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The most important objective for any government is
to achieve economic growth. Out of this growth develops employment and taxes to
fund government itself. It is in other words the primary focus of all
economic planning. Much effort is also spent perfecting the statistics deemed
vital to quantifying everything that might contribute to the attainment of
this end. Furthermore, “independent” monetary policy long ago
migrated from the principal objective of controlling inflation to stimulating
the economy into more growth. Almost everyone in developed economies knows
and supports this objective, even if they argue over the means. However, not
only have governments consistently failed to achieve this fundamental
objective, they are now increasingly worried that government spending cuts
will propel us all into a deep economic contraction.
But are we right to think in terms of economic growth
or contraction? The concept is essentially Keynesian and stems from
mainstream economic analysis. It presupposes that governments actually have a
positive interventionist role and can improve economic outcomes, a
supposition that is on examination completely flawed. Instead, an economy
that successfully delivers the products and services people actually want
does so in an unplanned, random fashion. It is the sum of all activity, which
organises the production of goods and services by
entrepreneurs and business proprietors in the considered belief they will be
wanted.
The strength behind a free-market economy is the
randomness of productive actions, and progress of mankind’s condition
is the result. It only expands if the factors of production expand; otherwise
the distribution of available resources depends on entrepreneurial
anticipation of people’s needs and wants. When government intervenes in
this unplanned but productive chaos it destroys this random quality,
harnessing economic actions into in a common direction.
Destructive cycles of boom and bust have always been
the result. Governments seek to co-ordinate randomness for an outcome they
commonly call growth, and for a short time they might appear to succeed. But
it is not long before these co-ordinated economic
actions inevitably drive up prices, because extra factors of production (raw
materials, labour and capital goods) only become
available at higher price levels. Higher prices inevitably lead to higher
interest rates, to the point where those who have fallen for the bait of
artificially cheapened credit have to cut and take their losses. Capital
theory predicts this outcome, events always confirm it, yet mainstream
economists continually ignore it[i].
Intervention is as likely to succeed as water is to
run uphill. Economic growth or the lack of it, the success or failure by
which it is measured, is its child. The question then arises as to whether or
not we can have economic growth without intervention.
The logical answer is no. A free-market economy in
the absence of external factors does not grow: it progresses, which is a very
different thing. It discards those things consumers do not want and produces
things they are likely to want. It adjusts the price of products to a level
which satisfies the consumer and is at the same time profitable.
Overproduction is punished and underproduction invites competition. No one
knows what the consumers will buy tomorrow or how much they are prepared to
pay, but randomly-acting entrepreneurs are generally pretty good at guessing,
because they put their own time and money on the line. They have to
anticipate levels of demand and also prices for their output for at least as
far in advance as it takes to plan, produce and market any product. This is
progress, not growth. Progress is about better products and services tomorrow
than today, using the resources actually available. Progress is about better
value for money tomorrow, which means that prices tend to fall. And as prices
tend to fall, more things can be bought for the same money. What governments
do instead is destroy this process of progression in an attempt to replace it
with statistical growth.
The statistics devised to measure it, principally
gross domestic product, cannot measure anything other than the money in the
productive economy, which it does imperfectly. Government spending, which is
an economic cost, is included pari-passu with
valued production. Efficient producers such as the manufacturers and
suppliers of electronic goods and services, who reduce their prices over
time, see their output diminished as a proportion of the statistical whole,
while those that maintain their prices by monopolistic or subsidised
means keep and even increase their weightings. This is simply the result of
the indiscriminate use of a money-aggregate to measure the fallacious concept
of economic growth. So GDP and related statistics do not measure progress: if
anything they promote economic regression.
Instead, we must conclude that GDP is an
approximation of the amount of money deployed in an economy. It is equal to a
combination of measured production, government spending and price changes.
Let us assume for a moment that extra factors of production at a given price
level are not available, so production only progresses depending on how
existing factors of production are redeployed. Let us further assume
government spending and regulation of the private sector is also unchanged.
These two conditions being the case, economic growth must be a reflection of
price changes, which in turn is the result of changes in the quantity of
money deployed in the economy. And in recording “real” economic
growth, that is economic growth adjusted by a price-inflation index,
statisticians avoid recording most of the effects of monetary inflation.
Therefore, economic growth is not growth at all: it is just an alternative
and flawed measure of unreported monetary inflation.
We would not take the central planners’ flawed
attempts to manipulate an economy and the statistical outcomes seriously were
it not for the ultimate consequences. Not only have they completely deceived
the public over economic growth, but they deceive themselves. For this reason
they are unequipped to deal with the developing crises, which are the result
of earlier interventions. They now claim that economic growth, the ultimate
source of tax revenue and government solvency is jeopardised
by spending cuts. Statistically, this is obviously true, because if you take
away government costs and support for unwanted economic activities, GDP will
fall. But the important point that is commonly missed is that a government
which stops draining an economy of its private sector resources actually
releases them to be deployed more effectively for the common benefit by those
randomly-acting entrepreneurs.
And that, ultimately, is the way out of all economic
difficulties.
[i] There are some
excellent analyses of Capital Theory, but the error of converting random
actions into common objectives, central to understanding the destructive
effects of central planning, gets little attention. This is a mistake.
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