Trust the Market, Not Government Stimulus

Some commentators are of the view that one cannot trust the market economy, which is seen as inherently unstable. If left free, the market economy could lead to self-destruction. Hence, there is the need for the government and the central bank to manage the economy. It is held, in this framework, that successful management could be achieved by influencing overall expenditure; it is expenditure that generates income. An expenditure by one individual becomes the income of another individual.

Hence, the more that is spent, the higher the overall income will be in the economy. What drives the economy then is spending. Whenever the overall income in the economy starts to display weakening because consumers lower their expenditure, it is then the role of the government to step in and increase its expenditure, thereby generating support to the overall income and thus to overall economic growth.

If, for whatever reasons, demand for produced goods is not strong enough, this results in a partial use of the existing labor and capital goods. Thus, in this framework, it makes a lot of sense to increase the government expenditure in order to strengthen the overall demand thereby raising the use of labor and capital.

Contrary to popular thinking, the key for economic growth is not an increase in demand but increases in production and saving. It is not possible to strengthen the overall production without the support from savings. For instance, through saving and capital investment, an individual or economy is able to increase production, and—only after that—consumption. Saving and capital investment, enabling new and greater production, allows for the attainment of various goals, which—prior to the increase in production—weren’t possible.