“As the new money is used to buy goods on the market, prices are bid up beyond where they otherwise would be because there is more money in circulation. When this happens, we see a general, but not uniform, increase in prices when new money enters the market. This is price inflation.” – How to Think About the Economy
On August 7, 2022, Biden and the Democrat Congress passed the deceptively named, “Inflation Reduction Act” to cover up the fact that they have been unable or unwilling to stop the rampant price increases affecting Americans in almost every area of life. Based on a Harris poll, however, only 21 percent of the most gullible Americans believe that it will actually do as intended. Instead, the CBO confirmed what we all suspected, the middle class will be ladened with a tax hike of over 20 billion dollars over the next 10 years.
Inflation is a consequence of government intervention in the market. When an economy is left alone, prices fluctuate based on consumer choice. Generally, when there is an increase in demand, prices rise, and when there is a decrease in demand, prices fall. But rarely is the market left to flourish on its own. Instead, the government needlessly tinkers and creates chaos, where none would be if left to its own design. When governments intervene in the economy through excessive spending, prices rise. These prices are the result of inflation, not the cause of it. Since money now buys fewer goods and services, inflation can be seen as a hidden tax, by reducing the purchasing power of the dollar that disproportionately leaves the poorest citizens worse off.
In Per L. Bylund’s 2022 short book, “How to Think About the Economy: A Primer”, Bylund attempts to explain the economy in plain terms. By increasing the economic literacy of the general public, he hopes to expand the understanding of how the market and the government each affect consumer goods, money, and most importantly, economic prosperity. As Bylund will show, left on its own, the economy performs best. Simply put, the economy is the accumulation of actions between individuals and institutions in a free society, with each acting in their own best interest. Businesses sell and customers buy to achieve the most value for mutual advantage. And because what we value is subjective; consumers keep businesses in a constant state of flux as they opt for new or improved goods.
Production is the engine of an economy. Businesses compete over limited resources, including capital goods and labor, not only with existing businesses but also with those thinking about getting into the game. Entrepreneurs look at available resources and create new products and services based on what they think the consumer will want. As such, they make their investment without any guarantee that their product will be accepted by the public. How the consumer reacts to new and existing products determines which entrepreneurs win and which entrepreneurs lose. When the public is on their side, entrepreneurs are paid through the profit mechanism from the sale of their goods and services.
Where there is production, there will be money. Money is simply a means of exchange, a measure, like a ruler. The best money is stable money whose value does not fluctuate. Throughout history, strong economies came from stable, non-inflatable currencies. Unfortunately for the United States, that ship sailed over 50 years ago when President Nixon took America off the gold standard. Its effects have been devastating. The result was fiat money or paper money, that is not tied to a commodity such as gold or silver. Making our money supply highly inflationary and more unstable.
When governments decide to inject more money into the economy, they typically either tax citizens or print money. Since most voters don’t like tax increases, printing money is increasingly the preferred option. The resulting rise in the supply of money affects the prices of goods. Inflation occurs because the increase did not come from the production of more goods in the economy. Instead, we are left with more money chasing the same number of goods. Prices rise to reflect this new reality. As such, government interventions are a stick in the spoke of an economy. When governments interfere, consumers lose choices, are left with higher prices for the same bundle of goods, and the value of money decreases.
Other harmful interventions into the economy include manipulation of interest rates and wages, as well as price floors or ceilings. The resulting misinformation sent to entrepreneurs and businesses creates distortions in the market which leads to malinvestment, shifting capital from where its best to less productive alternatives. The consequence is the overexpansion of one business, at the expense of another. Ultimately, this malinvestment leads to an artificial boom, with the inevitable bust. In the same way, government regulation, whether it is licensing, quotas, or subsidies, also affects consumer behavior, by changing conditions that would normally exist in an unfettered marketplace. These policies diminish economic growth, and as a result, the financial well-being of individual citizens.
As we have seen, there are vastly different incentives between the government and the private sector. When left to the voluntary choices of individuals in a marketplace, businesses must adapt to increases or decreases in sales, with prices adjusting based on new conditions. As a result, money goes to the entrepreneur's best-serving society, and not politicians making decisions in their own best interest.
Government is the only entity, other than thieves and robbers, who use force, through taxation, to obtain their revenues. Inflation is just another form of taxation hidden by the government, robbing citizens of their hard-earned money. Understanding how an economy works best can help us recognize how the government is rarely the answer to our difficulties, but more often the cause of them.
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