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

OBushonomics vs. Gilliganomics

Three Cheers for "Trickle-Down!"

Yaron Brook on "Trickle-Down"—the Leonard Peikoff Show

OBushonomics vs. Gilliganomics

Since the economy peaked nearly three years ago, we have seen so-called “demand-side economics” resurface with a vengeance. It has been bi-partisan, with Presidents Bush and Obama enacting multiple “stimulus packages” starting with Winter 2008. Under this scheme, government intervenes to increase “consumer spending” (“demand” for goods and services), which is believed to spur economic growth.

OBushonomics – the latest incarnation of an old economic theory – keeps its grip on our government policy makers. In a July 19, 2010 “consensus statement”, GET AMERICA BACK TO WORK, 16 prominent economists called on the federal government to enact yet another "stimulus" package to spur "demand". They wrote:

"The urgent need is for government to replace the lost purchasing power of the unemployed and their families and to employ other tax-cut and spending programs to boost demand. Making deficit reduction the first target, without addressing the chronic underlying deficiency of demand, is exactly the error of the 1930s". (For my brief comments left at the site, click here.)

However, these and similar policies to “address” the alleged “chronic underlying deficiency of demand” do not, never have, and in fact never can work.

To understand why, let’s turn to some of history’s best economic experts.

Gilligan … the Skipper too … the millionaire, and his wife … the movie star … the professor and Mary Ann: Remember them? They were the crew and passengers of a sightseeing tour boat in the 1960s sit-com Gilligan's Island. They all knew better. When the SS Minnow ship-wrecked on that uninhabited island off of Hawaii in 1964, the hapless seven’s first thoughts were not: Let’s see, how can we create food and shelter out of nothing, without any effort on our part other than to simply “demand” it?

The primary theme of the show centered on the castaways’ efforts to get off of the island. Another major theme, though, portrays their efforts to fashion the items they needed to survive, out of the native raw materials. Their inventiveness ranged from the production of “simple everyday things, [to] stretches of the imagination” - it’s a sit-com, after all - but “stretches of the imagination” are a driving force of productive innovation.

But, it is far from far-fetched to draw economic lessons from that show, and I have drawn upon the Gilligan analogy before. Those lessons relate directly to our government’s response to what has become known as “the Great Recession of 2007 -?”.

There was no episode in which the wealthy passenger Thurston B. Howell, III passed out some of his millions as “stimulus checks” to his fellow travelers so that they could rush out and spend their way to a vibrant Gilligan's Island economy.

They understood implicitly that before consumption, you must have production. They understood that to have production, you need real people doing real thinking and real labor. That’s what they did.

That silly little 1960s sitcom was way too serious a show to allow the producers to run an episode that portrayed Mr. Howell assuming the role of central banker, and yanking paper money out of his wallet and handing it out to everyone, telling them: “This paper will shower you with prosperity, because it will magically materialize into ‘purchasing power’!” It would have failed after that one episode. No one would have believed it. Money is not wealth, the castaways understood, because production comes before consumption. Gilliganomics reigned, or they would have perished.

Now, let’s step back from that uncharted island, and view the American economy. The first difference we see, is that the economy involves money, which is not needed on an island of seven inhabitants.

Washington politicians observe “consumers” exchanging money for goods in stores, car dealerships, and so on. Since it is widely believed that “consumer spending” represents some 70% of the economy, the politicians conclude that more money in consumers’ hands is all that is needed to “stimulate” the economy, evading the source of that money.

Money, however, does not change the fundamental nature of economic activity. Whether occurring among a handful of island castaways or on a vast continent involving 300 million people, the same principles apply. As Gilliganomics teaches us, production comes before consumption, and money is not wealth. What money does do is facilitate the exchange of goods and services… i.e., trade … among a vast number of productive people. Money enables you to produce economic values to satisfy the desires of one person, and receive in return economic values from another person who produces what you desire. You receive money in exchange for your work, and then exchange your money for that food, car or computer. Money makes possible an unlimited number of trades, among a limitless number of producing people who have never and will never meet. Money is the blood stream of a complex industrial economy.

Money is merely a tool, albeit a vital one. But it also serves to camouflage economic reality, and enables politicians to believe that they can make a miraculous end run around the inexorable principles of Gilliganomics. What act of evasion is involved here?

For the consumer, spending is the completion of an exchange of goods and services that began when he earned his money. Consumer spending is a trade, not between a consumer and a producer, but between two producers. As any honest “consumer” knows, you need to earn some money before you go to the store. Money must be made, before it can be spent. Put another way, money is not wealth – wealth creates money. If Gilligan’s Island were a New World, the close-knit group of seven would grow until money becomes necessary, based upon the expanding production of an expanding population.

Evading this knowledge - the meaning and source of money - leads to certain destructive actions. To understand what they are, let’s get back to the island.

They did pretty well there, that rag-tag group of economic experts. They worked. They had to. But suppose, in one episode, a looting gang of primitive savages invaded the island and began seizing their clothes, food, building materials, hunting weapons, etc., as well as their seed corn (their savings) that was set aside to plant the next harvest? Suppose those savages simply began consuming the stuff created by the ingenuity and hard work of the Gilligan Islanders? Would that have left the shipwrecked crew and passengers more prosperous, or poorer? Now you know why all attempts to stimulate growth through government spending always must fail, if prosperity rather than central planning is the goal. Those savages would have created plenty of “demand”, just like our president wants to do with government money.

Politicians who promote stimulus programs ignore or evade the first part of the trade that makes consumer spending possible – the earning part. This fact exposes the crucial difference between consumer spending and government (or government-induced) spending.

Every time the federal government creates another program to stimulate demand (or consumption), it does so – like the savages - by seizing the earnings and savings of the nation’s productive citizens through taxation, deficit spending, or inflationary printing press money. Posturing politicians claim to make us more prosperous, through policies paid for out of our own money and financial nest eggs. Unlike private consumers, the government doesn’t “earn” its money.

Stimulus always fails, for this very reason. Private consumers work for the money they spend, thus producing their own demand. Production comes before consumption. Stimulus politicians – from liberals like Obama to psuedo-conservatives like Bush – do not create demand. They simply steal it.

The source of consumer spending is productive work. The source of government demand-side stimulus policies is economic plunder.

OBushonomics does not and logically can not work. At best, all it can do is create a temporary illusion of “recovery”, much as an unemployed man can seem to prosper temporarily by running up credit card debt. The difference is the private citizen must eventually pay for his profligacy or declare bankruptcy. The government sacks and eventually bankrupts the entire productive class.

So, what kinds of policies would Gilliganomics yield? For starters, we would get massive, across the board cuts in income and capital gains taxes, major reductions in government spending, and a return to gold convertibility for the dollar. We would see an end to government attempts to manipulate the economy. And we would begin to dissolve the crushing regulatory burden, leaving Americans as free to act on their judgements as the Gilligan seven. In other words, we would kick those savages off of the island - or out of Washington.

Gilligan’s Island is a monument to economic wisdom compared with much of what comes out of Washington and the academic ivory towers today. As of now, the American economy seems to be recovering, grudgingly, no thanks to government policies. Despite loud assurances from the Obama Administration that its worn out, historically failed policies saved us from another Great Depression, OBushonomics is creating powerful headwinds against economic recovery. Until and unless we learn the lessons of Gilliganomics, our economy will continue to wallow well below its potential – or worse.

Oh, and one more thing. That looting tribe of fictional savages that invaded Gilligan’s Island? They had a famous leader. You might recognize him. His name was Chief John Maynard Keynes.

John Maynard Keynes helped to pioneer the field of macroeconomics, which studies economic activity without focussing on actual human beings. Macroeconomics, the “science” that studies “the economy as a whole”, can only have validity if it is anchored to the concrete reality of microeconomics, which focuses on the study of actual humans beings, their metaphysical nature, and their related economic activity.

But Keynes employed a gimmick. He helped to split the science of economics into two parts – macro- and micro-economics. Then, he disconnected macro from micro – i.e., from reality. This freed politicians from the necessity of logic and common sense. Keynesian Economics provides a semi-plausible theoretical cover for them, based upon a bevy of economic statistics, providing a vehicle for satisfying their powerlust and craving for a pat on the back for “doing something”. What Keynes managed to do is unleash government power to do whatever the whims of politicians dictated, to the escalating detriment of free markets. Keynsianism is statism in disguise.

Ideas are valid only to the extent that they can be logically connected to reality. Keynsianism cannot be, demonstrating its invalidation. But, it serves its sinister purpose – the expansion of government central planning authority.

On some level, perhaps, Keynes was not oblivious to the destructive effects of his theories. If he had been on the other side – a castaway on the SS Minow – would he have welcomed the savages as “consumers” rescuing them from a “chronic underlying deficiency of demand”? We’ll never know what he would have done in real life, although we can guess. We only know what his disciples continue to do. Keynsianism relies on a ready made store of wealth and savings previously produced by millions of people who know that reality can not be faked. They will, apparently and against all evidence that it cannot work, continue to loot this nation’s wealth with stimulus after stimulus until they bankrupt us.

They are undaunted, and stand ready for anyone who attempts to bring them into reality. When skeptics complained that the economy will be damaged long term, Keynes uttered his famous answer. Reaching the height of immoral irresponsibility, he flippantly declared: “In the long run, we are all dead.”

The long run has arrived, and we are fighting for our economic (and actual) lives. The choice is between OBushonomics and Gilliganonmics; between statist macroeconomic fantasy and economic free market reality; between economic deterioration and prosperity. The time to choose is now, and our time is running out.

[Please note that this essay was inspired, in part, by Ayn Rand’s lecture Egalitarianism and Inflation, which can also be read at Give Me Liberty.

Also, see George Reisman's essay entitled Stimulus Packages.]

The Howell's Check is in the Mail

It seems that the crew and passengers of the SS Minnow knew more about economics than do most of our leading economists and politicians. The bipartisan “economic stimulus” package just enacted in Washington is so illogical that it is hard to take it seriously. The plan is for government to raid the nation’s savings, via borrowing, in order to pass out checks for “consumers” to “spend our way to an economic recovery”.

Don’t get me wrong. With the taxes we pay, I’ll take the “rebate”. But as far as economic policy goes, I can only say, GIVE ME A BREAK!

This is bad economics based on a false premise…that consumption is 70% of the economy. This false premise is partly a result of the way we “measure” the economy. GDP is essentially a quantitative figure that tells you how much money is changing hands during a specific time period. But, essentially, consumption is the end of economic activity. Production is its meat and bones. This bill ignores production.

To illustrate my point, I’ll use an analogy.

When the SS Minnow of that old sit-com show Gilligan’s Island became marooned on that uncharted island, what was their first response? Did Gilligan, the Skipper, and their assortment of tourists immediately rush out and begin spending their money? Better yet, why didn’t the millionaire Howells just hand out clumps of cash to all the others so they could’ve started consuming their way to a vibrant island economy?

“But Mike”, you say, “there was nothing to buy!” “Why not ?”, I ask. “Because”, you say, “That island was uninhabited by humans! How could there have been anything to buy and consume when there where no people around to make anything to buy?” OOPS! But wait. No problem, President Bush, or Hillary, or Barack, or congressional leaders or talking heads assures the Gilligan Islanders. “Consumption is 70% of the economy,” they say in unison. “Just start consuming, and prosperity will spring to life on your little island!”

Of course, Gilligan, the Skipper too, the millionaire and his wife, the movie star, the professor and Mary Ann knew better. They went immediately to work fashioning tools to build shelter, cultivate the ground to grow crops, hunt for food, etc. It seems the Gilligan Islanders knew some things most of our leaders today can’t seem to grasp.

Money is not wealth.

The things humans need to survive and thrive are not found free in nature. They must be made.

And, above all, production comes before consumption!

What a profound discovery by those islanders!

Do these basic facts of human existence change in an advanced industrial economy of 300 million? What is missing is an understanding of what spending really is. When you spend money that you have earned by productive work on goods or services, what you are actually doing is engaging in trade. You are exchanging the product of your work, as represented by those dollars, for the product of the work of others. A sale is really an exchange (a trade), not between a consumer and a producer, but between two producers.

The fact that the item you received may be consumed by you does not change the fact that it first had to be produced. In fact, consumption is not fundamentally a part of the economy at all. It is the goal and end result of the economy. Essentially, the "economy" is your production and that of every other participant. The economy is 100% production and trade, in that order. (I’m not here referring to GDP, which measures money changing hands. I’m referring to what actually constitutes the real economy.)

If our political leaders really wanted to “spur” the economy, they would recognize that the source of “economic growth” is not “money in consumers pockets”. It is the minds and productive work of individuals working for their own benefit. And then they would look to remove or reduce the barriers and disincentives that restrain the production that leads to trade and finally consumption.

They should take steps such as cut taxes on income (current production), capital gains (future production), savings and investment (capital for future production), permanently, as well as cut or at least put a moratorium on new government regulations (costs on current and future production). They should focus on the source of wealth, not it’s consumption.

The current snake oil “stimulus” package reverses cause and effect and will thus do more harm than good, reducing long term economic growth by consuming the “seed corn” of future production, the nation’s savings. If the Gilligan Islanders faced a shortfall in their food stocks for the upcoming months (i.e., a recession), should their first response be to throw a banquet and feast on their remaining stockpiles? Or should they harbor their existing food reserves (i.e., their savings), and then embark on an effort to plant a larger crop, expand their hunting activities, etc. (i.e., expand production)?

The answer is obvious. And so is the answer to the current economic situation.

That silly little 1960s sitcom, Gilligan's Island, taught us more economic common sense than our current political leaders and many of our prominent economic thinkers gazing down from their academic ivory towers.