As economic free market advocates, we need to realize the importance education plays – if we hope to continue our growth in the next generation. This includes not only educating others about our principles, but also – and this is equally as important – criticizing mistruths wherever we find them.
John F. Kennedy famously said “children are the world’s most valuable resource, and its best hope for the future,” and he was right. The materials that children are taught has played a crucial role in the world’s most prosperous – as well as its most brutal – governments throughout history.
This article will be the first in a three-part series that will cover those misconceptions, which, due to their widespread acceptance, cause the most damage to our prolonged growth. The first of these misconceptions is the most prominent issue we face in economics today: it’s the debate between consumption and production.
Which came first, the chicken or the egg?
Almost anywhere you look, you’ll hear that the way to grow an economy is through an increase in consumption. We’re told we must inject more money into the economy, and spend it, in order to sustain prosperity.
However, that argument starts tumbling down with only a few simple questions. For example, what defines being better off? Better yet, what makes a country truly rich? Is it simply having more money? Or is it more of the resources that money affords us that make us rich? Think of it this way: if you were stranded alone on an island, and you were given the option to have $100 million, or a week’s supply of food, which would make you better off?
While that amount of money in America could comfortably feed millions of people, most of us realize that, in the example, it is the actual food which makes us better off. Why? Because money derives its value through the quantity of resources it can be exchanged for.
So, adding money to an economy (in an attempt to increase consumption), without adding more goods alongside of it, forces money to bid against itself for the same pool of resources as before. This only results in increased prices until a new level is settled upon.
The laws of economics dictate that, when a demand for something goes up (in this case because of an increase in dollars handed out) while the supply of it stays constant, the price must go up. Yet, our political leaders want us to believe the exact opposite is true. They want us to believe that simply printing money out of thin air and handing it out makes us all richer.
In the above example, it’s easy to see that no arbitrary number of dollars could make the man on the island suddenly rich if the number of goods and resources to exchange them for is next to nothing.
He may as well have $100 trillion dollars, like we see in the current situation in Zimbabwe, it makes no difference. Once we apply this idea to an entire economy, it suddenly becomes counterfactual.
This elusive scheme is the largest contributing factor into why our purchasing power has declined nearly 90% since the introduction of the Federal Reserve, and it’s fiscal stimuli.
Throughout human history, production has always preceded consumption, and real wealth has grown as a byproduct of an increase in production. The accumulation of capital, and in turn, capital goods, allowed the worker to produce more. Resulting in the justification of higher wages, a rise in disposable income, and leading to an increase in consumption of those abundant goods.
However, when politicians convince voters that the opposite is true, it undermines that process. Not only does it undermine the process – due to the rapidity of price increases from fiscal stimulus policies, real savings are destroyed. These are the exact savings that should be going towards capital investment and the increase in production. Still, we hear this lie repeated again and again in our classrooms, on our nightly news, and throughout the halls of government. The acceptance of this idea has been at the root of the boom-bust cycle since its inception.
This is the most crucial myth to overturn. With each individual we dissuade, we further stimulate our goal of liberty and sound monetary policy.
Thomas J. Eckert
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