Saturday, December 7, 2013

My Gedankenexperiment

You know what I fucking hate? I hate it when people say this to me: "We have to spend to grow the economy; that's how an economy grows." You don't understand, I really, really, really, really, really hate hearing that statement. Spending money makes an economy grow? I'm sure people will say, "But, of course," and then back it up with spending creates demand, and blah, blah, blah. If spending grows the economy, then let's have a thought experiment.

Let's say 101 people are traveling, by plane, with an enormous supply of paper and a printing press. They're on their way to show the United States government a new, great way to print more money. As luck would have it, the plane crashes on a deserted island and all of the people, paper, and printing press survive the crash.

One of the people decides that they will form a new country with a benevolent government with economic equality for all, where poverty and greed no longer exist. The person is elected president of the new government and their first act as president is to give everybody else a job in the new government; their second act is to print enough money, (they call it Islanders), to give all 101 people $300,000.00.

Well, the people have the money to spend, so, there's that demand, but how are they going to buy food, beverages, clothes, houses, medical care, or vehicles? An intelligent person might say, "Trade with another country for those things." Sounds great! One problem. The only money these people have is their currency, and no other country would accept it if that country cannot purchase on invest anything in this new country.

Is this a tough thought experiment? Not at all. The super intelligent person will realize that these people have to produce something first in order to demand something else. If they do that, then they can trade with each other as well as foreign countries. So, no, it's not spending that creates demand that grows an economy; it's production that creates demand that grows an economy.

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