at this point, as our population approaches 250 million, leading to a possible increase in consumption, is to increase our production levels to meet or exceed our local consumption levels so that we can export and our net export can manage. If we focus on producing for export without covering local consumption, we still have a problem. If we continue to consume without producing locally, we will still have a problem. However, the balance is to increase local production to meet local consumption and export the net.
The “consumption for production” cliché makes little sense in economics, as the paper has shown. We can only argue about the composition of our consumption. The correct cliché might be: “increase production to match and exceed local consumption”
Onyeagba (Ph.D) is the current Nigerian Ambassador to Burundi
