Showing posts with label Productivity. Show all posts
Showing posts with label Productivity. Show all posts

Wednesday, 27 May 2026

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.

Saturday, 18 April 2026

"If you want to know the real meaning of work, read Frederick Douglass's account of his first time working as a free man."

"If you want to know the real meaning of work, read Frederick Douglass's account of his first time working as a free man.
    "After escaping slavery, his first job was loading coal onto ships. It was new, hard, dirty work. Here's how he describes it:
"'I was now my own master. It was a happy moment, the rapture of which can be understood only by those who have been slaves. It was the first work, the reward of which was to be entirely my own.
"'There was no Master standing ready, the moment I earned the money, to rob me of it. I worked that day with a pleasure I had never before experienced. I was at work for myself and my newly-married wife. It was to me the starting-point of a new existence.'
"Dirty, backbreaking work—and he describes it as rapture, pleasure, a new existence. 
    "Next time you struggle to find meaning in whatever it is you do for paid work, think of Frederick Douglass."
~ Gena Gorlin, quoting Frederick Douglass from his Autobiographical Writings

Monday, 30 March 2026

The fuel crisis delivers a chance for genuine political leadership


"New Zealand does not possess the people, the capital, or the institutional settings to maintain our first world status. We are moving from the bottom of the OECD to the top of the developing world.

"[It's a] problem [when] ... the price of construction is the highest in the OECD, more than double the average, and ... the cost of capital formation '…which covers machinery, equipment and construction -- is 70% above average in New Zealand and also the highest in the OECD.'

"Meanwhile, global rating agency Fitch confirmed [this] gloomy assessment by downgrading the outlook for New Zealand from dismal to hopeless. I am paraphrasing. They noted that our promised return to fiscal surplus is perpetually delayed due to weak economic growth and expenditure proving more persistent than anticipated. ...

"[T]his [fuel] crisis [however] represents a greater opportunity [for real leadership]. It is chance for the Prime Minister to explain that we cannot borrow our way out of every economic shock. That the path back to fiscal solvency and economic vitality lies not in leveraging the sliver of headroom on the Crown’s balance sheet to avoid addressing our structural deficiencies but in aggressively dealing with those deficiencies.

"I do not mean to diminish the real progress his administration has been achieved but the underlying structural issues of over-regulation and lax fiscal discipline mean all we are doing is slowing the rate of decline.

"Leadership is about telling the electorate what they do not want to hear but need to understand; and that extends well beyond the prospect of a temporary fuel shortage."

Wednesday, 18 March 2026

It's the mind that creates value


The 'Amazing Physics' account observes:

This is a 1000-gram [steel] bar. 

In its raw form [as a steel billet], it’s worth around $1.

If it’s turned into horseshoes, its value rises to about $100. 

If it’s made into sewing needles, its value jumps to roughly $500. 

If it’s crafted into watch springs and gears, it can be worth around $100,000. 

And if it’s transformed into precision laser components, like those used in lithography, its value can reach $10-50 million.

What gives escalating value to the simple raw material is the mind. It is the mind that transforms the value of a metal bar into the value of those horseshoes, needles, watch springs, and precision labour components. 

Have you ever looked for the root of production? Take a look at an electric generator and dare tell yourself that it was created by the muscular effort of unthinking brutes. Try to grow a seed of wheat without the knowledge left to you by men who had to discover it for the first time. Try to obtain your food by means of nothing but physical motions—and you'll learn that man's mind is the root of all the goods produced and of all the wealth that has ever existed on earth.

That was Ayn Rand, writing in answer to the question: "What is Capitalism?" 

Rand was almost unique in writing about the role of the mind in man's existence; about its role in invention and production and valuing. "It is the mind," her novel Atlas Shrugged illustrates, "that is the root of all human knowledge and values -- and its absence is the root of all evil."

Read more here, in two parts:

Thursday, 13 November 2025

The oxymoron of 'smart active government'

"[L]ast month [MBIE and MFAT issued a draft report asking] ‘How can we accelerate the growth of high productivity activities in the New Zealand.’ …

"It was the ‘accelerate the growth of high productivity activities’ that prompted me to look a little further: the focus apparently was not economy-wide productivity and policy settings but the sort of ‘smart active government’ stuff MBIE has long championed, involving clever officials and politicians identifying specific sectors to focus on and specific interventions to help those sectors. …

"On a day when the dysfunctions of our public sector were on particularly gruesome display it seemed even less appealing and persuasive than usual. In a month when the government had been a) buying a rugby league game, b) increasing (again) film subsidies, and c) subsidising expensive New Zealand restaurants (via the Michelin corporate welfare), all in the name apparently of 'going for growth. …

"[T]he draft report is unlikely to be any use to anyone looking for illumination rather than support (the old two uses of a lamppost line). … [T]here is a list of types of interventions that have been or are being used in [other] countries but no effort at all to assess what role (positive or negative) these interventions have played in contributing to medium-term productivity growth. It certainly isn’t impossible that some might have been helpful, some will almost certainly have been harmful …, and perhaps many will have just been ornamental or redistributive … 
 
"N]ot once in the entire document is there any suggestion of the possibility of government failure, capture etc.

"Then the draft report moves on to four domestic case studies … None of it seems to display any scepticism, only a sense that we (governments) haven’t been sufficiently focused or willing to persist with particular sector supports. … And the whole document ends with a question that shouldn’t even be being asked by government departments: ‘How might we identify higher productivity and growth potential?’ …

"[T]heir mindset and fairly shallow analysis in documents like this helps provide cover for governments more ready to paper over symptoms, toss out some cash to favoured firms/sectors, and avoid insisting that the hard structural issues are identified and addressed).

"[Yet] this sort of stuff helps keep lots of officials busy and feeling useful."

Monday, 10 November 2025

"Since wealth is the only thing that can cure poverty..."

"Since wealth is the only thing that can cure poverty, you might think that the left would be as obsessed with the creation of wealth as they are with the redistribution of wealth. 
"But you would be wrong."
~ Thomas Sowell from bis 2006 column 'Political left has no interest in creating wealth' [hat tip Ira P]

Wednesday, 29 October 2025

Finding "the meaning of life" in dirty work

"Howard Roark’s bold claim in [the novel] The Fountainhead [is] that “the meaning of life” is “your work. ...

"[P]opular culture[however] reflect widespread attitudes about work: it’s not fun, is at best useful for paying the bills and funding more enjoyable activities, and should be avoided if at all possible ...

"It’s easy for those who live in industrialised countries and cities to picture suits and ties, paycheques, uniforms, store shelves laden with goods, and rush-hour commuter traffic when thinking about work. The trappings of complex market societies direct our focus in the realm of work to making and spending money. However, whether Eve plucks a piece of fruit from a tree or John Locke imagines gathering acorns from the woods, ultimately all labour—physical and intellectual—is first of all about producing in order to live. As Ayn Rand puts it, 'a man works in order to support his own life,' using his mind and effort to solve 'the problem of survival.' ...

"[Mike Rowe's TV series] 'Dirty Jobs and Somebody’s Gotta Do It' brought hundreds of examples of sooty, grimy, sweaty people—who were also happy, flourishing, and paid well—to millions of television screens for well over a decade. Some, like Les Swanson, even chose to leave the white-collar job of guidance counsellor for a career in cleaning septic tanks. 

"Rowe noticed that folks like Swanson 'seemed to be better balanced and happier than most of the people [he] knew,' and asked, '[W]hat in the world do these people know that the rest of us don’t?' In an inversion of a seeker’s stereotypical trek to the top of a mountain to ask a cross-legged sage about the secret to a happy and meaningful life, Rowe put the question to Swanson while helping him 'suck . . . the shit out of people’s septic tanks.' Swanson’s response? 'What came first was the fact that nobody was doing this. What came second was my own, hardheaded commitment to be very good at it. And then, I did the thing that is the hardest thing to do. And that is figure out how to love something that you didn’t think you did.'

"Swanson paid attention to the reality of the market to capitalise on an opportunity to fill a gap he perceived and was more than willing to become excellent at his new job. It’s in the last step he identifies of learning how to love work that was not in his original game plan—a reality for countless workers—that the key to meaning exists. Even those who do follow their passion and fortunately land work they love right out of the gate are not always sure that their work is meaningful. 

"They, too, need to wrestle with 'the meaning question.' So, what is meaningful work? And how can that make for a meaningful life? ...
"We can look to philosopher-mechanic Matthew B. Crawford for a more current embodiment and articulation of this insight. When reflecting on what being an electrician’s assistant meant to him (a job he held as a teenager and young man), he says:
'I never ceased to take pleasure in the moment, at the end of a job, when I would flip the switch. "And there was light." It was an experience of agency and competence. The effects of my work were visible for all to see, so my competence was real for others as well; it had a social currency. . . . Maybe another electrician would see it someday. Even if not, I felt responsible to my better self. Or rather, to the thing itself—craftsmanship has been said to consist simply in the desire to do something well.'
"Crawford’s thoughtful account of what the work of electrician’s assistant meant to him—which transfers to his approach to all of his current work as a philosopher and motorcycle mechanic—reflects insights offered by Rowe [and others] about what makes work both subjectively and objectively meaningful. ...

"[T]he spiritual values you produce through your work [summarises] Rand also 'make his life worth living.' ...

"[L]ife takes work and ... such work requires taking personal responsibility for building a character and self capable of working. It also involves consciously choosing to engage in meaningful work and finding ways to illuminate how that work provides meaning in your life. When these are all in place, alienation and other ills get crowded out. You can look with pride at your life that you stocked with values you created through your work, smile, and say, 'I made this!'

"When Rowe replaces 'follow your passion' with 'bring your passion with you,' that’s a call to bring your passion for living with you no matter where you go or what job you have. Whether you’re building houses or bridges, painting a canvas, or writing a book, you’re always busy with the work of building your life. Roark’s proclamation that 'the meaning of life” is 'your work' is thus not so startling after all."
~ Carry-Ann Biondi from her symposium paper 'Mike Rowe, Work, and Meaning in Life'

Monday, 29 September 2025

Have you been workslopped?

"A confusing contradiction is unfolding in companies embracing generative AI tools: while workers are largely following mandates to embrace the technology, few are seeing it create real value. Consider, for instance, that the number of companies with fully AI-led processes nearly doubled last year, while AI use has likewise doubled at work since 2023. Yet a recent report from the MIT Media Lab found that 95% of organizations see no measurable return on their investment in these technologies. So much activity, so much enthusiasm, so little return. Why?

"In collaboration with Stanford Social Media Lab, our research team at BetterUp Labs has identified one possible reason: Employees are using AI tools to create low-effort, passable looking work that ends up creating more work for their coworkers. On social media, which is increasingly clogged with low-quality AI-generated posts, this content is often referred to as 'AI slop.' In the context of work, we refer to this phenomenon as 'workslop.' We define workslop as AI-generated work content that masquerades as good work, but lacks the substance to meaningfully advance a given task.

"Here’s how this happens. As AI tools become more accessible, workers are increasingly able to quickly produce polished output: well-formatted slides, long, structured reports, seemingly articulate summaries of academic papers by non-experts, and usable code. But while some employees are using this ability to polish good work, others use it to create content that is actually unhelpful, incomplete, or missing crucial context about the project at hand. The insidious effect of workslop is that it shifts the burden of the work downstream, requiring the receiver to interpret, correct, or redo the work. In other words, it transfers the effort from creator to receiver. [Just as over-use of acronyms will — Ed.]

"If you have ever experienced this, you might recall the feeling of confusion after opening such a document, followed by frustration—'Wait, what is this exactly?'—before you begin to wonder if the sender simply used AI to generate large blocks of text instead of thinking it through. If this sounds familiar, you have been workslopped."
~ Kate Niederhoffer, Gabriella Rosen Kellerman, Angela Lee, Alex Liebscher, Kristina Rapuano & Jeffrey T. Hancock from their study summary: 'AI-Generated “Workslop” Is Destroying Productivity' [hat tip Gary Marcus]

Friday, 13 June 2025

Less with more

 The OECD measured New Zealand's recent productivity growth against the OECD average.

We're not even average.

... aaaand here, by comparison, is New Zealand's growth in employment:

That's the measure of how many more folk it took to do that little bit more.

So we've had decent growth.

Just not in productivity.

Is this a measure of how much we're restrained here by regulation and the incessant whine of the grey ones in our ear?

A lack of capital?

Or is it something wrong with our nous?

What do you think ... ?

[Hat tip Eric Crampton]

* Yep, construction is an outlier. I'm not sure how productivity is measured here, but I imagine that's a reflection of how many more townhouses and apartments have been built in recent years, as opposed to stand-alone dwellings.

Friday, 30 May 2025

"New Zealand’s low wages can be blamed on low productivity, and low productivity can be blamed on poor regulation."

"New Zealand’s low wages can be blamed on low productivity, and low productivity can be blamed on poor regulation. To raise productivity, we must allow people to spend more time on productive activities and less time on compliance. ...
    "In a nutshell: If red tape is holding us back, because politicians find regulating politically rewarding, then we need to make regulating less rewarding for politicians ... "

~ David Seymour from his press release ' Bill for transparent principled lawmaking to be read in the House'

Saturday, 22 March 2025

University education has an entirely undeserved higher status than industry training

"Nearly twice as many New Zealand school leavers fall into unemployment as undertake workplace-based learning. ...
    "In Germany, approximately half of all school leavers participate in the country’s ‘dual training’ apprenticeship system. In contrast, in New Zealand, only 6% of school leavers undertake workplace-based training ...
    "This represents a significant waste of human capital and opportunity, especially considering that industry training leads to many high-demand vocations.
    "The root of the problem is cultural. University education has higher status [entirely undeserved - Ed] than industry training among parents, schools, teachers, and students themselves.
    "The status disparity is exacerbated by the strong orientation of schools toward university preparation as the default setting. ...
    "If clearer pathways from school to industry training were established as a serious option for all students, esteem for industry training would gradually improve."
~ Michael Johnston from his report 'Trade Routes: Charting New Pathways from Secondary School to Industry Training'. Listen here to a podcast with Johnston discussing the report.

Monday, 24 February 2025

"The PM is right about the problem of our negative and utterly risk-averse culture. But changing our bureaucratic culture requires more than speeches."


"Prime Minister Christopher Luxon says he wants a bureaucracy that says 'yes.' He is right to want that of course, but a lot of current rules would need to change. ...
    "New Zealand’s regulatory culture of “no” has become so pervasive that even the simplest reforms now spark fierce resistance. ... This reflexive negativity illustrates a deeper problem. New Zealand’s economy is being strangled by excessive caution and regulatory overkill.

    "Some numbers are telling. Property developers now spend $1.29 billion annually navigating consent processes. ...
    "The Port of Tauranga’s expansion would boost exports for forestry, kiwifruit and dairy. Yet bureaucratic delays have stalled the project for years. Eden Park operates under council-imposed event caps while New Zealanders fly to Australia for concerts in packed stadiums.
    "Even our tax system seems designed to say 'no.' When businesses invest in new machinery to boost productivity, New Zealand’s depreciation provisions are among the most restrictive in the OECD. ....
    "Similar patterns emerge in construction. .... The building code and certification process favour established products and make it slow and expensive for new or imported products to gain approval. Even common materials used safely for years in Australia or Europe face lengthy and costly verification processes here. The result is higher costs for builders and homeowners alike.
    "Meanwhile, the banking sector faces its own regulatory headwinds. ...

"Reform need not be complex. Sometimes it simply means removing bureaucratic obstacles. Trust regulators in other developed countries rather than retesting everything here. ... But ... every change, no matter how sensible, must overcome a chorus of imagined risks and hypothetical problems. ... 
    "Those objecting to developments need to be confronted with the lost value to the community of getting their way.
    "The Prime Minister is right about the problem of our negative and utterly risk-averse culture. But changing our bureaucratic culture requires more than speeches. It demands sustained effort to identify and eliminate unnecessary rules, requirements and restrictions. ...
    "The alternative is continued decline."

Wednesday, 19 February 2025

"In the Minister’s words, 'Going For Growth outlines the approach the Government is taking to turbo-charge our economy.' Yeah right.


 

"The Minister [of Finance] also used her speech to announce the launch of a Going for Growth website complete with a 44 page document (15 of which are photos and covers, and another 9 are lists of things (being) done) titled 'Going for Growth: Unlocking New Zealand’s Potential' – in the Minister’s words, 'Going For Growth outlines the approach the Government is taking to turbo-charge our economy.'
    
"Yeah right.

"Now, to be clear, there are some (mostly small) useful things the government has done in the area of economic policy. There are also some (fewer in number) overtly backward steps ... and some important areas where the government has so far failed to act at all .... There is [however] just nothing in what the Minister said, or in what the government has done (or has concretely indicated it will shortly do), that comes even close to being likely to 'turbo charge' the economy.

"It isn’t even clear that either the Minister or her Treasury advisers has anything close to a compelling model and narrative about how we got into the longer-term productivity mess, let alone how we might successfully get out of it (if any politicians really cared enough to want to do so).

"We are told ... that 'Leaders around the world are being compelled to act more boldly than they have for several decades.' But there isn’t much sign of it ..."

"We are told that 'New Zealand’s low capital intensity is a key driver ... of our poor productivity performance.' No one disputes that business investment as a share of GDP has been low in New Zealand for a long time ... So the capital stock per worker is, in some mechanical sense, quite low. ...

"But ... the mentality is all wrong. Low levels of capital intensity are at best seen as symptom not as any sort of cause or 'driver' of productivity growth failures economywide. New Zealand has never had a particularly problem attracting finance ... And we should assume that, on average, firms and potential investors are responding rationally, and even optimally on average, to the opportunities they face.

"So the issue is not that firms are failing to use enough capital in their production processes – they are most likely doing what is best for them – but that, having regard to all the other constraints (taxes, FDI rules, RMA regimes, other bits of regulation, real exchange rates) there just aren’t that many attractive projects here in New Zealand. A highly successful New Zealand economy would be likely to be more capital intensive (and generate higher wages), but focusing on the capital intensity or otherwise is the wrong lens with which to look at the problem.

"Firms and investors respond to opportunities, and sometimes (often) governments get in the road and make investment ... unattractive."


~ Michael Reddell from his post 'Willis and Rennie speaking'

Thursday, 17 October 2024

"Though it's tempting to [always] blame the government for getting in the way of business, there's a lot about Kiwi business that is about getting in the way of itself."


"[T]hough it's tempting to [always] blame the government for getting in the way of business, there's a lot about Kiwi business that is about getting in the way of itself. ... The Mood of the Boardroom Survey & recent remarks by some of this nation's CEOs reflect on the (dubious) quality of New Zealand's boardrooms more than anything else. Namely that most are woke & weak. ...
    "NZ's Big Corporate CEOs will not themselves push productivity-enhancing reforms in their own firms ... They'd prefer, instead, to be Mr Nice Person. Look at the qualifications of many of them - the typical one being in Accounting. Other than that, its law. Lawyers often get on Boards because Kiwi firms want someone to help with compliance - not a person with imagination about where the future of the company should be. ...
    "Before the Productivity Commission was de-commissioned, it identified lack of 'managerial capability' as a contributor to our low productivity. ... Many of our CEOs & Boardrooms are not capable. ... The staff can't make up for a boss who is the wrong boss. ... "

Monday, 30 September 2024

Ludwig von Mises: Capitalism's great defender



When Ludwig von Mises appeared on the economic scene, Marxism and the other socialist sects enjoyed a virtual intellectual monopoly — there was virtually no systematic intellectual opposition to socialism or defence of capitalism. Quite literally, the intellectual ramparts of civilization were undefended. What von Mises undertook, and which summarises the essence of his greatness, was to build an intellectual defence of capitalism and thus of civilisation.
On the 100th anniversary of his birth in 1881, his student George Reisman penned this tribute to one of capitalism's greatest defenders. . .

A Tribute to Ludwig von Mises on the Anniversary of his Birth

by George Reisman

September 29, 2024, is the one-hundred-and-forty-third anniversary of the birth of Ludwig von Mises, economist and social philosopher, who passed away in 1973. Von Mises was my teacher and mentor and the source or inspiration for most of what I know and consider to be important and worthwhile in these fields of what enables me to understand the events shaping the world in which we live. I want to take this opportunity to pay tribute to him, because I believe that he deserves to occupy a major place in the intellectual history of the twentieth century.

Von Mises is important because his teachings are necessary to the preservation of material civilization. As he showed, the base of material civilisation is the division of labour. Without the higher productivity of labour made possible by the division of labour, the great majority of mankind would simply die of starvation. The existence and successful functioning of the division of labour, however, vitally depends on the institutions of a capitalist society — that is, on limited government and economic freedom; on private ownership of land and all other property; on exchange and money; on saving and investment; on economic inequality and economic competition; and on the profit motive that institutions everywhere under attack for several generations.

When von Mises appeared on the scene, Marxism and the other socialist sects enjoyed a virtual intellectual monopoly. Major flaws and inconsistencies in the writings of Adam Smith and Ricardo and their followers enabled the socialists to claim classical economics as their actual ally. The writings of Jevons and the earlier Austrian economists Menger and Böhm-Bawerk were insufficiently comprehensive to provide an effective counter to the socialists. Bastiat had tried to provide one, but died too soon, and probably lacked the necessary theoretical depth in any case.

Thus, when von Mises appeared, there was virtually no systematic intellectual opposition to socialism or defense of capitalism. Quite literally, the intellectual ramparts of civilisation were undefended. What von Mises undertook, and which summarises the essence of his greatness, was to build an intellectual defence of capitalism and thus of civilisation.

Capitalism operates to the material self-interests of all

THE LEADING ARGUMENT OF the socialists was that the institutions of capitalism served the interests merely of a handful of rugged exploiters and monopolists, and operated against the interests of the great majority of mankind, which socialism would serve. While the only answer others could give was to devise plans to take away somewhat less of the capitalists’ wealth than the socialists were demanding, or to urge that property rights nevertheless be respected despite their incompatibility with most people’s well-being, von Mises challenged everyone’s basic assumption. He showed that capitalism operates to the material self-interests of all, including the non-capitalists the so-called proletarians. In a capitalist society, von Mises showed, privately-owned means of production serve the market. The physical beneficiaries of the factories and mills therefore are all who buy their products. And, together with the incentive of profit and loss, and the freedom of competition that it implies, the existence of private ownership ensures an ever-growing supply of products for all.

Thus, von Mises showed to be absolute nonsense such clichés as poverty causes communism. Not poverty, but poverty plus the mistaken belief that communism is the cure for poverty, causes communism. If the misguided revolutionaries of the backward countries and of impoverished slums understood economics, any desire they might have to fight poverty would make them advocates of capitalism.

Socialism means chaos

Socialism, von Mises showed, in his greatest original contribution to economic thought, not only abolishes the incentive of profit and loss and the freedom of competition along with private ownership of the means of production, but makes economic calculation, economic coordination, and economic planning impossible, and therefore results in chaos — because socialism means the abolition of the price system and the intellectual division of labour; it means the concentration and centralisation of all decision-making in the hands of one agency: the Central Planning Board or the Supreme Dictator.

Yet the planning of an economic system is beyond the power of any one consciousness: the number, variety and locations of the different factors of production, the various technological possibilities that are open to them, and the different possible permutations and combinations of what might be produced from them, are far beyond the power even of the greatest genius to keep in mind. Economic planning, von Mises showed, requires the cooperation of all who participate in the economic system. It can exist only under capitalism, where, every day, businessmen plan on the basis of calculations of profit and loss; workers, on the basis of wages; and consumers, on the basis of the prices of consumers’ goods.

Von Mises’s contributions to the debate between capitalism and socialism the leading issue of modern times are overwhelming. Before he wrote, people did not realise that capitalism has economic planning. They uncritically accepted the Marxian dogma that capitalism is an anarchy of production and that socialism represents rational economic planning. People were (and most still are) in the position of Moliere’s M. Jourdan, who never realized that what he was speaking all his life was prose. For, living in a capitalist society, people are literally surrounded by economic planning, and yet do not realise that it exists. Every day, there are countless businessmen who are planning to expand or contract their firms, who are planning to introduce new products or discontinue old ones, planning to open new branches or close down existing ones, planning to change their methods of production or continue with their present methods, planning to hire additional workers or let some of their present ones go. And every day, there are countless workers planning to improve their skills, change their occupations or places of work, or to continue with things as they are; and consumers, planning to buy homes, cars, stereos, steak or hamburger, and how to use the goods they already have for example, to drive to work or to take the train, instead.

Yet people deny the name planning to all this activity and reserve it for the feeble efforts of a handful of government officials, who, having prohibited the planning of everyone else, presume to substitute their knowledge and intelligence for the knowledge and intelligence of tens of millions. Von Mises identified the existence of planning under capitalism, the fact that it is based on prices ( economic calculations ), and the fact that the prices serve to coordinate and harmonise the activities of all the millions of separate, independent planners.

He showed that each individual, in being concerned with earning a revenue or income and with limiting his expenses, is led to adjust his particular plans to the plans of all others. For example, the worker who decides to become an accountant rather than an artist, because he values the higher income to be made as an accountant, changes his career plan in response to the plans of others to purchase accounting services rather than paintings. The individual who decides that a house in a particular neighborhood is too expensive and who therefore gives up his plan to live in that neighborhood, is similarly engaged in a process of adjusting his plans to the plans of others; because what makes the house too expensive is the plans of others to buy it who are able and willing to pay more. And, above all, von Mises showed, every business, in seeking to make profits and avoid losses, is led to plan its activities in a way that not only serves the plans of its own customers, but takes into account the plans of all other users of the same factors of production throughout the economic system.

Thus, von Mises demonstrated that capitalism is an economic system rationally planned by the combined, self-interested efforts of all who participate in it. The failure of socialism, he showed, results from the fact that it represents not economic planning, but the destruction of economic planning, which exists only under capitalism and the price system.

Competition under capitalism is of an entirely different character than competition in the animal kingdom

VON MISES WAS NOT primarily anti-socialist. He was pro-capitalist. His opposition to socialism, and to all forms of government intervention, stemmed from his support for capitalism and from his underlying love of individual freedom, and his conviction that the self-interests of free men are harmonious indeed, that one man’s gain under capitalism is not only not another’s loss, but is actually others’ gain. Von Mises was a consistent champion of the self-made man, of the intellectual and business pioneer, whose activities are the source of progress for all mankind and who, he showed, can flourish only under capitalism.

Von Mises demonstrated that competition under capitalism is of an entirely different character than competition in the animal kingdom. It is not a competition for scarce, nature-given means of subsistence, but a competition in the positive creation of new and additional wealth, from which all gain. For example, the effect of the competition between farmers using horses and those using tractors was not that the former group died of starvation, but that everyone had more food and the income available to purchase additional quantities of other goods as well. This was true even of the farmers who lost the competition, as soon as they relocated in other areas of the economic system, which were enabled to expand precisely by virtue of the improvements in agriculture. Similarly, the effect of the automobile’s supplanting the horse and buggy was to benefit even the former horse breeders and blacksmiths, once they made the necessary relocations.

In a major elaboration of Ricardo’s Law of Comparative Advantage, von Mises showed that there is room for all in the competition of capitalism, even those of the most modest abilities. Such people need only concentrate on the areas in which their relative productive inferiority is least. For example, an individual capable of being no more than a janitor does not have to fear the competition of the rest of society, almost all of whose members could be better janitors than he, if that is what they chose to be. Because however much better janitors other people might make, their advantage in other lines is even greater. And so long as the person of limited ability is willing to work for less as a janitor than other people can earn in other lines, he has nothing to worry about from their competition. He, in fact, outcompetes them for the job of janitor by being willing to accept a lower income than they. Von Mises showed that a harmony of interests prevails in this case, too. For the existence of the janitor enables more talented people to devote their time to more demanding tasks, while their existence enables him to obtain goods and services that would otherwise be altogether impossible for him to obtain.

He showed that the foundation of world peace is a policy of laissez-faire both domestically and internationally

ON THE BASIS OF such facts, von Mises argued against the possibility of inherent conflicts of interest among races and nations, as well as among individuals. For even if some races or nations were superior (or inferior) to others in every aspect of productive ability, mutual cooperation in the division of labour would still be advantageous to all. Thus, he showed that all doctrines alleging inherent conflicts rest on an ignorance of economics.

He argued with unanswerable logic that the economic causes of war are the result of government interference, in the form of trade and migration barriers, and that such interference restricting foreign economic relations is the product of other government interference, restricting domestic economic activity. For example, tariffs become necessary as a means of preventing unemployment only because of the existence of minimum wage laws and pro-union legislation, which prevent the domestic labor force from meeting foreign competition by means of the acceptance of lower wages when necessary. He showed that the foundation of world peace is a policy of laissez-faire both domestically and internationally.

In answer to the vicious and widely believed accusation of the Marxists that Nazism was an expression of capitalism, he showed, in addition to all the above, that Nazism was actually a form of socialism. Any system characterised by price and wage controls, and thus by shortages and government controls over production and distribution, as was Nazism, is a system in which the government is the de-facto owner of the means of production. Because, in such circumstances, the government decides not only the prices and wages charged and paid, but also what is to be produced, in what quantities, by what methods, and where it is to be sent. These are all the fundamental prerogatives of ownership. This identification of socialism on the German pattern, as he called it, is of immense value in understanding the nature of present demands for price controls.

Von Mises showed that all of the accusations made against capitalism were either altogether unfounded or should be directed against government intervention

VON MISES SHOWED THAT all of the accusations made against capitalism were either altogether unfounded or should be directed against government intervention, which destroys the workings of capitalism. He was among the first to point out that the poverty of the early years of the Industrial Revolution was the heritage of all previous history that it existed because the productivity of labour was still pitifully low; because scientists, inventors, businessmen, savers and investors could only step by step create the advances and accumulate the capital necessary to raise it. He showed that all the policies of so-called labour and social legislation were actually contrary to the interests of the masses of workers they were designed to help — that their effect was to cause unemployment, retard capital accumulation, and thus hold down the productivity of labour and the standard of living of all. 

In yet another major original contribution to economic thought, he showed that depressions were the result of government-sponsored policies of credit expansion designed to lower the market rate of interest. Such policies, he showed, created large-scale malinvestments, which deprived the economic system of liquid capital and brought on credit contractions and thus depressions. Von Mises was a leading supporter of the gold standard and of laissez-faire in banking, which, he believed, would virtually achieve a 100% reserve gold standard and thus make impossible both inflation and deflation.

I do not believe that anyone can claim to be really educated who has not absorbed a substantial measure of the immense wisdom present in his works

WHAT I HAVE WRITTEN of von Mises provides only the barest indication of the intellectual content that is to be found in his writings. He authored over a dozen volumes. And I venture to say that I cannot recall reading a single paragraph in any of them that did not contain one or more profound thoughts or observations. Even on the occasions when I found it necessary to disagree with him (for example, on his view that monopoly can exist under capitalism, his advocacy of the military draft, and certain aspects of his views on epistemology, the nature of value judgments, and the proper starting point for economics), I always found what he had to say to be extremely valuable and a powerful stimulus to my own thinking. I do not believe that anyone can claim to be really educated who has not absorbed a substantial measure of the immense wisdom present in his works.

Von Mises’s two most important books are Human Action and Socialism, which best represents the breadth and depth of his thought. These are not for beginners, however. They should be preceded by some of von Mises’s popular writings, such as Bureaucracy and Planning For Freedom.

The Theory of Money and Credit, Theory and History, Epistemological Problems of Economics, and The Ultimate Foundations of Economic Science are more specialised works that should probably be read only after Human Action. Von Mises’s other popular writings in English include Omnipotent Government, The Anti-Capitalistic Mentality, Liberalism, Critique of Interventionism, Economic Policy, and The Historical Setting of the Austrian School of Economics. For anyone seriously interested in economics, social philosophy, or modern history, the entire list should be considered required reading. [All titles of von Mises currently in print can be ordered on this web site, or downloaded free here.]

Courage

VON MISES MUST BE JUDGED not only as a remarkably brilliant thinker but also as a remarkably courageous human being. He held the truth of his convictions above all else and was prepared to stand alone in their defence. He cared nothing for personal fame, position, or financial gain, if it meant having to purchase them at the sacrifice of principle. In his lifetime, he was shunned and ignored by the intellectual establishment, because the truth of his views and the sincerity and power with which he advanced them shattered the tissues of fallacies and lies on which most intellectuals then built, and even now continue to build, their professional careers.

It was my great privilege to have known von Mises personally over a period of twenty years. I met him for the first time when I was sixteen years old. Because he recognised the seriousness of my interest in economics, he invited me to attend his graduate seminar at New York University, which I did almost every week thereafter for the next seven years, stopping only when the start of my own teaching career made it no longer possible for me to continue in regular attendance.

His seminar, like his writings, was characterised by the highest level of scholarship and erudition, and always by the most profound respect for ideas. Von Mises was never concerned with the personal motivation or character of an author, but only with the question of whether the man’s ideas were true or false. In the same way, his personal manner was at all times highly respectful, reserved, and a source of friendly encouragement. He constantly strove to bring out the best in his students. This, combined with his stress on the importance of knowing foreign languages, led in my own case to using some of my time in college to learn German and then to undertaking the translation of his Epistemological Problems of Economics, something that has always been one of my proudest accomplishments.

Today, von Mises’s ideas at long last appear to be gaining in influence. His teachings about the nature of socialism have been confirmed in the first-hand observations of honest news reporters with extensive experience in Soviet Russia, such as Robert Kaiser, Hedrick Smith, John Dornberg, and Henry Kamm. They are being confirmed at this very moment by the actions of millions of angry workers in Poland.

Some of von Mises’s ideas are being propounded by the Nobel prizewinners F.A. Hayek (himself a former student of von Mises) and Milton Friedman. They exert a major influence on the writings of Henry Hazlitt and the staff of the Foundation for Economic Education, as well as such prominent former students as Hans Sennholz. Von Mises’s monetary theories permeate the pages of recent best-selling books on personal investments, such as those by Harry Browne and Jerome Smith. And last, but certainly not least, they appear to be exerting an important influence on the present President of the United States [Ronald Reagan], who has acknowledged reading Human Action and has expressed his admiration for it.

Von Mises’s books deserve to be required reading in every college and university curriculum not just in departments of economics, but also in departments of philosophy, history, government, sociology, law, business, journalism, education, and the humanities. He himself should be awarded an immediate posthumous Nobel Prize indeed, more than one. He deserves to receive every token of recognition and memorial that our society can bestow. For as much as anyone in history, he laboured to preserve it. If he is widely enough read, his labours may actually succeed in helping to save it.

* * * * 

Economist George Reisman was a student of Ludwig Von Mises, Pepperdine University Professor Emeritus of Economics, and the author of Government Against the Economy and Capitalism: An Economic Treatise [free download here, or buy it here or here]. His blog is here, his website here, and all his publications here. This essay originally appeared in 1981, on the occasion of Mises’s one-hundredth birthday, and appeared recently at the Mises Institute blog.

Wednesday, 25 September 2024

We're just not very productive ...

 ... or maybe we're short of capital, and over-endowed with regulation?

If there is one graph that symbolises the relative economic decline of NZ [says Robert MacCulloch], then I believe it is the one below. It measures NZ GDP per capita from 1990 to 2022, and compares it with all other nations in our Asia-Pacific region. ...


The scale is logarithmic for a reason. It gives you a measure of the percentage increases in GDP per capita in NZ compared to other nations. Every single year over this 35 year period, as far I can see from eye-balling the graph, with the exception of 1998-99, NZ's percentage rise in GDP per capita has been way lower than the average. When I was in my 20s in the 1990s, NZ's GDP per capita was about 6 times the average in the Asia-Pacific region. As of 2024, our GDP per capita is only about 2 times the Asia-Pacific average. Give it another decade or two, and there won't be much difference - the rest of Asia will be richer than us.

 

Monday, 12 August 2024

Productivity. In medals, at least.

 

Economist Robert MacCulloch notes that New Zealand's productivity growth, as measured in Olympic medals, is astonishing.

In the 1924 Paris Olympics, New Zealand won one bronze medal in total. It was in athletics for the 100m by Arthur Porritt. The race was later immortalised in the film, 'Chariots of Fire.' NZ had a population of around 1 million back then. Just over 100 years later, the tally is 10 golds, 7 silvers and 3 bronzes*, which after adjusting for population increase, is a huge rise. Meanwhile the United States won 45 Golds at the 1924 Paris Olympics, a tally which has plummeted down to around 37 at the Paris 2024 Olympics. So productivity in this sphere in New Zealand, compared to other countries, is phenomenal.

As you're probably aware, for all sorts of reasons New Zealand is shit at economic productivity. 


So why the difference?

On this MacCulloch suggests the reason for this is simple: In sports, unlike elsewhere, New Zealanders value meritocracy "where the fastest, highest, longest .. the best .. wins, regardless of other considerations?"

Kiwis clearly respond to merit being rewarded and produce amongst the finest output in the world when it is. Meanwhile in many other spheres in NZ, everything but meritocracy is winning the day. And productivity is paying the price.

In microcosm, he's probably right. And it's great to see these athletes triumph.

Mind you,  if I were to carp — and I will, even if it's a mite too soon — I can't help wondering how much taxpayers and ratepayers are dunned for all this nationalistic gold. You know, how many millions it's cost taxpayers per medal.

Consider, Arthur Porritt paid his own way to Paris in 1924. So that was zero-taxpayer-dollars** per gold then. And now? Well, I'd like someone somewhere to do the calculation ...


* I've updated the totals.

** Yes, it was pounds then. But using that there would be too confusing.

Thursday, 16 May 2024

" The 'vision' seems to be to catch Australia. Wouldn’t that be great?"


"[T]he Prime Minister announce[d] a bold new economic performance goal. ... His 'vision' seems to be that economic growth in New Zealand over the next 16 years will be so strong that we’ll have matched – perhaps even exceeded – what is on offer abroad. .... The 'vision' seems to be to catch Australia.
    "Wouldn’t that be great? ...
    "[Luxon] ... reminded us of his firm focus ('resolutely and unapologetically') on 'delivery.'
"So having set out a bold vision what is the Prime Minister offering as a policy programme to achieve it? It isn’t, after all, a small ambition. ...
    "The Prime Minister does lay out some substance on the [first-hundred] days [etc.] ... but to a first approximation what it mostly does is undo stuff the previous government did and restore something like the policy set of 2017. ... [but] we weren’t making any progress then either in closing gaps to the rest of the advanced world ...
    "[I]t is welcome, and sounds good, but…..we’ve heard lines about fixing the RMA before, including from the previous National government.
    "And that was sort of the problem with the entire economic strand of [the PM's] vision. It brought to mind ... [John Key's] 'concrete goal' [in 2008] of closing the income gap with Australia by 2025.' ... [I]t all made no difference whatsoever. ... the goal ... would have greatly benefited New Zealanders had it been seriously pursued. It wasn’t. ...
    "[T]here ha[s] been a lot of talk over the years. ... Who knows if Mr Luxon is any more serious about his 'vision' – laudable on its own terms – than John Key was about the 2025 goal. ... but Key and his government did nothing even close to being equal to the task to make it happen. There seems little basis – whether in [Luxon]’s speech, his campaigning last year, or anything about what his government is and isn’t doing now – for believing it will be any different this time. ...
    "It would be great to be proved wrong on that, because the people who pay the price of empty political aspirational rhetoric never matched by policy seriously equal to the task aren’t Prime Ministers, who eventually move on to gilded retirements, but the children and grandchildren of ordinary New Zealanders.
    "If, as he should be, the Prime Minister is serious about that aspiration of New Zealanders (net) coming home not just because mountains and beaches make it a nice place for many to live, but because economic performance means you don’t have to leave for a higher income, the concrete policies need to start matching the rhetoric.
    "In the PM’s own words, delivery matters."
~ Michael Reddell from his post 'Words and (in)actions'

 

Monday, 13 May 2024

"How did Hipkins, Ardern and Robertson manage to make Kiwis less productive over the six years they were in office?"

 

SOURCE: Productivity figures, NZ Treasury, The blue line comes from
the Treasury's Productivity Slowdown publication released this past
week, which uses updates from the latest Budget Policy Statement 2024.

"How did Hipkins, Ardern and Robertson manage to make Kiwis less productive over the six years they were in office? My suspicion is that they changed our culture. They divided the nation. They turned rich against poor, farmers against environmentalists, pro-vaccinators against anti-vaccinators. Neither of these sides ever deserved to be demonised. Yet that is what the past Labour government did. It took away the largely harmonious nature our society, which was one of NZ's great achievements & which had previously lifted us above the troubles of nearly every other nation. We lost our comparative advantage. Ironically, though 'kindness' was the mantra of the last government, it turned Kiwis mean. It rewarded people who had not put in the effort and did not have the achievements required to make them deserving of high office and top jobs. In doing so, it took away the reward for truly high-achieving NZ children, which made them feel they had to go overseas to be recognised for their talents, or drop-out.
    "My explanation for our currently plummeting productivity lies in a culture shift which has undermined out national unity and taken away the incentives to perform. Ardern, Robertson and Hipkins took away our pride in ourselves."

Friday, 22 March 2024

CNN Is Wrong. "Deflation" Is a Good Thing.

 


This guest post by Soham Patil is for everyone who still thinks that falling prices are a bad thing, and that rising prices are, somehow, good...

CNN Is Wrong. "Deflation" Is a Good Thing.

by Soham Patil

A recent video by CNN states that lower prices are bad for the economy, and that consumers must get used to the newer, higher prices. The video goes so far as to say, “We’re never going to pay 2019 prices again.” The video claims that deflation is responsible for a long list of problems including layoffs, high unemployment, and falling incomes. Americans should simply get used to paying more and more each year, they say, and be happy about it. Except, so-called "deflation" -- falling prices, caused by rising productivity rather than by monetary collapse — is actually good for consumers despite the contentions of inflation-supporting economists.

The conclusion that inflation is a good thing is reached by the mishandling of economic terms. While Austrian economics accepts that "inflation" when used accurately is the expansion of the money supply, mainstream economics contends that inflation is simply an increase in the general price level in an economy however it is caused. This skewed definition allows one to erroneously conclude that inflation causes prosperity by raising profits and incomes through higher consumer prices. The problem with this is that “price inflation” (rising prices) is also often caused by real inflation: i..e, the increase of the money supply. An increase in the money supply comes from the creation of additional units of money. The wealth of savers is diluted by the expansion of the money supply, which leads to the hardships many Americans face.

Further, while the video contends that the pandemic may have caused rising prices, it cannot explain the continual growth of prices even after the effects of the pandemic have subsided. The pandemic is not responsible for the continual trend of increasing prices; the growth of the money supply is.

Figure 1: The M2 in the United States, 1959–2024

While the money supply of US dollars has increased steadily over the past few decades, a significant jump can be seen after 2019 when the Federal Reserve’s expansionary monetary policies caused a great rise in the money supply. This growth, uncompensated by additional production due to the pandemic, caused the price inflation that many now blame solely on the pandemic. The truth is that if the pandemic were the cause of prices rising a significant amount, the absence of the pandemic should account for a proportionally drastic deflationary period afterward. This never occurred, and thus the money supply paints a more honest picture of inflation than any index of a collection of prices ever could.

Rising prices are obviously troublesome for both consumers and producers (everyone faces rising costs). By contrast, deflation (falling prices) is often a good thing. "Deflation" in simple terms simply means that the same unit of money is worth more today than it was yesterday. Consumers thus can buy more today than they could yesterday. Instead of actively being impoverished during conditions of rising prices, during times of gently falling prices consumers would instead be made richer. There are two contrasting ways that we might see falling prices: when productivity increases faster than the money supply (a very good thing), or when the money supply collapses after a failed inflationary boom (almost always a bad thing). Unfortunately, both good and bad are tarred with the same semantic brush.

The reason many economists are quick to champion inflationary booms as somehow creating prosperity is because central banks have previously used expansionary monetary policies to temporarily boost the economy by increasing aggregate demand. Several of these policies, often specifically lowering interest rates, cause a boom-bust cycle. When the money supply is expanded and cheap credit is abundant, firms are able to take on ambitious projects that they may not have been able to previously. Malinvestment results from the unsustainable credit expansion created by extremely low interest rates. There is greater demand for the factors of production, and an increase is seen in conventional metrics of economic growth such as gross domestic product.

During the process of malinvestment, an increase in employment occurs due to the firms having access to cheap and easy credit, allowing for greater business spending. However, when firms lose access to cheap and easy credit due to the central banks having to prioritise cutting inflation, jobs are lost. These job losses are not the fault of the deflation but rather of the malinvestment during the false economic booms. Without malinvestment and inflation, resources would have been invested in more-profitable endeavours, making better use of these resources.

Artificially cheap credit causes a misallocation of resources by skewing price information. Eventually, a bust must follow the boom. In this period, deflation often occurs due to market actors coming to more-realistic valuations of the factors of production. After these realistic valuations come about, consumers are able to pay less for their goods and services . . . at least until the central bank causes the next boom-bust cycle.

In conclusion, it would be wrong to pinpoint deflation as a potential issue for the economy. To do so would be to conflate the cause and effect of how money supply affects an economy. Contrary to CNN’s video, the Federal Reserve throughout its history has not helped the cause of consumers, evidenced by the exponential growth of prices since its foundation.

* * * * 


Soham Patil is a high school senior at Symbiosis International School. He is passionate about Austrian Economics and Philosophy.
 
His post first appeared at the Mises Wire.