One of the ideas that has been repeatedly floated during the recent economic crisis, recession, and long stagnant recovery is the notion of “stimulus” as a way to jump-start the economy. This strategy is based on Keynesian economic theory and is based on the notion that when an economy falls into recession, the fundamental problem is the scarcity of people who consume. The solution that the Keynesian economist offers is intervention by government entities through monetary expansion and spending to fill the perceived gap in spending. The fundamental underpinning of Keynesian theory is the notion that consumption creates production.
An alternative view to Keynesian theory is that proposed by Jean-Babtiste Say, which contributes to broader classical economic theory. A main idea put forward by Say was known as Say’s Law or the idea that “products are bought with products”. This theory underlines the fact that wealth is defined by what is produced, and the accelerated transfer of products from one person to another does not increase the total amount of wealth. According to Say’s Law, a general economic recession is not the result of insufficient consumption, but of incorrect production… that is, production has been over-sought in some areas (such as home construction). and has not been sought in others.
Furthermore, trying to “solve” the problems by printing more money does absolutely nothing to increase or change the total amount of production or the total amount of wealth. When more money chases the same amount of goods and services, the result is high prices or inflation. Recent increases in food and energy costs, in the wake of the US Federal Reserve’s massive monetary easing, have caused many to revisit classical and Austrian economic theory.
The importance of Say’s Law is often hard for people to see directly, since most employees don’t work for products…they work for money. Therefore, people equate the money they earn with wealth. However, it is nothing like that… money is just paper. Wealth is what you can buy with money. Since most people work on the preparation, sale or delivery of some product or service, it is ultimately true that the products and services we buy are bought with the products and services we create. Money is simply the medium through which this transaction takes place.
Another important aspect of Say’s Law is the notion that products and services are not homogeneous. What this means is that producing more of something that people are not willing to pay for is not the path to wealth. This situation is actually the cause of market sector crashes when excess production cannot be sold profitably. Also, if government bailouts are created to “save” companies that gambled wrong, it perpetuates low-value production that impedes economic growth.
In a dynamic market economy, downturns in a sector such as home construction will result in price declines that will eventually attract investment capital without the need for government incentives. People who built speculative houses with the expectation of big profits would go bankrupt. The assets of those companies would be sold at a discount. Companies that acted prudently could buy those assets at very little cost and launch new growth initiatives. The problem with bailouts is that they reward irresponsible behavior while punishing those responsible by denying them the investment opportunities that would arise if prices adjusted to their true value.
This is where the fundamental flaw in Keynesian theory emerges. In the Keynesian view, supply and demand are aggregate. This vision combines the production, consumption and unemployment of the healthy sectors with the unhealthy ones. Every time a big correction occurs, this leads to the conclusion that the entire economy is unhealthy. However, that is not necessarily true… even in the worst of recessions, there are often sectors of the economy that are perfectly healthy. Trying to address the so-called aggregate problem with aggregate solutions results in subsidies for foolish investments and penalties for responsible investors.
Additionally, stimulus programs are necessarily run by government agencies and financial institutions that extract a significant amount of overhead from the total amount that is spent. This is where the problem of intermediates arises. In a market system, middlemen only exist in situations where they add value to the system…otherwise buyers and sellers would ‘cut out the middleman’ for higher volumes and lower prices. However, in the world of legislative fiat, intermediaries stand between the money and the products, taking a percentage of the transaction and doing absolutely nothing to improve or optimize the quantity or quality of the total production.
Ultimately, this turns into what many have called “crony capitalism,” where large corporations dominate the market, not because of any particular ability to create or sell products and services, but because their connections to lawmakers allow for advantages. that other companies do not enjoy. Financial institutions and auto companies that avoided bankruptcy and maintained all of their business/leadership practices serve as prime examples of this principle. Had AIG been allowed to fail, its assets would have been sold at a discount and a new competitor would have emerged to fill the vacancy created by AIG’s departure. This company would have every incentive to hire the responsible AIG employees and no incentive to hire the people who caused the company to collapse.
In the end, products and services are really paid for with other products and services. Attempting to circumvent this simple economic reality has resulted in tremendous misallocations of capital and enrichment of politically connected organizations, while preventing real economic growth from emerging. Unfortunately, we do not have the ability to stop this trend as individuals. However, we have the ability to adjust our own decisions to minimize the impact of these trends on our lives.
The most important thing anyone can do is work and live in the “real” economy producing real products and services for real people that you buy by producing real products and services for other real people. The trail to extract resources through financial manipulation of smoke and mirrors is getting shorter. The time is fast approaching when governments can no longer afford to rely on smoke and mirrors to disguise fiscal problems and unfunded promises that cannot be kept. When this reality finally emerges, it will be very painful for many people who have become dependent on fictional reality. Make sure your wellness is built on a solid foundation.
