Liberty Forged

the State has no money of its own, so it has no power of its own. ` Nock

Public works and real savings.

Posted by Jesse on March 6, 2009

Unnatural Disaster by Thomas Woods

Keynesian “pump priming,” whereby governments fund public-works projects, often financed by deficits, are another destructive if inexplicably fashionable course of action, based on the modern superstition that the very act of spending is the path to economic health. Take from the economy as a whole and pour resources into particular sectors: that should make us rich! Economic historian Robert Higgs compared plans like these to taking water from the deep end of a pool, pouring it into the shallow end, and expecting the water level to rise.

Additional public-works spending not only deprives the private sector of resources by taxing people to support these projects, it diverts resources toward firms that may need to be liquidated and drives up interest rates if the projects are funded by government borrowing, thereby making bank credit tighter for private firms. These projects are the very opposite of what the fragile bust economy calls for. It needs to shift resources swiftly into the production of goods in line with consumer demand, with as little resource waste as possible. Government, on the other hand, has no way of knowing how much of something to produce, using what materials and production methods. Private firms use a profit-and-loss test to gauge how well they are meeting consumer needs. If they make profits, the market has ratified their production decisions. If they post losses, they have squandered resources that could have been more effectively employed on behalf of consumer welfare elsewhere in the economy. Government has no such feedback mechanism since it acquires its resources not through voluntary means but through seizure from the citizens, and no one can choose not to buy what it produces. These projects squander wealth at a time of falling living standards and a need for the greatest possible efficiency with existing resources.

Also see Frank Shostak’s Printing like Mad

As a result of the artificial lowering of interest rates and massive money pumping, an additional demand for various goods and services emerges. This leads to an attempt to expand the infrastructure.

This attempt is bound to fail since the flow of real savings is not large enough to support the expansion of the capital structure. Consequently, the attempt to expand the infrastructure leads to the diversion of real funding from various activities that make the present flow of real savings possible. Thus, the flow of real savings comes under pressure and the rate of real economic growth follows suit.

……Remember that the interest rate is just an indicator of the state of demand and supply for real savings. The falsification of this indicator cannot expand the flow of real savings.

Likewise money is just a medium of exchange. Its function is to permit the exchange of the products of one specialist for the products of another specialist. More money cannot generate more real savings or real economic growth.

On the contrary, a further planned expansion in monetary pumping by central banks can only weaken the flow of real savings and undermine prospects for a sustained economic revival.


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