Quote from Susannah:
I don't mean this to sound stupid, but what else would an economy be based on?
Is there something I'm just missing in my thinking?
Your question seems sincere (and I'm kinda bored), so Iâll hammer out a quick & elementary primer on the components of our GDP:
In the classical sense, the other options besides consumption are government purchases, net exports and (my favorite) investment.
So, the govt could buy itself lots of missiles, that would be something that increased the economy, as people become gainfully busy procuring/producing the raw materials, engineering the damn things, hiring people to build & inspect them, plus all the ancillary stuff like accountants to do their payroll, attorneys to review contracts and sue other competing entities that the govt is buying missiles from, etc. etc. etc. all this promotes growth in the economy.
If the government is sitting on a great big pile of valuable currency it is extremely stimulative to the economy for them to spend some of it (on practically anything).
If they don't have any money and have to borrow it at a price (interest), or worse yet just make up more money, then things like missiles, new toilet seats in the post office and bridges to places that no-one ever goes don't make much sense and just make the money that everyone else has saved up worth less than it was before.
HOWEVER! If they borrow cheaply and spend the money on things that provide more return than they are paying in interest it can be very worthwhile. Things like making people smarter and more efficient (or enabling otherwise disenfranchised people to contribute valuably) can increase future tax revenue streams and more than offset the cost of the initial borrowing. Also things like NEW infrastructure in places where it unlocks value, or audacious science projects that (often through surprising tangential discoveries and inventions) propel our economy forward. Everything in this paragraph would qualify as government investment (although in the general category of government purchases).
Private investment is sort of the same as above, just supposedly more efficient. Commodity companies might invest in trying to develop really high tech ways of producing or recovering natural resources (say natural gas, or soybeans, or whatever) another example might be a telecom company spending money on building a massive network of cellular phone towers (or 500 satellites, whatever) in order to make an entirely new concept (instant information flow to anywhere) available to the participants in the economy, who each trade some of their money for the right to use this large network to their liking or benefit. The money paid by the users will more than offset the cost of building the cell tower network, profiting the telecom company. Very similar to government investment, except that private companies do it.
The theory is that private investment is more efficient/less wasteful than govt investment because of the profit motivation of the company doing the investing. Even if the govt just hires the profit motivated company to do the thing they want, there are still always administrative costs and all kinds of other hidden agendas that can be costly. Sometimes socially beneficial investment (like creating "unfair" programs that keep hoards of unfortunate, disaffected, lazy, incompetent, insane or stupid people from rioting and/or otherwise making it less palatable for smart, ambitious and hard working people to perform valuable activity) doesn't occur in the private arena without a push from the government (or at all). Also, some projects are beyond the scale achievable by the private sector and couldnât be financed without a govt stake. Hence, the govt should sometimes engage in investment even if it isn't the most economic or efficient.
The next component in the economy is net exports, not only of consumer goods, but also of investment type stuff like new oil drilling techniques, fancy banking or money management techniques, etc. If you import more stuff than you export, then your net exports in negative, and decreases your economy (and transfers supposedly valuable money to other, outside economies). Here things like the types of things im- and exported can matter for the long run health of the economy; e.g. importing 100% of the required food, and exporting only interpretive dancing lessons could be considered risky for an economy, even if the monetary exchange is currently in balance. in the US, the trade deficit as measured is rather large (unfavorable to our economy), but I don't think it captures many of our "service" exports, which are huge.
And the last, and in the us the largest by far, is Consumption, which you point out in your post. Things like spending your money on expensive coffee, just to piss it out an hour later, is counted as part of the economy (woo hoo!!!), but doesn't have any anticipated future revenue stream to you. Here it also matters to the economy where the stuff comes from that you consume. This then gets us back to the net exports idea, which I won't go into.
Anyway, this turned out a little longer than I'd expected. Hope it helps prompt a thought or two. Maybe someone will add cliff's notes...
