From basic principles, economic growth comes from several key areas:
1) Dividing labour so we're not all doing the same task at the same time
2) Specialising in that which we have a passion/talent for.
3) Introducing more capital into the production process (this makes it more long-winded before it reaches the consumption stage).
Then we get a bit broader - what encourages such developments? Freedom to trade, the rule of law, and a pro-culture business. Without these three, economic growth is thwarted either by government interventions and predations, legal uncertainties, and a culture that despises wealth creation.
When an economy sheds the manacles of violence and anti-wealth, it begins to move forward and upward: people can get richer not on the backs of others' labour or through exploitation or violence, but through trading in the market place. Economic growth then enriches the rich and the poor (something that even Karl Marx accepted but which has yet to filter into most people's consciousness).
Trading is fundamentally a win/win situation: when people trade their surpluses in the market, they benefit through the accumulation of stuff that they want. Through trade and profits, they can increase their ability to make money and attract wealth through leverage: Bob can build one house at a time with his crew, but if he expands his crew, they can get more jobs done as he rises to oversee more projects: he can become a housing developer. That is capitalism.
Capitalism is the introduction of more capital to give people leverage in what they do - this both increases the cash flow to them (when successful) and increases employment opportunities for people looking for jobs.
What is critical in this scenario is investment. To gain leverage, somebody must give up something somewhere to gain more in the future. In other words, they must pay the price today to get tomorrow's reward. From saving current funds, people can then invest to increase their own cash flow and thereby give themselves leverage through getting their money to work for them.
Investment is a sensitive action though. It is particularly sensitive to the general economic climate in which companies and individuals act. If the government proceeds on an inflationary path, the potential gains from future profits dwindle; if the government raises interest rates to protect its currency following its inflationary policies, it can pull up investment sharply. If the government taxes the return on successful investments, guess what? Investors become more reluctant to invest.
For an economy to develop healthily, it is critical that the economy is protected (constitutionally if politicians need it written down) from inflationist policies, whimsical legislation, and taxes on profits.
Without investment, the infrastructure of the country begins to deteriorate - repairs are left, machines break down, houses and roads begin to look shabby: future prosperity is slowly being undermined.
We see this in countries struggling in inflationary environments - superficial prosperity is created around the cities or particularly around the financial centres but is obviously not filtering out to other parts of the country. It is an unhappy sign that the distribution of wealth is being stretched between those who are enjoying the inflationary ride and those who are being hit by it - but one of the greatest threats to future prosperity is the undermining of investment that QE (printing money) has on the ability of firms to invest. It slowly strangles it - and with it, hope.
To return to healthy growth, central banks should stop inflating (devaluing) their currencies: indeed, a return to a hard monetary standard such as gold would obviate the need for central banks, and it would improve the ability for investors to put their money into productive enterprises that enrich us all.
No comments:
Post a Comment