Does Demand Create Supply?

Amongst the first reactions when Nicola Willis announced a coming cut in Wellington's bureaucrats came the outcry that the reduced consumer spending by those unemployed grey ones will keep Wellington "at the bottom of the pack in terms of things like economic activity," their reduced demand leading (so it's said) to a downward spiral.

The most cited author of that premise is alleged economist Nick Brunsdon, who seems to labour under the illusion that economic causality can be reversed, that demand induced by govt deficits somehow creates its own productive supply -- that if government keeps on over- spending and injecting new money into the economy, then productive wealth will follow. Fortunately, Frank Shostak is here in this Guest Post to dispel that destructive illusion ...

Does Demand Create Supply?

by Frank Shostak

By popular thinking, increases in demand cause economic growth. According to such thought, whenever the economy falls into a recession what is required is to strengthen demand. Since government is seen as an important part of total demand, what is then required is to increase government outlays, thereby lifting overall demand and hence increasing economic growth.

According to the popular view, it is also possible to strengthen overall demand through the inflationary increases in money supply. With more money in their possession, and for given prices, the so-called real balances will increase and this, in turn, will strengthen individuals’ expenditure on goods and services. This allegedly will strengthen the economy’s overall demand and will strengthen economic growth. A decline in the prices for a given money supply will also boost the real balances and thus the economic growth. 

But does it make sense that demand is the key driver of the economy?

In the free market economy, wealth-generators do not produce everything for their own consumption. Part of their production is used to exchange for the products of other producers. Hence, in the free market economy, production precedes consumption. This means that something is exchanged for something else. This also means that an increase in the production of goods and services sets in motion an increase in the demand for goods and services. According to David Ricardo,

No man produces but with a view to consume or sell, and he never sells but with an intention to purchase some other commodity, which may be immediately useful to him, or which may contribute to future production. By producing, then, he necessarily becomes either the consumer of his own goods, or the purchaser and consumer of the goods of some other person.

An individual’s demand is constrained by his ability to produce goods demanded by others. The more goods that an individual can produce, the more goods he can demand.

Expanding Private Savings: Key to Economic Growth

Without the expansion and the enhancement of the production structure, it is difficult to increase the supply of goods and services. The expansion and enhancement of the production structure hinges on the expansion of production, private saving, and capital investment. Saving supports individuals in the various stages of production. It supports individuals that are employed in the enhancement and the expansion of the production structure. Hence, what matters for economic growth is not just tools, machinery, and labour, but saving and investment in capital goods.

Government Is Not a Wealth-Generator

Contrary to popular thinking, the government does not produce any wealth. Increases in government spending cannot grow the economy. By nature, the government must take from the private, productive economy to facilitate any of its actions. By doing this, the government weakens the wealth-generating process and undermines prospects for economic recovery during a downturn. According to Murray Rothbard,

Since genuine demand only comes from the supply of products, and since the government is not productive, it follows that government spending cannot truly increase demand.

Likewise, an increase in money supply only sets in motion an exchange of nothing for something. This means a weakening in the process of wealth formation and leads to economic impoverishment.

An important factor that makes the fiscal and monetary stimulus appear to “work” is if the amount of private savings is large enough to support non-wealth generating activities while still permitting a growth rate in the activities of wealth generators. It also gives the appearance of wealth as new sectors are stimulated. Additionally, if funded by inflation, the benefits of inflation appear early and are only realised later.

If, however, voluntary saving is declining, then, regardless of any increase in government spending and inflation by the central bank, overall economic activity cannot be revived. In this case, the more the government spends, and the more the central bank inflates, the more will be taken from wealth-generators, thereby weakening any prospect for a recovery. Additionally, these measures will further distort the economy.

As one can see, not only does the increase in the expansionary fiscal and monetary policies not raise overall output, but, on the contrary, it leads to a weakening in the process of wealth generation in general. According to Jean Baptiste Say,

. . .the only real consumers are those who produce on their part, because they alone can buy the produce of others, [while]. . .barren consumers can buy nothing except by the means of value created by [actual] producers.

Conclusion

By popular thinking, increases in government spending and central bank inflation strengthens the economy’s overall demand. This, in turn, sets in motion increases in the production of goods and services. What we have here is a claim that “demand creates supply.” However, to be able to exchange something for goods and services, individuals must first have something that others want. This means that, in order to demand goods and services, individuals must produce something useful first. Hence, supply drives demand and not the other way around. Governments, by nature, must take from the private, productive sector in order to fund their activities. Increases in government spending and the money supply growth rate results in the diversion of savings from the wealth-generators to non-wealth-generators, thus undermining the wealth generating process.

* * * * 

Frank Shostak is an Associated Scholar of the Mises Institute. His consulting firm, Applied Austrian School Economics, provides in-depth assessments and reports of financial markets and global economies. He received his bachelor’s degree from Hebrew University, his master’s degree from Witwatersrand University, and his PhD from Rands Afrikaanse University and has taught at the University of Pretoria and the Graduate Business School at Witwatersrand University. Frank’s publishes frequent posts on economics and the markets on his Substack page.

His post first appeared at the Mises Wire.

"Commerce first taught nations to see with goodwill the wealth and prosperity of one another."

"[C]ommerce first taught nations to see with goodwill the wealth and prosperity of one another. Before, the patriot, unless sufficiently advanced in culture to feel the world his country, wished all countries weak, poor, and ill-governed but his own: he now sees in their wealth and progress a direct source of wealth and progress to his own country. 

    "It is commerce which is rapidly rendering war obsolete, by strengthening and multiplying the personal interests which are in natural opposition to it. And it may be said without exaggeration that the great extent and rapid increase of international trade, in being the principal guarantee of the peace of the world, is the great permanent security for the uninterrupted progress of the ideas, the institutions, and the character of the human race"

~ John Stuart Mill from his 1848 book Principles of Political Economy, under the heading 'Indirect benefits of Commerce, Economical and Moral; still greater than the Direct'

Free trade is good. A reminder. [updated]

Getting a free-trade agreement with India over the line has been harder work than getting oil out of the Straits of Hormuz. But over the weekend it finally happened, and the agreement was signed.

It's true, as Murray Rothbard used to say, that genuine free trade doesn’t require a treaty or its deformed cousin, a “trade agreement” -- all it needs is repealing our numerous tariffs, import quotas, anti-'dumping' laws, and other restrictions on trade. Which, to be fair, is most of what this agreement seems to offer.

A relaxation of rules, not any new ones.

Over the centuries, getting it understood that trade is good -- a win-win -- has been even harder work. It's been 250 years since Scotsman Adam Smith wrote 700 pages to explain that very point. Yet as Daniel J. Smith, Gabriel F. Benzecry point out, "Returning to The Wealth of Nations, one is struck by how little progress has been made in educating the public about sound principles, a task that must be renewed with every generation."

The Enlightenment ideals of individual liberty and voluntary exchange that inspired America’s founders also laid the foundation of modern economics. Yet two and a half centuries later, persistent policy blunders — protectionist trade barriers, ballooning national debt, and stubborn inflation — reveal how far we have strayed from the Scotsman’s insights, endangering the principles upon which our republic was founded.

Protectionism is becoming so endemic once again, so normalised, that it requires a major effort to implement its opposite. It's big news when shackles come off. freedom free-trade 

The problem isn’t a lack of knowledge — it’s a failure to teach and apply enduring principles. ...

Yet even as those principles are applied we can see and applaud the results. Even as the world's population has increased rapidly, we see that the most important growth with more population is not more stomachs to feed, but more minds able to produce -- and (in Adam Smith's words) more people ready to truck, barter and trade. The very simple fact, as Marian Tupy reminds us, is that "for every 1 percent increase in global population, population-level resource abundance grew by about 6.3 percent."

For every 1% increase in global population, population-level resource abundance grew by about 6.3% — according to @HumanProgress's new Simon Abundance Index.

In other words, when people are left even moderately free to produce, resources grow at a faster pace than the population.

It was Malthus, writing after Adam Smith, who ignored so many of his lessons and saw only the stomachs to be fed. 

The Malthusian mind never [saw] the human capacity to cooperate, trade, discover, invent, and adapt.

The record is clear. Smith explained how it works 250 years ago. Let's applaud when more of it is allowed to happen.

UPDATE: Another reminder: 

It's not nations that trade. People trade.

And they will if you just get out of their way. 

"This is the engine that's lifting humanity out. The entrepreneurs are the drivers of that engine."

"Capitalism created the possibility of the win-win-win. It used to be a zero sum game where somebody won, somebody else lost.  

"It was never a zero-sum game in my mind. You’re always trading with your customers and your employees and your suppliers for mutual benefit, mutual gain. That’s the miracle of capitalism. That’s why humanity has been lifted out of the dirt in the last 250 years. The Industrial Revolution led humanity out of this trap that we were in, which really was a zero-sum game. ...

"The biggest mistake people make, intellectuals in particular, they still think we're in a zero sum world. They're obsessed with some billionaires because Bernie Sanders thinks that Jeff Bezos and Elon Musk somehow stole the money from the people. 

"They don't understand that it's this prosperity machine that's creating more, not just for those billionaires, but for everything that they're touching. They're creating value for their customers, they're creating value for their employees. Their suppliers are flourishing, their investors are seeing their capital go up. It can be reinvested and compound. 

"All philanthropy ultimately comes from business. That's where the profits are. Where do all the taxes come from? It ultimately comes from business as well. 

"This is the engine that's lifting humanity out. The entrepreneurs are the drivers of that engine. Somebody like Elon Musk, he gets a very, very, very tiny sliver of the value that he creates for the whole world."

~ Whole Foods founder John Mackey on the Win-Win Mentality That Lifted Humanity Out of the Dirt [hat tip David Senra]

Deregulation in Argentina: Milei Takes “Deep Chainsaw” to Bureaucracy and Red Tape

Argentine President Javier Milei has lowered inflation, drastically reduced government spending, and dismantled large parts of the federal bureaucracy. But as Ian Vásquez points out in his guest post, one of the most far-reaching efforts by his administration has been its deregulation push, with officials implementing about two deregulations per day on average since he took office, and using ingenious ways to discover where most needs deregulation. It's an Example for the World, if only New Zealand were not too sclerotic to learn from it ...

Deregulation in Argentina: Milei Takes “Deep Chainsaw” to Bureaucracy and Red Tape

by Ian Vásquez
At the heart of Argentina’s chronically crisis-prone economy is a political system that encourages unconstrained public spending and overregulation in the extreme. It is the system set up by Juan Domingo Perón in the 1940s that strengthened in subsequent decades, and that President Javier Milei promised to cut down with a chainsaw and replace with classical-liberal policies of the kind that made his country one of the most prosperous in the world a century ago.

Since assuming power in December 2023, Milei has been slashing government to that end. His priorities have been to get spending under control and to deregulate. Milei cut the budget by about 30 percent and balanced it one month into his term. That facilitated more disciplined monetary policy and the reduction of inflation from 25 percent per month when the president came to office to 2.2 percent in January 2025.

The success that Milei’s economic stabilisation has had so far is now widely acknowledged. The president took an economy from crisis to recovery much faster than most people expected: Growth returned in the second half of 2024, wages have increased, and the poverty rate, after having initially risen, has fallen below the 40 percent range that the previous government left as part of its legacy.

How much Milei has been deregulating, however, and the role that deregulation plays in Argentina’s success, is less widely appreciated—yet it is every bit as important as cutting spending. To understand why, it helps to know something about what makes Argentina’s politics different from that of most countries.

Argentina’s Peronist System

For more than seven decades, Argentina has had a corporatist system that Perón set up using Mussolini’s fascist Italy as a model. Under that system, the state organises society into groups—trade unions, business guilds, public employees, and so on—with which it negotiates to set national policies and balance interests. It’s a kind of collectivism that erases the individual, centralises power in the state, and incentivizes interest groups to compete for government favoritism through public spending and regulation.

This system gave rise to a proliferation of rules intended to protect and promote particular sectors through price controls, licensing schemes, differential exchange rates depending on type of economic activity, capital controls, preferential borrowing rates, compulsory membership in (and support of) guilds, and other interventions.

The system that the Peronist party set up discouraged free exchange, competition, and productivity but became deeply entrenched. Privileges accorded by regulation were politically difficult to lift. Legal scholar Jorge Bustamante, moreover, notes that regulation plays a more significant role in redistributing wealth in Argentina than fiscal policy does. He adds that “the waste of scarce resources caused by regulations is more serious than the direct activity of the state in the economy itself [fiscal policy], which is known to be in deficit.”

Unions in particular gained immense political power. Such was the case that Bustamante describes the Argentine system as one that “converts the unions into organs of the state when the party to which they belong [the Peronist party] is in power or converts the state into a prisoner of the unions when the party is in the opposition.”

Federico Sturzenegger, Argentina’s minister of deregulation and state transformation, made a similar point at the Cato conference we held in Buenos Aires in June 2024 with President Milei and other leading classical liberals. “The Peronist party,” Sturzenegger said, “is the manager of the status quo.… It is the manager of the vested interests; it is the conservative party of Argentina.”

The Peronists may want to conserve the system, but Milei is right in cutting it down. According to Cato's Human Freedom Index, the Argentina that the president inherited is one of the most regulated countries in the world, ranking 146 out of 165 countries in terms of the regulatory burden. As of last year, it ranked 81st.

Milei’s Cuts in One Year

Since coming to power, Milei has made wide-ranging cuts to Argentina’s bureaucracy. In his first year, he reduced the number of ministries from 18 to 8 (eliminating some and merging others), fired 37,000 public employees, and abolished about 100 secretariats and subsecretariats in addition to more than 200 lower-level bureaucratic departments.

The president has also aggressively pursued deregulation. Using a conservative methodology, my colleague Guillermina Sutter Schneider and I calculated that during Milei’s first year in office, he implemented about two deregulations per day. Roughly half of the measures eliminated regulations altogether, while the rest modified existing regulations in a generally market-oriented direction.

Milei has implemented these reforms legally and constitutionally, and they have resulted mainly from two broad measures. First, Milei began his administration by issuing an emergency “megadecree” that consisted of 366 articles. Emergency decrees are consistent with Argentine law if they meet certain conditions. They are also reviewable by Congress, which has the right to reject the orders within a specified period of time. Since the legislature did not object, most of the deregulations in the megadecree went into effect.

Second, Congress approved a massive bill (“Ley Bases”) last June that allows the government to issue further deregulatory decrees for one year. Most of Argentina’s deregulations are taking place under that authority and have been led by the new Ministry of Deregulation that began operating the following month.

The ministry is literally in a race against time, and its sense of urgency is palpable. When I visited Minister Sturzenegger and his team in November, they showed me a countdown sign outside his office that read “237 days left,” indicating the time remaining for the government to continue issuing deregulatory decrees. Sturzenegger’s team—made up of legal experts and accomplished economists—also has a clear sense of mission: to increase freedom rather than make the government more efficient. When reviewing a regulation, therefore, they first question whether the government should be involved in that area at all.

Following that approach, the government implemented deregulations in sectors of the economy ranging from agriculture and energy to transportation and housing. 

Looking at Prices

To help prioritise those reforms, the ministry looks at prices. If the cost of a good or service is significantly higher in Argentina than internationally, the regulatory burden often explains the price differential. Sturzenegger reports that deregulation in Argentina has tended to make prices fall by about 30 percent. The ministry has also set up a web portal called Report the Bureaucracy that takes recommendations from businesses and the public, resulting in numerous reforms.

Some of the reforms have been procedural. For example, government inspections are now sometimes conducted after a firm begins engaging in business (on the assumption that it is following the law and may be subject to inspection), rather than before any business is allowed to even go forward. This “ex-post” inspection of the labeling of imported textiles, for instance, led the price of textiles to fall by 29 percent. 

The government has also instituted a “positive administrative silence” rule affecting several activities by which requested permission is considered approved if the government bureaucracy does not respond within a fixed period of time. In yet another example, Milei prohibited legally sanctioned hereditary positions that had become normal practice at numerous government agencies.

Much of the impact of the deregulations has not yet been measured, but the hard or anecdotal evidence that does exist suggests that the reforms are making a significant difference. The following are some accomplishments from Milei’s first year:

• The end of Argentina’s extensive rent controls has resulted in a tripling of the supply of rental apartments in Buenos Aires and a 30 percent drop in price.
• The new open-skies policy and the permission for small airplane owners to provide transportation services within Argentina has led to an increase in the number of airline services and routes operating within (and to and from) the country.
• Permitting Starlink and other companies to provide satellite internet services has given connectivity to large swaths of Argentina that had no such connection previously. Anecdotal evidence from a town in the remote northwestern province of Jujuy implies a 90 percent drop in the price of connectivity.
• The government repealed the “Buy Argentina” law similar to “Buy American” laws, and it repealed laws that required stores to stock their shelves according to specific rules governing which products, by which companies and which nationalities, could be displayed in which order and in which proportions.
• Over-the-counter medicines can now be sold not just by pharmacies but by other businesses as well. This has resulted in online sales and price drops.
• The elimination of an import-licensing scheme has led to a 
• 20 percent drop in the price of clothing items and a 35 percent drop in the price of home appliances.
• The government ended the requirement that public employees purchase flights on the more expensive state airline and that other airlines cannot park their airplanes overnight at one of the main airports in Buenos Aires.

Many more examples could be given, but there’s no doubt that Argentines are beginning to feel the results of the reforms. Those results also help explain Milei’s approval rating of 50 to 55 percent, according to recent polls.

Year Two of Milei: The “Deep Chainsaw” Begins

In his address to the nation on his one-year anniversary as president, Milei explained that the cuts he’s made so far are only a beginning. “We will continue to eliminate agencies, secretariats, subsecretariats, public companies and any other State entity that should not exist,” he promised, and then went further: “Every attribution or task that does not correspond to what the federal state is supposed to do will be eliminated. Because as the state gets smaller, liberty grows larger.” Milei declared that he would now begin applying the “deep chainsaw.”

Minister Sturzenegger is leading the charge. A decree in February instructed all ministers to review all laws and regulations under their purview and recommend comprehensive deregulations within 30 days. In a country with nearly 300,000 laws, decrees, or resolutions, that is no small task. But according to Sturzenegger, the government has cut or modified 20 percent of the country’s laws; his goal is to reach 70 percent. He adds that the pace of firing public employees will increase.

Regulatory reforms have already picked up pace. In January, Sturzenegger announced a “revolutionary deregulation” of the export and import of food. All food that has been certified by countries with high sanitary standards can now be imported without further approval from, or registration with, the Argentine state. Food exports must now comply only with the regulations of the destination country and are unencumbered by domestic regulations.

That innovative reform, which outsources regulation, is intended to generate “cheaper food for Argentines and more Argentine food for the world.” But it is also an example of how the ministry takes input from Argentine citizens about the need to change nonsensical regulations. As Sturzenegger explained: “Countless companies have told us of the incredible hardships they had to go through to meet local requirements that were not required by the destination market. A producer who needed to certify a sample to see if he could enter the US market was asked to set up a factory first.”

In another case, Argentina required a watermelon exporter to package his product in a way that was different from what the recipient country required. So, in practice, the exporter would load the ship in compliance with Argentine law and, once the cargo left port, the watermelons would immediately be repacked.

Other examples abound. A decree in February facilitated farmers’ use of new seeds by eliminating the requirement to conduct extensive testing of those seeds. As Sturzenegger observed, in a country where agriculture plays a significant economic role, those restrictions were especially perverse: “Brazil has tripled its soybean production, largely with seeds made by Argentine researchers, working in Argentine companies but based in Brazil. The dramatic thing is that the increase in production in Brazil sinks the price of the grain while we are relatively stagnant because we cannot access our own technology!”

Another decree reduces the cost of warehousing imported containers awaiting customs inspections by an estimated 80 percent because it allows importers to keep their goods in competing locations during that time rather than solely in places run by the customs service. That cost reduction, like countless others that result from accelerated regulatory reforms, will be passed on to Argentine consumers. And to the extent that the chainsaw really does go deeper and faster in year two, the benefits will be even more pronounced.

An Example for the World

Milei’s task of turning Argentina once again into one of the freest and most prosperous countries in the world is herculean. But deregulation plays a key role in achieving that goal, and despite the reform agenda being far from complete, Milei has already exceeded most people’s expectations. 

His deregulations are cutting costs, increasing economic freedom, reducing opportunities for corruption, stimulating growth, and helping to overturn a failed and corrupt political system. Because of the scope, method, and extent of its deregulations, Argentina is setting an example for an overregulated world.

* * * * 

Ian Vásquez is Ian Vásquez is vice president for international studies at the Cato Institute, holds the David Boaz Chair, and is director of Cato’s Center for Global Liberty and Prosperity. He is a weekly columnist at El Comercio (Peru), and his articles have appeared in newspapers throughout the United States and Latin America.

His post first appeared at the Cato at Liberty blog.

"No such thing as a low-energy high-income country"

A gentle reminder for everyone: You may have a low-energy low-income country or a high-energy high-income country ---- but you will go a very long way to find any place with that link reversed.

"Globalisation encourages the capitalist engine of growth."

"Globalisation encourages the capitalist engine of growth. If people understood how generous that engine has been they would have less enthusiasm for protectionism or socialism or environmentalist or economic nationalism in any of their varied forms. Most educated people believe that the gains to income from capitalism’s triumph have been modest, that the poor have been left behind, that the Third World (should we start calling it the Second?) has been immiserised in aid of the First, that population growth must be controlled, that diminishing returns on the whole has been the main force in world economic history since 1800. All these notions are factually erroneous. But you’ll find all of them in the mind of the average professor of political philosophy."

~ Deirdre McCloskey from her review of Thomas Friedman’s The Lexus and the Olive Tree and John Gray’s False Dawn

Super-abundant economic progress

EVER SINCE THE INDUSTRIAL  REVOLUTION in the nineteenth century and ever-increasing global freedom in this one, human progress has been on a roll -- so says author and rational optimist Marian Tupy. He outlined his arguments and data a few nights ago at an enjoyable NZ Initiative presentation.

Tupy is the editor of HumanProgress.org, the world's most comprehensive database tracking improvements in human wellbeing, a senior fellow at the Cato Institute, and co-author of the acclaimed book Superabundance: The Story of Population Growth, Innovation, and Human Flourishing on an Infinitely Bountiful Planet.

He's one of the good guys.

Miserabilist Thomas Malthus famously expressed the idea that while resources would only expand at a linear rate, population will expand exponentially -- a disaster waiting to happen. But Malthus was writing about rabbits, or animals without the brain that humans have; and he was writing before the industrial revolution, when that brain was put to powerful practical use. Malthus was not just wrong, but spectacularly wrong, as Tupy's data abundantly proves.

Take that Malthus!

In just the last four decades alone, commodities across the board have become more abundant thanks to globalisation and increasing freedom. Even in sub-Saharan Africa, long a source of concern, the average calorie intake is now ticking up to 2,500!

Take that Paul Erlich!

THAT FAMOUS PANGLOSSIAN THOMAS BABINGTON Macaulay talked in the nineteenth century about the inevitability of progress: “In every age," said Macaulay, "everybody knows that up to his own time, progressive improvement has been taking place; ... On what principle is it that with nothing but improvement behind us, we are to expect nothing but deterioration before us?” It's still possible to remain optimistic even with the many steps backwards anti-freedom forces insist we take.

I was reminded of Peter Boettke's analogy of the horse race between Smith, Schumpeter, and Stupidity -- the progress of Smith's Division of Labour and Schumpeter's progress in technology (well explained by our presenter) has to continually stay ahead of the various degrees of Stupidity inflicted on us all. It's a tribute to human reason and the power of human freedom to wield it that we have to thank for continuing and ongoing progress.

OUR PRESENTER DID GET A LITTLE  pushback from a questioner who interrogated his concept of abundance. Is abundance always good, asked his questioner? A super-abundance of nuclear weapons, for example, or opioids, is hardly a good thing for human progress, he maintained.

It's a fair point, and it resonates with those who argue that to expect infinite growth on a finite planet you must be either insane or an economist. For both points, I think, economist George Reisman makes a profound point in response: the loss of the concept of economic progress.

Tupy still talks of human progress but of economic growth. Reisman (a student of Von Mises) would suggest he'd be better to combine the two to answer both objections: i.e. to talk of economic progress rather than economic growth.

Growth is a concept that applies to individual living organisms. An organism grows until it reaches maturity. then it declines, and sooner or later dies. The concept of growth is also morally neutral [the point made by our questioner], equally capable of describing a negative as a positive: tumours and cancers can grow. Thus the concept of growth both necessarily implies limits and can easily be applied negatively.

In contrast, the concept of progress applies across succeeding generations of human beings. The individual human beings reach maturity and die. But because they possess the faculty of reason, they can both discover new and additional knowledge and transmit it to the rising generation ... with each succeeding generation receiving a greater inheritance of knowledge than the one before it and making its own fresh contribution to knowledge. This continuously expanding body of knowledge, insofar as it takes the form of continuously increasing scientific and technological knowledge and correspondingly improved capital equipment, is the foundation of continuous economic progress.

Progress is a concept unique to man: it is founded on his possession of reason and thus his ability to accumulate and transmit a growing body of knowledge across the generations. Totally unlike growth, whose essential confines are the limits of a single organism, progress has no practical limit. Only if man could achieve omniscience would progress have to end. But the actual effect of the acquisition of knowledge is always to lay the foundation for the acquisition of still more knowledge. Through applying his reason, man enlarges all of his capacities, and the more he enlarges them, the more he enlarges his capacity to enlarge them.

He notes here that it Ludwig Von Mises who had first alerted him to this vital distinction.

The concept of progress differs radically from the concept of growth in that it also has built into it a positive evaluation: progress is movement in the direction of a higher, better, and more desirable state of affairs. This improving state of affairs is founded on the growing body of knowledge that the possession and application of human reason makes possible. Its foundation is the rising potential for human achievement that is based on growing knowledge.

While it is possible to utter denunciations of too rapid "growth" as being harmful, it would be a contradiction in terms even to utter the thought of too rapid progress, let alone denounce it. The meaning would be that things can get better too quickly -- that things getting better meant they were getting worse. [Capitalism, p.106]

FYI, Professor Reisman has kindly made his book Capitalism: A Treatise on Economics (in which you can read all his arguments) freely available for reading, saving, and printing. Download the link here.

"Economic theory has identified four sources of economic progress"

In January Javier Milei explained to a room of Davos delegates to the WEF forum how the world works, and how economic progress and prosperity happens. This is an excerpt. [Milei's speech was originally in Spanish, and the English version at the WEF website has been transcribed by AI. I have edited slightly it for smoothness and clarity. Emphases mine]

As early as 380 BC, Xenophon pointed out that economics is a form of knowledge that enables men to increase their wealth while arguing that private property is the most beneficial vehicle for the life of individuals.

Xenophon ... [first] highlight[ed] the benefit of private property by stating that the owner's eye fattens his cattle. [Or as the English saying has it: "It's the master's eye that makes the mill go"]... Xenophon then delves into the dynamic realm, noting that efficiency also entails increasing wealth: that is, increasing the available quantity of goods through entrepreneurial creativity, namely through trade, innovation, and recognising opportunity. ...

"[T]he institution of private property deserves a separate chapter. By focussing on it, the Austrian School of Economics from Mises, Hayek, Rothbard, Kirzner and Hoppe to Huerta de Soto has demonstrated the impossibility of socialism, thereby dismantling the illusory idea of John Stuart Mill that postulated independence between production and distribution; a form of academic deafness that led to socialism, and cost the world the lives of 150 million human beings -- while those who managed to survive the terror, did so in absurd poverty.

In line with [those writers'] previous remarks, and consistent with Xenophon's second [point], economic theory has identified four sources of economic progress.

First, there's the division of labour, which was illustrated by Adam Smith through the pin factory example. At its core, this is a mechanism that generates productivity gains, manifested as increasing returns. Although its limit is determined by market size, the size of the market is positively affected by this process. However, it is also worth noting that this virtuous process is not infinite and that its ultimate limit lies in the endowment of initial resources.

Second, there is the accumulation of capital, both physical and human. With regard to physical capital, the interaction between saving and investment is crucial, highlighting the fundamental role of capital markets and of the financial system in carrying out such intermediation. On the human capital side, the focus should not be limited to education alone, but should also include the development of cognitive capacities from birth, as well as nutrition and health, basic elements for gaining access to education and the labour market.

Third, there is technological progress, which consists in being able to produce a greater quantity of goods with the same amount of resources, or to produce the same output using a smaller quantity of inputs.

Finally, there is entrepreneurial spirit, or rather the entrepreneurial function, which, according to Professor Huerta De Soto constitutes the main driver of the economic growth process. Because, although the three factors mentioned are important, without entrepreneurs, there can be no production, and living standards would be extremely precarious.

In fact, the entrepreneurial function is not so much focused on short-term efficiency, but rather on increasing the quality of goods and services, which, in turn, leads to higher standards of living. On this basis, what truly matters is to expand the frontier of production possibilities to the maximum extent possible.

Thus, dynamic efficiency can be understood as an economy's capacity to foster entrepreneurial creativity and coordination.

In turn, the criterion of dynamic efficiency is inseparably linked to the concept of the entrepreneurial function, which is that typically human capacity to perceive profit opportunities that arise in the environment and to act accordingly to take advantage of them. This makes the task of discovering and creating new ends and means fundamental, driving spontaneous coordination to resolve market imbalances.

Moreover, this definition of dynamic efficiency proposed by Huerta de Soto coherently and appropriately combines Schumpeter’s idea of creative destruction with North's concept of adaptive efficiency.

Naturally, given the role of the entrepreneurial function, the institutions under which it develops are of vital importance. In this regard, both Douglass North and Jesús Huerta de Soto consider one of the key functions of institutions to be that of reducing uncertainty.

So, while North presents them as a set of humanly devised constraints that structure social interaction in a repetitive manner, Huerta de Soto considers that these institutions, conceived by human beings, emerge spontaneously from a process of social interaction without being designed by any single individual, and that they reduce uncertainty in the market process.

As Roy Cordato points out, the appropriate institutional framework is one that favours entrepreneurial discovery and coordination. Accordingly, within this framework, economic policy should aim to identify and remove all artificial barriers that hinder the entrepreneurial process and voluntary exchanges.

Given the decisive influence of institutions on economic progress, this directs our attention to the importance of ethics, as societies that adhere to stronger moral values and ethical principles in support of institutions will be dynamically more efficient and will therefore enjoy greater prosperity.

Accordingly, the fundamental ethical problem is a search for the best way to foster entrepreneurial coordination and creation.

Therefore, in the field of social ethics, we conclude that conceiving human beings as creative and coordinating actors entails accepting axiomatically the principle that every human being has the right to appropriate the results of their entrepreneurial creativity.

So the private appropriation of the fruits of what entrepreneurs create and discover is a principle of natural law because if an author were unable to appropriate what they create or discover, their capacity to detect profit opportunities would be blocked, and the incentive to carry out their actions would disappear. Ultimately, the ethical principle just stated is the fundamental ethical foundation of the entire market economy.

So, what we've just demonstrated is that free enterprise capitalism is not only just but also efficient and also that it is the one that maximises growth.

[Full speech here]

RELATED: Here's Per Bylund at the latest Ludwig Von Mises conference explaining that it's entrepreneurs, not politicians, who change the world for the better.

Thank you Adam Smith

It's a busy week. This week also marks the 250th anniversary of Adam Smith's Wealth of Nations, the first in-depth exploration and explanation of (in PJ O'Rourke's words) why some nations are prosperous and wealthy and other places just suck.In honour of the anniversary, here are several of Adam Smith’s most insightful observations:

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages. [The Wealth Of Nations, Book I, Chapter II]

It is the great multiplication of the productions of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people. [The Wealth Of Nations, Book I, Chapter I]

Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things. [Lecture in 1755, quoted in Dugald Stewart, Account Of The Life And Writings Of Adam Smith LLD, Section IV, 25]

It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. [The Wealth Of Nations, Book IV Chapter I]

By means of glasses, hotbeds, and hotwalls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expense for which at least equally good can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of claret and burgundy in Scotland? [The Wealth Of Nations, Book IV, Chapter II]

Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer. [The Wealth Of Nations, Book IV Chapter VIII]

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices…. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies, much less to render them necessary. [The Wealth Of Nations, Book IV Chapter VIII]

To widen the market and to narrow the competition, is always the interest of the dealers…The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution... It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it. [The Wealth Of Nations, Book I, Chapter XI]

It is the highest impertinence and presumption… in kings and ministers, to pretend to watch over the economy of private people, and to restrain their expense... They are themselves always, and without any exception, the greatest spendthrifts in the society. [The Wealth Of Nations, Book II, Chapter III]

There is no art which one government sooner learns of another than that of draining money from the pockets of the people. [The Wealth Of Nations, Book V Chapter II Part II] 

Every individual... neither intends to promote the public interest, nor knows how much he is promoting it... he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.
    Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. [The Wealth Of Nations, Book IV, Chapter II]

What improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. [The Wealth Of Nations, Book I Chapter VIII]

Mercy to the guilty is cruelty to the innocent. [From his 1759 work, The Theory of Moral Sentiments]

The man of system…is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it… He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it. [The Theory Of Moral Sentiments, Part VI, Section II, Chapter II]

"Since then, poverty has fallen to the lowest level ever recorded."

 

"While the share of people in extreme poverty has been falling since the 19th century, the total number didn’t begin to decline [at scale] until the late 20th century, when [communism collapsed and] rapid economic growth spread worldwide.

"Since then, poverty has fallen to the lowest level ever recorded."

~ post by Human Progress

The Chart of the Century, in context

"Imagine a horse race between Smith, Schumpeter, and Stupidity," begins economist Peter Boettke. Who wins?

The horse "Smith" is Adam Smith. He represents the gains from trade and division of labour about which Adam Smith spoke so well.

"Schumpeter" is the horse representing gains from invention, from new technology, from all the gains that innovation brings.

Together they drive the race forwards.

But "Stupidity" is the horse sponsored by the government, and trained by big-government worshipping economists. He bumps into the others, bites at their heels, and generally gets in their fucking way. 'Stupidity' represents every stupid idea, every stupid regulation—and all that insane tinkering with counterfeit credit as if it were the way to economic nirvana. 

He takes it all backwards.

We can see Leg One of that race below: Mark Perry's famous “Chart of the Century,” tracking the price of 14 items over the last quarter-century. 

It's pretty clear that when 'Smith' and 'Schumpeter' can run largely unhindered, then nearly everyone gets better off. Even if the change in average hourly wages is taken into account, all but five of the items tracked above give those two horses (and every wage-earner) a win.

It's only when 'Stupidity' is allowed a free rein that he starts to come out ahead. (And I'm fairly sure that an analysis using NZ data would show something very similar.)

Let's hope the lesson is clear?

It's a heatwave?

"It's like a heat wave

It's burning in my heart

I can't keep from burning

It's tearing me apart"

~ Martha and the Vandellas

TERMINOLOGY IS CHANGING. WHAT USED to be called "swamps" are now wetlands. Heavy rain is now an "atmospheric river." A violent storm is now a "weather bomb" And extreme and large-scale warming events in the ocean have been dubbed "marine heatwaves."

It's said that recent flooding in New Zealand—a "glimpse into the future of climate change"—is due to our present La Niña summer and an increase in these "marine heatwaves." First arriving in the summer of 2017/18, they are now said to be "commonplace."

One of these "new" marine heatwaves helped cause the warm summer of 2018/19. Rainfall that summer "was below normal (50-79% of the summer normal) to well below normal (<50 % of the summer normal) in Northland, Taranaki, Nelson, Tasman and the West Coast as well as parts of Marlborough, Manawatu-Whanganui, Otago and Southland. Above normal rainfall (>120% of the normal) was observed around Hawke’s Bay and parts of Gisborne. Rainfall was near normal elsewhere (80-120% of the summer normal rainfall)."

The new arrival combined with La Niña conditions to get the blame for the unseasonably hot 2017/18 summer. Rainfall that summer was "highly variable from month to month and heavily impacted by two ex-tropical cyclones during February. Summer rainfall in the South Island was above normal (120-149%) or well above normal (>149%) over Canterbury, Marlborough, Nelson, and Tasman, and near normal (80-119%) to below normal (50-79%) around Otago, Southland, and the West Coast. North Island summer rainfall was above or well-above normal around Wellington and much of the upper North Island, and near normal or below normal over remaining North Island locations including Taranaki, Manawatu-Wanganui, Hawke’s Bay, and Gisborne."

2022/23's summer was "a summer of floods and droughts, and very warm," with "a protracted marine heatwave that peaked during January." Cyclone Gabrielle of course arrived a month later when the Antarctic Oscillation "dipped negative."

Summer of 2023/24 was warm, with another marine heatwave and, for most regions, drier. The narrative of causation is already breaking down.

As it did nearly a century ago in 1934/35 when New Zealand experienced its hottest summer because of a massive warming events in the ocean. Or 1938. But this time the floods came in winter. 

SURROUNDED BY OCEAN AND WITH warm air and occasional cyclones brought down from the tropics, flooding is this country's most frequent form of natural disaster—and always has been.

Māori legend includes a story of a great flood. Tāwhaki, god of thunder and lightning, was almost murdered by his brothers-in-law. When he had recovered, Tāwhaki took his warriors and their families and built a fortified village on top of a mountain. Then he called to his ancestors – the gods – for revenge, and they let the floods of heaven descend. The earth was overwhelmed by the waters and the entire population perished. This was known as Te hurihanga i Mataaho (the overwhelming of Mataaho – one of the places that were destroyed). ...

Māori history tells of a pre-European flood in the Tūtaekurī area of Hawke’s Bay in which a party of 50 men, women and children were drowned when two streams rose. 

The early European settlers failed to realise the intensity of rainfall in New Zealand and how rapidly rivers could rise.  The New Zealand Company's very first settlers were dumped on the Hutt Riverside in Petone to begin building Britannia, their new town. It was only a matter of weeks before they discovered what a stupid idea this was, relocating after a few months of regular flooding to Thorndon.

The South Island’s broad gravel-bed rivers were particularly deceptive: they were usually shallow enough to wade across, but when in flood their currents were powerful. By 1870, just three decades after European settlers began arriving in large numbers, rivers had been responsible for 1,115 recorded drownings. Drowning became known as ‘the New Zealand death’.

The greatest flood ever observed on the Clutha River Mata-Au, New Zealand’s largest river in catchment area and volume of flow, occurred in 1878. It was the result of a succession of weather systems bringing in warm wind and rain, which melted the winter snow cover. At the height of this flood, more than 5,700 cubic metres of water poured down the lower reaches of the river every second. ... A 1938 account described the Clutha in flood:
[i]ts angry surface [was] strewed with dead horses and cattle, houses, bridges, furniture, timber and farmstacks. Some days the spring sun shone with a ghastly pleasantry on the devastated towns, while 100 miles away more heavy rain on the mountains was preparing still greater strength for the flood. ...

Twenty-one people were killed in the Kōpuawhara flood of 1938 – the largest number of fatalities from a 20th-century New Zealand flood. It is a sobering reminder of the dangers of building on low-lying land close to rivers.

A reminder we're still receiving.

And those tropical cyclones just keep arriving, as they did long before CO2 levels were rising. The fifty-four people who died in the 1968 Wahine disaster, for example, are one tragic reminder of that. That was Sub-Tropical Cyclone Giselle. And we've been through several alphabet's worth of cyclones since then, everything from Bola to Hola, and worse, to come around again to Gabrielle's letter 'G.'

And there have been many worse cyclones in the South Pacific over the centuries before human industry began. But they either didn't hit these islands, thank goodness, or there was no-one here to record them.

WHILE THE NARRATIVE WAS breaking down on the ground in 2023, it was nonetheless ramping up in the world of climate modelling. A worldwide study (above) published in 2025 claimed '2023 Marine Heatwaves [Were] Unprecedented and Potentially Signal a Climate Tipping Point.' It's that study generally referenced by warmists here. Its "breathless tone is familiar," says Anthony Watts ("new records"! "unprecedented in intensity, persistence, and scale"! "may portend an emerging climate tipping point"!) but its "underlying logic is seriously flawed."

But as Watts argues, "context matters. Particularly in climate, which has cycles that span millennia, not just decades."

The foundational flaw in this study is its timescale. The research relies on satellite data beginning in 1982. That gives us about 40 years of observational history, which is virtually nothing in terms of Earth’s climate system. Prior to satellite coverage, comprehensive, high-resolution global measurements of sea surface temperatures simply didn’t exist. Claims of “unprecedented” events must be framed within that very limited context. As I’ve said before, declaring a “record” based on such a short window is like calling a coin flip streak a “trend” after four tosses.

Ocean temperatures fluctuate naturally over decadal, centennial, and even millennial scales. Our current observational capacity doesn’t cover even half of one oceanic oscillation cycle, such as the Pacific Decadal Oscillation (PDO), which paleoclimatology suggests runs as long as 50-70 years. To suggest a climate “tipping point” based on this short dataset is not just premature—it’s scientifically irresponsible.

Yet here we are. The marine heatwave cycle in the Southwest Pacific Ocean (our area) has an estimated return period of 141 years. Yet the longest-running evidence for this, says the study, is the coastal station in Leigh, whose records go back just 57 years.

Not just short on temporal context, but also on geographic. The climatic change is said to be global, due to increased global CO2, yet "the authors cite “region-specific drivers” for each major marine heatwave." 

In the North Atlantic, enhanced shortwave radiation and a shallower mixed layer were culprits. [Down here] in the Southwest Pacific, the heat was attributed to reduced cloud cover and increased advection. The Tropical Eastern Pacific was influenced by oceanic advection.

Notice anything? These aren’t unified, global changes due to increased CO2. They are local, meteorological, and oceanographic phenomena—exactly the kinds of natural variability we should expect in a dynamic system. The fact that these local causes are acknowledged undercuts the paper’s own argument for a singular, global cause rooted in greenhouse gas emissions.

Bad science and an unjustified extrapolation is the gist of this study and press release. Perhaps the most egregious leap comes in the suggestion that the 2023 marine heatwaves might represent a “tipping point” in the Earth’s climate system. The term “tipping point” implies a sudden, irreversible shift—a planetary point of no return. But what evidence is there for this? The authors provide none beyond the temperature anomalies themselves and vague references to mixed-layer dynamics.

No historical precedent is given. No paleoclimatic comparisons are offered. No quantitative thresholds are defined. It’s all speculation dressed up in technical language.

Meanwhile, as carbon emissions have been rising over this last century, rainfall has been going down, not up.

The highest frequency of global-scale extreme rainfall events occurred from 1960-1980 − when there were concerns about cooling. 

Since then, the frequency and intensity of rainfall events have “decreased remarkably” (Koutsoyiannis, 2020).

ALSO DECREASING—AND DECREASING REMARKABLY—is the world's s number of climate-related deaths.

One reason it's worth remarking is that severe weather events globally are themselves generally either decreasing or showing no particular trend. And that's not just me and climate scientists like Roger Pielke Jr saying that. It's the IPCC, who find no trends in flooding globally; no long-term trends in meteorological or hydrological drought; no upward trend either in so-called atmospheric rivers, and no upward trend in landfalling hurricanes or tornadoes either in the US or globally. 

None. 

And the US Govt, whose official metric records a general decrease in heatwaves since the 1930s -- or the international insurance industry, who record a decline in both US and European disaster-related losses. And the World Bank agrees. 

Meanwhile, even as alarmists talk about sea level rise inundating coastlines in the near future, the US National Oceanic and Atmospheric Administration (NOAA) records that ongoing sea level rise since 1880 amounts to only 240mm, i.e., just 17mm per decade -- measurable, but steady, and not accelerating -- and recent research shows many coastlines worldwide to be prograding rather than retrograding (i.e., shifting seaward) and at a globally-averaged rate of 260mm per year, reducing even this slow but steady threat. And the Department of Atmospheric Science at CSU records that cyclone frequency in the South Pacific (the very reason we're here talking about this stuff) has, since 1980, been declining. (Which is welcoming considering so many more people are living and building in these otherwise threatening places, in part because governments have foolishly absorbed so much of the financial risk.)

But the other main reason for climate-related deaths to fall so remarkably is the very thing warmists decry so loudly and so monotonously, i.e.,human industry, which is the very thing that keeps folk safer from the dangerous weather events that do occur. 

It was the Netherlands' rising wealth, for example, that allowed them to build the dikes and dams that protected their sub-sea level provinces from flooding. And mortality from extreme heat in the US for example, as heat waves have recently kicked up and more and more people have moved to live in desert regions, has fallen pretty much all over the country over the past 50 years. In this case, it's because of things like air conditioning and better medicine that more and more people can afford.

And in the general case, as Bjorn Lomborg explains is succinctly, it's "because richer and more resilient societies are much better able to protect their citizens." 

The climate catastrophists don’t want you to know this [points out energy advocate Alex Epstein] because it reveals how fundamentally flawed their viewpoint is. They treat the global climate system as a stable and safe place that we make volatile and dangerous. In fact, the global climate system is naturally volatile and dangerous—we make it liveablethrough development and technology—development and technology powered by the only form of cheap, reliable, scalable reliable energy that can make climate liveable for 7 billion people.
As the climate-related death data show, there are some major benefits—namely, the power of fossil-fuelled machines to build a durable civilisation highly resilient to extreme heat, extreme cold, floods, storms, and so on.

It's not just that GDP is correlated with fewer climate-related deaths and disasters, although it is; it's that the whole relationship between economic progress and human flourishing itself is actually causal. The richer and wealthier a society is, the better able it is to train the engineers and to raise the capital and to devise and build the infrastructure that allows human beings in all the many places on this fragile planet to master all the many things that nature is ready to throw at us.

And that's one phenomenon that really is global.

Here's Martha: