Production and Consumption

Production and consumption are the complementary human actions of producing and consuming economic goods. The human roles of producer and consumer should not be conflated with the acts of production and consumption. A role refers to intent not action. All producers consume and all consumers produce. Consumption that produces an economic good is production, otherwise it is the process of either leisure or waste.

The pure bank provides the model of all production. A pure producer has borrowed capital, consuming it in the creation of a product. The consumed fraction at any time has been loaned to production. The unconsumed fraction at any time has been reserved for liquidity. The new product is sold, obtaining interest on the consumed fraction, returned as dividend. As production requires time, and as perfect efficiency is assumed, the reservation rate declines from 100% to 0% over time. The amount of reserve is the same necessary productive expense as the pure bank's liquidity reserve. The reserve is only repopulated by more borrowed capital, such as by dividend reinvestment.

A real producer converts time and capital to interest, at the market price of the product produced, just as a real bank obtains interest at the market price. The bank is merely obtaining the interest of another producer by being its investor. This shows the fundamental equivalence of lending as debt and equity, independent of statutory distinctions (tax).

A pure consumer hoards capital without any loaned to production. All capital is borrowed and reserved. At 100% reserve there is no interest, no return, and eventually full depreciation. In this case the borrowed capital is considered a gift (charity). A real consumer is additionally subject to tax and subsidy, which increases and decreases the rate of hoard depreciation respectively.