The Formula for Economic Progress (Vol. 16)

analyticsbox | Sep 08, 2021

It's Not Magic, It's Econ 101

“If Socialists knew economics, they wouldn’t be Socialists.”

— FRIEDRICH HAYEK, NOTED ECONOMIST

The science of Economics is full of opinions and differences, but there is one thing most objective economists agree on - how growth in an economy comes about. An economy grows when capital is invested in productive resources. It’s not magic, it is fundamental economics. It may be new products, or improved products, or cheaper prices for the same product - they all help improve the standard of living.

So how do we get capital to invest - by saving some of what we make, so we have something to invest. Here is the simplistic formula:

1. Save

2. Invest

3. Produce

4. Consume

How fast and how much we grow is another issue. And that is all tied to the Economic Policy of a country.

Remember, it is the private sector in a free enterprise/market economy which is doing the investing and producing. And as businesses invest they create more jobs and income for the people in the country, and more output for all to consume.

Here is where economic policy comes in. If we leave more capital in the hands of private enterprise and limit regulations which stifle growth, we grow faster. If we take more and more money out of private hands and put it into government hands, we will grow slower. If we over-regulate and impede investment, we slow growth.

How government taxes and regulates is a prime determinant of how fast we can grow the economic pie and improve living standards for all. And that is mostly determined by government economic policy.

THE BOTTOM LINE

LOWER TAXES + SMALLER GOVERNMENT + MORE INVESTMENT = FASTER GROWTH

An economy prospers and grows fastest when taxes are modest, regulations are limited, and the government is limited in size. The more we tax and grow government, growth slows, and the economy becomes less productive.

This country became rich under limited government, but that is changing and this is terrible economic policy if you want to foster a growing and prosperous economy.