A Self Regulating Economy

By Douglas V. Gibbs

Money is more than currency. The strength of money depends on the value that backs it. Therefore, economic growth is dependent upon value being added to the economy through the growth of business which produces goods for the people to use. Our money, however, is no longer backed by valued reserves, but by the general acceptability of the currency. The acceptability was established by the government enforcing that the dollar would be legal tender. Based on the legal aspect, we accept the dollar in payment for goods and services because of the fact that the dollar is legal tender enforced by the government. The dollar holds its worth because of value in the system, and because we know that others will accept the dollar as payment as well. So, money is something that is widely accepted for purposes of exchange - sort of like bartering, but using a receipt or note of value in the place of goods. But, without goods that hold value in the system, the value of the currency drops. Then, as the federal government is doing right now, when money is added to the system without accompanying value, the worth of the currency goes down, and it takes more of the monetary unit to purchase a good. Hence, inflation.

The current minds in control of the American Government believe in the Keynesian theory of economics. They believe that the economy's primary engine is the demand side of economics. "If only," they believe, "we can get the people to start buying products, our economy will improve." Because of this belief, the current administration places a lot of importance on credit. They believe the ability to borrow is key to invigorating an economy. But as we saw with the housing collapse, credit creates a temporary bubble that eventually bursts, and creates recessionary conditions.

Though the power to purchase is an important key in stabilizing an economy, the growth of the supply side of the fiscal system must take the lead. What good is the power to purchase if there is a shortage of products? Bringing down tax rates better enables growth in aggregate supply and aggregate demand, which in turn increases the ability to produce. The growth of production creates jobs, and forces prices down as the producers attempt to sell their products. The increase in jobs, lower taxes, and lower prices then better enables the consumer to spend because the consumer has more money available to him and a more reasonable price to take advantage of. In turn, the consumer buys more, and to replace the products the business produces more.

The money supply, then, should rise as the value rises. Should there be an increase or decrease of the money supply without the accompaniment of a rise or drop in value the result will be inflation or deflation. In other words, the money supply affects the economy in a predictable way, and since aggregate demand depends upon the production of goods and the money supply, to see a drop in the production of goods because of heavy regulation and taxation against the business sector, and an increase of the money supply at the same time, will result invariably in a recessionary environment, increased jobless rates, and a devalued dollar.

Prices and wages are flexible, and the economy is self-regulating if left alone by government forces. In other words, if government was to withdraw much of its regulations, and heavy taxation, the economy would take care of itself. As prices rise, consumers would buy less, forcing prices down, which in turn encourage consumers to buy more. As more is bought, producers produce more; as consumption drops, producers produce less. Economic systems are inherently stable when government forces remove themselves from the system and allow the free market forces to act independently.

The Obama Administration is inserting the government into every part of the private sector it can. The result, based on the von Mises Theory, will be inflation, greater job loss, and ultimately a collapse of the economic system (see Greece for evidence).

In short, if the American Government was to remove itself from the economy and allow it to self-regulate, our economy would be sound, with no inflation, and only minor rises and falls in prices and wages.

-- Political Pistachio Conservative News and Commentary