This stock of capital goods can only be increased if money is invested in productive activities. The record of economic history explicitly states that for a country to increase production in the long run, it needs to increase its stock of capital goods. However, on the other hand, if the same baker goes on a vacation and spends money that expense would not reap any returns in the future. For example, if a baker buys a new oven, he is actually making an investment that will help him earn a higher income in the future. For instance, it overlooks the fact that all spending is not equal. The overly simplified version of the circular flow of economy omits many relevant facts. Also, since the spiral is self-reinforcing, it is difficult to come out of recession. The belief is that it is this downward spiral that causes a recession. Many economists like Keynes believe that this leads to a downward spiral which is self-reinforcing. The overall negative sentiment will lead to few people buying even fewer goods. Hence, according to this model, when spending is cut down, people will lose their jobs. Spending is also seen as the number one reason for increased employment and job creation.
Thus, according to this model, spending is what keeps the economy alive. Similarly, the spending by the second person becomes the earning of the first. Hence, the spending of one person becomes the earning of another person. This model explains that the cash flow in the economy is circular in nature. The justification for increased consumer spending is generally derived from the circular flow of economy model. In this article, we will try to resolve this dichotomy. On the other hand, there are these economic gurus who claim that spending is what keeps the economy afloat. On the one hand, they know from common sense, that saving is indeed good for the economy. This has created a dichotomy of sorts in the minds of the modern student. For many centuries, economics has actually been urging people to save money. However, this doctrine which advocated more and more spending is somewhat recent in nature. This is the reason why the American government requested the people to go out and spend their money after the 9/11 attack which threatened to slow down the economy. Hence, modern-day economists believe that incessant spending by the consumers is what drives the economy. Demand is another word for increased spending. Thus, an economy grows by increasing demand. Hence, when there is more demand, there is more economic activity. The underlying belief is that demand stimulates all economic activity. This has been the stance of mainstream economics for a very long time.
John Maynard Keynes once said that saving money is an individual virtue but a societal vice.
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