By Frank Shostak, Mises Institute
When the economy goes into a recession, most economic commentators believe that the government and the central bank should take steps to counter the rise in unemployment. Some economists believe that lowering unemployment can be achieved without any cost, given that the unemployed workers are idle. According to Paul Krugman, “If you put 100,000 Americans to work right now digging ditches, it is not as if you are taking those 100,000 workers away from other good things they might be doing. You are putting them to work when they would have been doing nothing.”
But how will such a policy be funded? Who pays the unemployed for digging ditches? It seems that Krugman believes that funding can be easily generated by the central bank via money printing.
Now, funding is not about money as such but about real savings, which is the amount of consumer goods produced less the consumption of these goods by the producers of consumer goods. Real savings sustain people who are engaged in the production of goods.
When a baker trades the saved loaves of bread for potatoes, he provides the means of sustenance to the potato farmer. Equally, the potato farmer provides the means of food, his saved potatoes, to the baker. These real savings sustain producers while they create intermediate goods and consumer goods and services.
To maintain their life and well-being, individuals require consumer goods, not money as such, which is just the medium of exchange. Money helps to facilitate trade among producers—it is not real wealth itself. According to Murray Rothbard, “Money, per se, cannot be consumed and cannot be used directly as a producers’ good in the productive process. Money per se is therefore unproductive; it is dead stock and produces nothing.”
Paraphrasing Jean Baptiste Say, Ludwig von Mises wrote, “Commodities, says Say, are ultimately paid for not by money, but by other commodities. Money is merely the commonly used medium of exchange; it plays only an intermediary role. What the seller wants ultimately to receive in exchange for the commodities sold is other commodities.”
Tools and machinery or the infrastructure that producers employ has one purpose, which is to produce consumer goods. The greater the production of consumer goods, the larger the pool of real savings. Consequently, through the increase in real savings, a better infrastructure can be built and this in turn enables more economic growth.
Savers create wealth, and their savings are used to fund people specializing in the production and maintenance of the infrastructure and individuals employed in the production of final consumer goods. Contrary to Krugman, the artificial initiation of employment such as digging unneeded ditches is not cost free because those non-wealth-generating projects must be sustained.
Since government does not produce real wealth, it cannot save and therefore cannot fund wealth-creating activity. For the government to engage in such projects, it must divert real savings from wealth generators, who are the ones that save and employ real savings in the production of final consumer goods.
Production Increases Are Limited by Real Savings
For Krugman, the government policies of countering unemployment not only will be costless but will increase total demand in the economy. Consequently, this will enhance overall output by the multiple of the increase in the demand. John Maynard Keynes, who popularized this concept, wrote,
If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on...(READ THIS FULL ARTICLE, FREE, HERE).
