The vew that spending is not just part of the economy, but a stimulant to the economy always seemed crazy to me because it overlooks production. As Tom Woods derisively says, "Just take and take and take -- and that will make everyone rich!" But I do see the plausability of this view. Consumers spend, businesses get income, businesses raise wages, consumers have more money to spend. What is the major flaw here?
The major flaw here is the ignorance of the structure of production. All businesses need some degree of savings in order to be profitable; some more-so than others. A company like Walmart does need much savings in order to be profitable, since their products are so cheap and take so little time to produce that virtually anyone can purchase Walmart's products with only an hour or two worth of wages. On the other hand, a construction company needs a much higher savings rate in order to be profitable. Without savings, a construction company would have no businesses since nobody would be able to take money out of their savings or to borrow money in order to purchase a house, buy office space, or build a factory. Thus, high savings spur the production of higher order and more expensive goods. These higher order goods are vital to economic growth because they enable the production of other goods. Without savings, nobody would be able to fund the construction of a new factory. Without additional factories and other capital equipment, the economy would never grow since more products would not be able to be produced.
In other words, savings are necessary for capital goods, since capital goods are so expensive that nobody would be able to pay out of pocket for them. Without capital goods, the economy would not grow since additional capital goods are needed in order to produce more goods.
So, to use your example, the spending rate is 100%. All money that is earned is spent almost immediately; absolutely nothing is saved. Companies like Walmart earn record profits because of this. However, the capital goods used to make Walmart's products begin to deteriorate as the funds necessary for the repair, replenishment, and expansion of the capital stock evaporate due to a low savings rate. Because nobody is saving, there is no money that can be used to replenish and expand the capital stock, thus, less and less goods are produced. Living standards, as a result, fall.
Political Atheists Blog
Unknown consumers just don't give their money to some unknow business. Businesses just don raise wages. Consumers just don't spend their increased income. If this were true then you need to only increase the amount of money and you increase wealth. Paper or better yet electronic money will then be the most optimal as they are the easiest to create. The problem with this theory is that paper or electronic money are much easier to make than real products or services.
The process of a real wealth generating activity begins with individuals taking some of the wealth they would use for consumption and saving it. A real business person or persons start by using real savings to build the equipment and knowledge required to satisfy the desires of some number of real consumers. The difference between the value the consumers place on the product or service and what the business places on the product or service is profit. Businesses that have positive profits stay in business, ones that have negative profits stop.
Businesses invest the mass majority of profits into making their current products more appealing to consumers or by building new products to satisfy consumers. Businesses increase the numbers of wage earners to make or improve products. Businesses compete for these wage earners by using profits to pay them. Businesses also must pay current wage earners more to keep them as well.
The result is that there is a constant creation of new products and services to replace previous products and services as businesses take savings and turn that stored wealth into something desired by consumers.
Consumer cannot "just spend more". You may spend only what you have produced. In order to spend more, you have to produce more. I hope I don't have to prove that production always comes before consumption?
In order to produce more, you must improve your production in some way (cut costs, increase production). Or you have to find a way to use current inputs to produce something that will be of greater value to the consumers. That generally requires funds (engineering work, marketing, buying new machines, maybe new truck or you have to build a bridge). All that you have to fund from somwhere of course. Where from, if you are spending everything you produce?