Production and Consumption

Production and consumption are the processes of producing and consuming economic goods. As all property is owned by people, these are necessarily human actions. A pure bank produces the service of liquid investment, an economic good. The cost of production is the depreciation of its reserve. This is 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 reserve ratio declines from 100% to 0% over time. The reserve is only repopulated by more borrowed capital, such as by dividend reinvestment. The amount of reserve represents the same necessary productive expense as the pure bank's liquidity reserve.

A real producer converts time and capital to interest, at the market price of the product produced, just as the 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.