Following in the footsteps of John Maynard Keynes, many economists believe that we cannot fully trust a market economy, viewing it as unstable. They argue that without intervention, the market could fail and thus require government and central bank management to stabilize it. According to this view, spending is the engine of income generation, where one person's spending becomes another person's income. Therefore, during a recession, it is seen as the government's role to encourage more spending to stimulate economic growth.
However, this Keynesian perspective overlooks the issue of funding. Funding comes from prior production, meaning that for consumption to occur, goods must first be produced and saved. Using a simple example, if a baker makes ten loaves of bread and consumes two, the remaining eight loaves can fund the purchase of shoes from a shoemaker. This shows that consumption cannot drive growth on its own; instead, it notably depends on prior production and savings. Capital accumulation, which allows for further production and consumption, also relies on prior savings.
Introducing money does not fundamentally change the nature of funding; it merely facilitates the exchange of goods. Money itself is not consumable and does not replace consumer goods. While spending money can stimulate consumption, it does not guarantee real economic growth. Commonly, it is thought that the demand for goods is limited by the money supply, but in reality, it is shaped by consumer preferences and the available production. More goods can be demanded with increased production, not just more money.
Government does not create real wealth; it can only redistribute it by taxing wealth-generating individuals. Thus, when government spending increases, it can actually weaken the overall wealth-generating capacity in the economy. If private savings are adequate, they may support government activities alongside real wealth generation. However, if savings are inadequate, government spending can crowd out private investment and hinder growth.
Economic adjustments, often seen as negative events like recessions, are actually reallocations of resources according to consumer priorities after periods of market distortion due to mismanaged money and credit. Allowing free market operations typically yields better outcomes. Historical precedents, such as actions taken by Lenin, indicate that acknowledging market mechanisms can help avert economic disasters.
To remedy economic issues effectively, entrepreneurs should be allowed the freedom to allocate resources based on consumer demand. Thus, the best stimulus plan is to permit the market to function without interference. Contrary to popular belief, expansive fiscal and monetary policies do not help the economy; instead, they often prolong inefficient activities while draining resources from productive ones.
After years of poor monetary and fiscal management, the current economic situation cannot be improved by more easy money. A “do nothing” approach by the government and Fed can enable true wealth-generators to reorganize, save, produce, and exchange more effectively. This also means that unproductive entities would need to reorganize or diminish, aligning economic activities with consumer needs.
In conclusion, government spending and easy money policies from the Fed do not foster genuine economic growth. Instead of bolstering the economy, they may weaken its foundations. Should consumption alone suffice for economic growth, global poverty would already be eliminated. Past government and central bank intervention seemed to work due to prior private production and savings. Once these foundations weaken, the illusion of effectiveness vanishes, and aggressive government actions only exacerbate economic challenges. Without needing Keynesian interventions, the optimal approach is for both the government and Fed to cease meddling in economic processes.
https://mises.org/mises-wire/market-economy-inherently-unstable-or-government-culprit
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