If my company makes and sells 100 units of X, perfectly meeting demand, does making 100,000 make me an instant billionaire?

Of course not. Production doesn't fuel growth. In fact, acting on that belief just leads to a misallocation of resources. I.E. All the parts, materials, utilities and labor were used on this, but won't be getting paid.

It's supply and demand that drives the economy, most importantly increasing demand. The United States Economy of the early 1940's had, arguably, the greatest production of any country and any time, ever. Yet the economy didn't thrive. It stayed the same. Why? Simply put because they weren't making anything the US Citizen could or would buy.

Saying that production, no matter what the source, is the key to a growing economy is akin to saying that Spending is the key to a growing economy, no matter what the source of money is. The problem with that is neither production, or spending is free.

Simply put because there was no demand

Thanks man! If you can subscribe on itunes/sticher so you can get all my new episodes. I have a new one coming out on Tuesday I think you will like. "Why there should be NO minimum wage." :)

I agree with most of what you have to say here but I just disagree on one small part. When you mention that money changing hands drives the economy up. That logic says that it's spending and "demand" that create economic growth. But it's not. It is production that is key. People can change money all they want but if there aren't anymore goods in the economy then there isn't any growth. "Real money" is a commodity. So when your trading with a commodity and they're more goods available then the consumer is better off and there is also more savings in the economy because of increases in production.

Keep up the good work Justin!

Robbie - Are you familiar with George Resiman's book Capitalism? He makes a reasonably clear case that lower money growth does not lead to a stagnation of the economy. If you care - his arguments get to the heart of the issue.

need a pre-publication feedback review of your forthcoming book? :-)

All real economic growth comes from investment of real, hard earned money. For example, a business can earn a million dollars. Basically, they can do one of three things. They can spend it. They can invest it in themselves. And lastly, they can stick it in a bank account. Remember, that every dollar spent in the economy changes hands a further 2.3x, thus driving up the economy. Also remember that when you stick money in a bank, and the interest rates are normal, the bank loans out this money to other people and businesses. Theoretically, if every person who got a loan from the bank turned around and stuck it in the bank, $1 can drive a further $9 into the money supply. But this is unrealistic to expect this much.

All of this is based on the assumption that every single dollar flowing through the economy was properly earned, properly spent, or properly loaned out.

The largest driver of booms and busts is the Federal Reserve. The Fed, a private profit-seeking institution, basically loans out money for a really low interest rate. Sometimes even a negative interest rate, basically giving money away. This money isn't real money as I highlighted in the assumption above.

This has several negative aspects. First is that it makes it economically unfeasible for Banks to loan out money to people and businesses. They can't possible shoulder the risk for such a low rate. Second, banks offer little to no interest rates for saving money there, meaning that any money saved loses "value" to inflation. Third, and most importantly, it means that there is a ton of "unearned" money flowing through the economy.

And since the laws of supply and demand reign supreme, even with money, the Federal Reserve Money creates a boom. The value of whatever good, service, commodity or item drives higher and higher until it either far out paces the increase in money supply, or people who are dealing in real money get shut out of the market entirely. Then the bust happens.


The problem comes after the bust. The Federal Reserve believes it has to fix the bust, and resort to methods that caused the boom in the first place. Thus begins the cycle.

Interestingly enough Rand is very clear that she is not defining a science of economics in Capitalism: The Unknown Ideal, but explaining the moral basis for Capitalism.

In my opinion there is no school of economics that is consistent with Rand's ideas, which is why she had such a tenuous relationship with so many free market economists. I am writing a book that I believe defines or at least points the way to a school of economics that is consistent with Rand.

genius is better description. 3 cheers for you and BJ. I have read the book more than once and some parts of it more than others.

You are spot on man! Government intervention begets more government intervention. The "problems" they try to solve causes more problems. Then the government is there to be the super hero to save the day to fix the "problems" they caused in the first place!

Ayn Rand is brilliant. You have no arguments from me there!

Not a problem man.

will do justin

Thanks, Justin... my mistake. ;^)

The ONLY policy a government can adopt that would not cause speculative booms and widespread collapse is to abstain from intervention. Unfortunately, that train left the station long ago (& not on the John Galt Line)

No comment I can make would be better than to refer all to Capitalism: The Unkown Ideal by Ayn Rand. For those unfamiliar with it, you're welcome. There's no better text or lecture on the topic. (note: I spent 4 years getting my education in Economics, and this one book was better than all of my studies prior to it)...
I'll still make comments, but Ayn's work is the best

khalling, I appreciate the welcome and really love this site! Also, thanks for the heads up. I will take a look at the article. If you get a chance take a look at my podcast, "The Power of the Entrepreneur in the economy." I talk about Atlas Shrugged and I think you will enjoy it.

justin, 1st, welcome to the Gulch. Also, in the future, you can respond to comments by hitting "reply" underneath the comment. let's people know you're talking to them, otherwise they may not get an email prompt. :) ok, here's the link:http://reason.com/blog/2013/08/12/qe-phooey-milton-friedman-thought-there

The link provided doesn't require itunes. It will play right on your browser.