Thursday, May 22, 2014

Money vs. Wealth: Which is the Cart, and Which is the Horse? Ask Gilligan

If you want to see the mental corruption that is the legacy of Keynesian economics, read the letter Trickle-down economics is a ruse by Charlie Hagel. Hagel sees money exchanged for a car, computer, or hot dog, and concludes that money is the economy's driver. Put enough money in consumers' hands, and material goods, services, and jobs will miraculously materialize. Like an animal or infant, Hagel's (and many, many highly influential people's) mental activity stops at this perception.

Hence, this astounding statement:

"Businesses have never created a job — consumer demand for goods and services creates jobs."


This statement wouldn't be worth a second of my time, except that the premise is the basis for the destructive economic policies of most governments.

I left these comments:

This is one of the most bizarre statements ever uttered. Try tying that premise to reality. How do you consume before producing? Try eating a loaf of bread before you bake it.

As any rational person knows, you (or somebody) have to earn money by productive work before you go to the store to spend it. For that, you need a job. Businesses create jobs. Jobs create consumer demand. Production precedes consumer demand. No production, no consumer demand. And if there are no entrepreneurs to organize the factors of production toward the creation of goods and services—create businesses—there is no consumer demand because there are no products and services for your money to buy and no jobs for which to earn the money that stands for your productive contribution.

Henry Ford didn't pay higher wages so his workers could afford to buy cars. He paid higher wages to attract the best qualified people, and he was able to pay higher wages because he increased the productivity of his workers through his productive genius. And why did he increase his workers' productivity? So he could lower the price of his cars and thus expand consumer demand for cars to the average person. Only increased productivity can increase wages, lower prices, and create demand. That is the province of the businessman, not the consumer. Henry Ford, not consumers, was the ultimate source of the consumer demand for his cars (and a lot of other products by other businesses).


And the source of productivity is human brain-power. If that weren't so, then stronger animals like gorillas and mules would be far more prosperous than humans. They aren't, because they don't have the brainpower—reason—to guide their muscle power. Only humans do. Business is the application of human brainpower to human labor, and thus the driving force of our prosperity. Trickle down? The benefits of successful businesses—the "one-percenters"—is a flood, not a trickle, that lifts the boats that carry the rest of us.


How does taxing (i.e., stealing) money from those who earned it and handing it over to a non-worker add to consumer demand? It doesn't. It just redistributes consumer demand. Only working creates consumer demand. How does forcing higher wages by legal fiat increase productivity? It doesn't. It just throws people out of work and kills entry-level jobs.


The businessman is the unsung hero of the advanced, middle class industrial economy. Meddling government is the enemy.


By the correspondent's own premises, his statement is self-refuting and proves my point. If consumption creates jobs, then the products that the consumers consume could not even exist for consumers to consume, because the jobs (and businesses) that produce the consumer goods haven't come into existence yet, being dependent for their creation on the consumer to begin with. A "consumer" with noting to consume is a logical absurdity. But that is precisely what the correspondent say creates jobs—consumers with nothing to consume. Got it?


But, let's go back to basics.

In a primitive, barter economy, the process is obvious. You exchange a good for a good—e.g., a loaf of bread for a dozen eggs. If you do not have that loaf, your barter partner doesn't hand you the eggs; the trade doesn't take place. Money facilitates trade and makes possible the division of labor economy. Money enables you to produce a good for one productive person, and, in exchange, receive a good from another, different productive person in a completely different transaction. How? Money is the medium of exchange that makes this possible. You hand your work product to the first person in exchange for money, which you then exchange for the work product of the second person. Multiply this type of trade by millions and billions, and you've replaced the primitive barter economy with an advanced industrial economy. 

But beneath it all, every single one of those untold numbers of transactions is just as much a trade of actual goods for actual goods as the bread-for-eggs barter transaction. The whole process begins with production. It has to. Otherwise, there is no need for money because, like the barter example, there is no trade.


If the egg producer accepts money in exchange for his eggs, it is only with the assurance that the bread (or someone else's work product) will be there for him to exchange his money for. Money not backed by work product is worthless, and the egg producer would have no reason to exchange his eggs for money. Without production, there's no money, because production, not money, is consumer demand. In my barter example, the baker's bread is his demand for the eggs, and the farmer's eggs are his demand for the bread. When you talk about "consumer demand", you're talking about a producer's work product, whether money is involved or not. Money represents your unconsumed wealth production (consumer demand). It is not, in and of itself, consumer demand.


But, according to the Keynesians, money comes before wealth, as if you could exchange nothing for something—a something that doesn't yet exist. Another correspondent asks me"what is production of goods and services if no one can pay for goods and services? You have the cart in front of the horse." Production of goods and services is the only thing that can pay for goods and services.


The Keynesians can learn a thing or two from the rag-tag gang living on Gilligan's Island.

Related Reading:

The Howell's Check is in the Mail

2 comments:

Peter Cresswell said...

Well said, Michael. I thoroughly enjoyed that.

Michael A. LaFerrara said...

Thanks!