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The Mystery Behind Economic Growth

by Alasdair Macleod, GoldMoney:

With sound money and free markets, the evolving production of businesses increases the purchasing power of money over time.

We learn, out of the blue, that “the Eurozone is performing well, but with opinions divided on the causes, doubts linger over whether it is a sustainable recovery” (Daily Telegraph, 19 April). We are also told that economic growth in the US is stalling, as evidenced by downward revisions by the Atlanta Fed, and the fact that the rate of increase in Loans and Leases by commercial banks is also stalling. The Bank of England was unable to forecast the strength of the UK economy in the wake of Brexit.

This article explains why this confusion occurs. It is clear the economics profession is ill-informed about the one thing it is paid to know about, and the commentary that trickles down to the ordinary person is accordingly incorrect. State-educated and paid-for economists always assume the private sector is the problem, when it is the burden of the state, and the state’s futile attempts to manage the consequences of its actions through the corruption of money.

By misdirecting their attention to the private sector in the search for solutions, economists confuse growth in gross domestic product with progress. Growth is the expansion of a balance sheet total, reflecting an increase in the amount of money spent in the economy between two dates. Progress, on the other hand, is the improvement in living standards we get from more efficient production and technology.

Take Italy as an example. The chart below is of quarterly real GDP. Bear in mind the annualised rate is four times the quarterly figure.

GDP is today’s standard measure of economic performance, and it shows that the volume of consumer transactions in Italy today is well below the record achieved in 2008, before the financial crisis. That’s still down over 7% after eight years.

It is a disaster for those out of work, the unfortunates who are not earning to spend. It’s bad news for government, which relies on taxes from income and VAT. It’s socially divisive. But for most Italians, unless they are paying appreciably higher taxes, life has improved. They are still eating the same things mostly, going out to restaurants occasionally. For the last four years, Italian domestic car sales have increased from 1.3 million to 1.8 million. Cars are more reliable, safer and better today than ever before. Improved computers, flat screen TVs and electrical white goods whose prices have fallen have also seen good demand at lower prices, improving people’s standards of living, ease and enjoyment.

The one thing that the fall in Italy’s GDP has failed to capture is this progress. The same is true in France, except the anti-progressive element in the economy, government, is larger as a proportion of GDP. State-provided services are generally slow to progress, and many are stuck firmly in the past. The state also destroys wealth through taxation. In France, profit has become a dirty word, replaced by puritanical socialism. But notwithstanding all this, the French are also buying better cars and flat-screen TVs. Despite every obstacle government places in their way, it just cannot stop people from progressing with their lives.

The same is true in America. Growth in loans and leases can slow, the Atlanta Fed prognosticate, and still the economy progresses. And how did anyone really think that after Brexit, people and businesses would suddenly stop buying the goods and services they desired, and stop working? The Remainers complained at the idiocy of Brexit, but didn’t change their spending habits one bit. If anything, the removal of uncertainty led to a surge of capital investment, which had been only held up by the referendum. Life returned to normal.

This is so obvious, it is amazing that very few modern economists see it. The reason is quite simple: the whole of the neo-Keynesian macroeconomic profession has rejected the one economic truism that stands in the way of their belief in intervention by the state, and that is Say’s law.

Say’s law is central to understanding economics

Say’s law is very simple. It states that in a world where we divide our labour, we produce to consume. It therefore follows that if we are not able to produce so that we can consume, someone else must produce on our behalf. The disabled, the unemployed, the home-makers and children have their consumption paid for by someone else, a partner in marriage, family member, or parent. Welfare distributed by the state doesn’t change this iron law, because the state must tax someone else’s production or debase their earnings to cover welfare distribution.

This cannot be denied. We are all at the same time producers, consumers and savers. These functions can no more be separated than the human body be divided into three parts and still function. The role of money is to facilitate the exchange of production for consumption in both its forms, no more than that. Attempts to manipulate the quantity of money do not change this underlying truth, beyond being disruptive. Therefore, reflationism never succeeds. It is also the reason why economists who believe in state reflation in defiance of Say’s law get it horribly wrong every time.

Read More @ GoldMoney.com

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