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What Causes Economic Growth?

In modern economics, no greater effort has been made than in identifying some lack of money as the solitary drag on economic growth. 

However, the present state of money, a fiat currency with no inherent value, has confounded the nature of money and, in turn, the most important dynamics pertaining to economic growth. 

In effect, the rise of fiat currencies and their digital formations has produced an abstraction effect that has obfuscated the meaning of investment, prices and economic growth. 

In order to better appreciate these concepts, we will endeavor to classify and relate them to the inherent state of human affairs, whereby we may aspire to truly understand their meaning and influence over the economy and our lives. 

To begin, we must appreciate that economic growth stems from saving (from underconsumption) and capital investment (which stems from the surplus enjoyed from saving), whereas consumption essentially draws from saving and capital investment (and thereby growth), while drawing concomitantly from future consumption; the present form of debt-financed consumption renders the expenditures only more expensive by accruing interest (and assuming the opportunity cost of investment). 

Finally, many economists fraudulently report that rising consumption singularly indicates rising confidence and economic growth. 

However, this is myopic reporting, at best, or blatantly dishonest, at worst. 

In truth, consumption alone can indicate a variety of affairs of varying complexion: beyond the domain of a growing real economy, it can indicate anticipation of higher prices, the realization of higher prices in autonomous spending, greater access to artificially-cheap credit or (which is identical) an artificial increase in wages or employment. 

Consumption is classified as private expenditures in services, durable goods and non-durable goods, whereas investment is composed of real development, construction, and business purchases of machinery and equipment. 

The modifying distinction between consumption and investment stems from the character of use, whereby the former will be exhausted or used up as a final good, while the latter will serve as a capital good to improve the production of final goods. 

Only the formulaic homogenization of money savings and real savings, of money investment and real investment, produces the illusion of similitude. 

Whereas consumption regards private expenditure on depreciating or non-generative goods and services, capital investment regards business expenditure on assets whose productive use is expected to outstrip the attending using costs. 

Remember, in defining economic activity it is not important that currency is exchanged — which here produces that confusion for the non-economist — but that the exchange amounts to, on one hand, a generative asset and, on the other, a non-generative final good. 

Indeed, the accounting principles are important here: whereas consumption amounts to direct costs of ownership, to depreciation, maintenance, repairs, etc., the capital investment is expected to more than offset those costs, which seeks to build savings for future investment or consumption. 

There are professional economists, non-economists and politicians who contend that it is spending that is responsible for economic growth; however, this is merely an illusion produced by the aforementioned abstraction effect. 

Those of this particular camp have committed the error of assuming that consumer spending can operate as a substitute for capital investment, when it is capital investment that renders those final goods available for consumption in the first place. 

In this particular instance, we must remember that whatever is consumed must first be produced, and that whatever is produced will become more widely available and inexpensive by developing the capital and tools to produce more efficiently; indeed, it is precisely this efficiency which we attempt to quantify as economic growth. 

While increased measures of consumer spending follow from economic growth, they cannot drive it. 

Some exponents of the so-called “demand-side” economics even suggest that capital investment is “more closely tied to consumption than to savings,” purely based on the comparable conditions whereby the monetary asset has exchanged hands. 

Regardless of the theories surrounding this notion, the statement is moot, irrelevant and unscientific. 

Moreover, this theory is also patently ignorant of economic and accounting principles. 

Whereas consumption amounts to no wealth preservation, let alone any measure of wealth creation, its enablers known as savings and investment certainly do; yet the latter ultimately serve as means to future savings for further investment and consumption. 

Oddly enough, if one were to have asked John Maynard Keynes, the calculating propagandist for demand-side theory, he would have proclaimed that savings is always equal to investment. 

In short, due to the unscientific nature of the assertion and its dubious implications, it is indeterminable, at best, and wrongheaded, at worst, to draw any such conclusion that “capital investment is more closely tied to consumption than to savings.” 

Ultimately, the world of commerce operates from the production of real goods, not from the proliferation of paper notes or infinitely-demanding customers.


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