(HT: Justin Taylor)

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Tim Keller draws out the implications of this in Ministries of Mercy: “God requires not only a significant expenditure of our substance on the needy. We are obligated to spend our hearts and minds as well. . . . We are to ponder the condition of the poor and seek ways to bring them to self-sufficiency. This takes a personal investment of time and of mental and emotional energy. God looks for a willing, generous heart, which freely helps those in need, and what we give with our hands is not acceptable without it (2 Cor 9:7).

So we are to be eager, not begrudging, in helping the poor and we are to give thought to how to do this in a way that helps bring them out of poverty over time, rather than merely doing a few things here and there.

Both of these are related. For if we are eager to help others, including the poor, this implies that we will give careful consideration to how we do it, even creating plans and generating ideas and initiatives to serve with insight in ways that help over the long term. And it means, when possible, we will ultimately seek to address root causes rather than give relief only — as important as relief itself is, all on its own.

Job is an example of this. In chapter 29 he mentions how he not only provided relief to those in need, but also “broke the fangs of the unrighteous and made him drop his prey from his teeth” (v. 17). As Keller points out in his article The Gospel and the Poor, the prophets also denounced “corrupt business practices (Amos 8:2-16), legal systems weighted in favor of the rich and influential (Deut. 24:17; Lev. 19:15), [and] a system of lending capital that gouges the person of modest means (Lev. 19:35-37; 25:37; Ex 22:25-27).”

So we should both seek to provide relief and have a view towards helping the poor become self-sufficient, ultimately seeking to address the root causes that keep people in poverty.

Lots could be said here about the various factors involved here and how to go about this, but I will mention one thing that is not commonly mentioned, at least in the church.

Many attempts to help alleviate poverty (whether in Africa, the US, or elsewhere in the world) have often been based on an inaccurate understanding of economics. As a result, they have often failed to have a last impact, and sometimes have hurt more than they have helped.

Consequently, I would argue that one of the most important things we can do if we are going to make an effective contribution to the solutions for global poverty is gain a correct understanding of economics. There is more that we need to do, of course, but gaining a right understanding of economics is critical for knowing how to direct our efforts rightly. A right understanding of economics, I would argue, is part of considering the needs of the poor (Psalm 41:1).

One of the most helpful books for this is Thomas Sowell’s Basic Economics. Sowell’s classic is one of those rare books that helps put all the pieces together. And it’s helpful not only for thinking correctly about global issues, but also issues in our own country (which was his primary purpose in writing it; the sub-title of the first- edition was A Citizen’s Guide to the Economy).

I first came across Basic Economics in a bookstore in about the year 2000. It was shortly after that I made my first trip to Africa, where many of the things I encountered illustrated the economic principles Sowell discussed.

For example, in the country we were in, the government controlled the tea industry and the zinc industry (zinc was used to make the roofs for the houses). This was supposed to make tea and zinc more affordable. Instead, it actually increased the price and decreased the quality. Sowell’s book shows why this is so — namely, because the government monopoly on these items eliminated competition, and thus the incentive to keep prices down and quality up. The nation would have been better off if the government did not seek to control these industries, but instead allowed companies to be free to produce tea and zinc as they chose, thus enabling competition to keep prices down while preserving quality.

Now I’m back in Africa and encountering similar poverty — though not necessarily to the same degree as on my prior trip (which was to a different part of the continent). I think a lot in general about “what can we do about this? How can we help more, and in a way that makes a long-term difference?” And when I’m here, it gets me thinking about it even more.

Anyway, Sowell’s book is very helpful because the only long-term solution to poverty is economic growth — which comes through business and entrepreneurship. Foreign aid can be helpful, but businesses create goods and create jobs — and keep producing goods and providing income through the jobs year after year. Thus, business is the best long-term solution to poverty.

Yet, as Sowell illustrates, certain economic policies make it harder for businesses to start and grow. Furthermore, some of these policies that hinder economic growth actually seem sensible at first. And that’s why it’s so important to educate ourselves on economics — so that we aren’t guided in our thinking and initiatives by stage-one solutions that actually hurt more than they help, and so that we don’t advocate such solutions when they are promoted by others. We have to think beyond stage one.

When it comes to economics in general, here are two very helpful and easy to read books:

• Basic Economics, as I’ve mentioned
• Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics

When it comes to economics and global poverty, here are some of the most helpful books I’ve come across:

• The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else
• When Helping Hurts: Alleviating Poverty Without Hurting the Poor. . .and Ourselves

And here are some books I look forward to reading when I get the chance:

• The Shackled Continent: Power, Corruption, and African Lives
• The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good
• Solutions for the World’s Biggest Problems: Costs and Benefits
• How to Spend $50 Billion to Make the World a Better Place

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William Carey … introduced the idea of savings banks to India, to fight the all-pervasive social evil of usury. Carey believed that God, being righteous, hated usury, and that lending at interest rates of 36 to 72 percent made investment, industry, commerce, and economic development impossible.

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In an economic crisis, it would be fatal to forget everything we know about economics. Though cyclical downturns do occur in the free market — they are due to uncontrolled innovation — this is a defect in the system, not a failure of it. To abandon the free market because it is imperfect would be a dangerous overreaction. After all, state intervention is imperfect, as is human nature itself.

During the current crisis, it’s crucial to recall the unprecedented benefits that free markets have brought to global economics. Since the public sector gave ground to market capitalism, beginning in the early 80s, the results have been breathtaking. The opening of economic borders and the promotion of free trade in Europe after 1990 contributed to the reconstruction of Eastern Europe and lifted 800 million people out of poverty across the globe.

In Economics Does Not Lie, Guy Sorman shows that behind this unprecedented growth is not only the collapse of state socialism but also a scientific revolution in economics, as yet dimly understood by the public but increasingly embraced by policymakers around the globe. He reminds us that bad economic policies ravaged entire nations during the twentieth century, producing more victims than any epidemic did. Any attempt to return to those obsolete policies would bring chaos and poverty. The way out of the current crisis is to restore trust in the free-market society and the policies that have provided economic recovery over the last thirty years.

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Marvin Olasky has some good words about Jay Richards’ book Money, Greed, and God: Why Capitalism Is the Solution and Not the Problem:

Many of us have had flu shots this fall, but what about an inoculation against the hate-America economics that many colleges teach? Money, Greed and God: Why Capitalism Is the Solution and not the Problem, by Jay Richards (Harper One, 2009), undercuts myths that students might otherwise accept as facts.

Among the myths Richards demolishes: The Nirvana Myth (contrasting capitalism with an unrealizable ideal rather than with its real alternatives), the Piety Myth (focusing on good intentions rather than results), and the Materialist and Zero-Sum Game Myths (believing that wealth is not created but simply transferred).

Richards, one of that rare breed with a theology doctorate but an understanding of economics, also points out the errors of the Greed Myth (believing that the essence of capitalism is greed), the Usury Myth (that charging interest on money is immoral), and the Freeze-Frame Myth (that what’s happening now regarding population, income, natural resources, or so on, will always happen).

After knocking down the concept of Christ against capitalism, Richards summarizes proven ways to alleviate poverty: Teach that the universe is meaningful, thrift is good, and the rule of law is essential. He discusses the importance of delaying gratification, establishing property rights, and building stable families. An appendix helpful to libertarians shows why “spontaneous order” in economics does not argue against Intelligent Design in biology.

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The mystery of capital is this: Assets (property, money, the means of production) are not automatically capital. Capital is like electricity. Until it is there, the assets are dead. Property rights are what close the circuit and bring dead assets to life. This is chief reason third world capitalism is not flourishing.

This is the premise of the book The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else.

De Soto’s book has revolutionized our understanding of capital and “points the way to a major transformation of the world economy.” According to The Economist, it is “the most intelligent book yet written about the current challenge of establishing capitalism in the developing world.”

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“Before I started my business, my political philosophy was that business is evil and government is good. I think I just breathed it in with the culture. Businesses, they’re selfish because they’re trying to make money.”

At age 25, John Mackey was mugged by reality. “Once you start meeting a payroll you have a little different attitude about those things.” This insight explains why he thinks it’s a shame that so few elected officials have ever run a business. “Most are lawyers,” he says, which is why Washington treats companies like cash dispensers.

Mr. Mackey’s latest crusade involves traveling to college campuses across the country, trying to persuade young people that business, profits and capitalism aren’t forces of evil. He calls his concept “conscious capitalism.”

What is that? “It means that business has the potential to have a deeper purpose. I mean, Whole Foods has a deeper purpose,” he says, now sounding very much like a philosopher. “Most of the companies I most admire in the world I think have a deeper purpose.” He continues, “I’ve met a lot of successful entrepreneurs. They all started their businesses not to maximize shareholder value or money but because they were pursuing a dream.”

Mr. Mackey tells me he is trying to save capitalism: “I think that business has a noble purpose. It’s not that there’s anything wrong with making money. It’s one of the important things that business contributes to society. But it’s not the sole reason that businesses exist.”

What does he mean by a “noble purpose”? “It means that just like every other profession, business serves society. They produce goods and services that make people’s lives better. Doctors heal the sick. Teachers educate people. Architects design buildings. Lawyers promote justice. Whole Foods puts food on people’s tables and we improve people’s health.”

Then he adds: “And we provide jobs. And we provide capital through profits that spur improvements in the world. And we’re good citizens in our communities, and we take our citizenship very seriously at Whole Foods.”

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Is the American Recovery and Reinvestment Act of 2009 working? At the time of the act’s passage last February, this question was hotly debated. Administration economists cited Keynesian models that predicted that the $787 billion stimulus package would increase GDP by enough to create 3.6 million jobs. Our own research showed that more modern macroeconomic models predicted only one-sixth of that GDP impact. Estimates by economist Robert Barro of Harvard predicted the impact would not be significantly different from zero.

Now, six months after the act’s passage, we no longer have to rely solely on the predictions of models. We can look and see what actually happened.

And it concludes:

Incoming data will reveal more in coming months, but the data available so far tell us that the government transfers and rebates have not stimulated consumption at all, and that the resilience of the private sector following the fall 2008 panic–not the fiscal stimulus program–deserves the lion’s share of the credit for the impressive growth improvement from the first to the second quarter. As the economic recovery takes hold, it is important to continue assessing the role played by the stimulus package and other factors. These assessments can be a valuable guide to future policy makers in designing effective policy responses to economic downturns.

(HT: Glenn Brooke)

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This is a plain-English explanation of how we got into the current economic disaster that developed out of the economics and politics of the housing boom and bust. The “creative” financing of home mortgages and the even more “creative” marketing of financial securities based on American mortgages to countries around the world, are part of the story of how a financial house of cards was built up—and then suddenly collapsed.

The politics behind all this is another story full of strange twists. No punches are pulled when discussing politicians of either party, the financial dangers they created, or the distractions they created later to escape their own responsibility for what happened when the financial house of cards in the financial markets collapsed.

Sowell also wrote a column a few months ago on summarizing some of the main themes of the book. Justin Taylor points out today on his blog that Sowell was recently interviewed on the subject on “Uncommon Knowledge.”

Another helpful book on the financial crisis and the causes of the housing boom is Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse. Meltdown was a very clear and enlightening book that I would love to summarize sometime (someday/maybe).

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Therefore, attempts to re-start the economy by encouraging spending are addressing the symptom, not the problem. If we want to address the problem — and see spending revive — we need to realize that production precedes and enables consumption. Thus, any stimulus package needs to focus on removing obstacles to production (usually taxes and excessive regulation), rather than stimulating consumption.

This point is made very well in the book Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse. Reading that book is actually what sparked my first post on spending and the economy. To flesh things out a bit more, here is one of the most helpful (and extended) quotes from that book on spending and the economy, which I’ve broken up a bit through some brief summary statements.

(By the way, if you are aware of the “paradox of thrift,” the seeds to a large part of the answer are in this quote. If I get the chance, I’ll post more thoughts on the paradox of thrift down the road.)

Behind every government “stimulus” effort—whether it’s Barack Obama’s massive infrastructure programs or George W. Bush’s checks to every American, is the belief that consumer spending drives the economy.

There is one sense in which we can say “spending drives the economy”:

There is a Kernel of truth in this otherwise illogical view [note: I'm not always a fan of the tone in this book; for example, I wouldn't call the other view "illigocial," although I do believe it is wrong]. Consumer spending does drive the economy in the sense that every firm decides on what it will produce, with what methods, and in what quantities, in light of what it anticipates consumer demand to be. Businesses don’t survive unless they create what the consuming public wants. So consumers drive the economy in the sense that their wishes are what motivate the production decisions of producers.

But that is not what is usually meant:

But “consumer spending drives the economy” is often taken to mean that wealth is generated by the mere fact of our spending—and this belief is provably false.

Whenever a recession threatens to hit, Americans are urged to rush out and empty their wallets to get the economy back on track. But what is supposed to happen next, when the following day Americans have no more money to spend? That’s left unexplained. Saving is especially condemned, even though it’s obviously the prudent and sensible thing to do during a recession. A penny saved, we’re told, is a penny diverted from immediate spending—it’s actually said to be a drag on the economy. It was this fallacy on which the “stimulus package” of 2008 (and so many other … programs like it) was based.

The spending-is-good-for-the-economy fallacy grows partly out of our use of Gross Domestic Product as a measure of economic health. GDP sums up the dollar value of all final goods and services sold in a country in a given year. It thereby leaves out all the higher and intermediate stages of production that take place on the way to producing final consumer goods, since these processes are the ingredients of final good, but not final goods in themselves. But this higher-stage production is the bulk of the economy, and leaving it out gives a distorted picture of the percentage of overall economy that consumer spending amounts to.

Consumption is the act of using things up; a nation does not become wealthy by using things up:

Even without examining the statistics on which this idea is based—its proponents claim that consumption spending is over 70 percent of the economy—it should be obvious that something isn’t quite right about it. Consumption is the act of using things up.  How did any country ever become rich simply by using things up? Before things can be used up, they need to be produced. Production, in fact, is what makes consumption possible in the first place, because it gives us the means with which we can acquire to goods we want. to consume more, we first have to produce something ourselves.

The power to consume comes from having produced:

Where does a consumer shopping at a retail store get the purchasing power that allows him to make his purchase and consume in the first place? He gets the money he spends from contributing to some previous production process. He earns a paycheck by playing a role in producing something people want.

Production implies the willingness to spend:

John Stuart Mill already refuted the fallacy that consumer spending drove the economy nearly two centuries ago. “What a country wants to make it richer is never consumption, but production,” he wrote. “Where there is the latter, we may be sure that there is no want [lack] of the former. To produce, implies that the producer desires to consume; why else should he give himself useless labor? He may not wish to consume what he himself produces, but his motive for producing and selling is the desire to buy. Therefore, if the producers generally produce and sell more and more, they certainly also buy more and more.” [emphasis mine]

Stimulating consumption apart from production is what created the problem and thus is not the answer:

And as Austrian business cycle theory shows, the last thing we should want to do during an economic downturn is to give an artificial stimulus to consumption.  The downturn itself is caused by an increase in consumption simultaneously with an (incompatible) increase in investment. Stimulating more consumption will only widen the mismatch between resources invested in higher-order stages of production geared toward future production on the one hand and demand for consumer goods in the immediate present on the other. That’s why economist Gottfried von Haberler, speaking during the Great Depression, warned about “a one-sided strengthening of the purchasing power of the consumer, because it was precisely this disproportional increase of demand for consumers’ goods which precipitated the crisis.”

But what about over production?

The usual fallacy that comes in reply is that if we increase our productive capacity too much, we’ll have  general overproduction: the economy will produce more goods than people can afford. … [but] the increased production is precisely what gives people the wherewithal to buy the newly created goods. And the more goods we produce, the less expensive in terms of money they will be, thereby making it possible for people to buy the increased supply. As we noted above, a consumer is able to buy things only because he himself has produced things in the past. Thus it is production that makes consumption possible. As long as firms produce things consumers want in the proportions they want, therefore, the more we produce the more we can consume. The contention that there can never be a general overproduction of all goods, and that increased supplies of goods themselves constitute the demand for other goods, is known as Say’s Law, after economist J.B. Say. (John Maynard Keynes famously claimed to have refuted Say’s Law, but, as usual with Keynes, he did so only by misstating the law and then refuting his own misstatement.)

Think of all the houses that were built during the recent American housing bubble. Government policy, including the cheap credit policy of the Federal Reserve, encouraged this excess of home building. the boom in home purchases in turn led many people to believe that home prices would continue ever upward. As a result, we might say there was an “overproduction” of homes. But there certainly was not a general overproduction of all goods in the economy. All the resources—capital, labor, parts, land, etc.—poured into making houses would have gone elsewhere if not for this building boom. Entrepreneurial error or government interference can produce overproduction in a particular economic sector—but only to the extent that other sectors underproduce. The overproduced sector, in a market economy, will suffer as prices go down and costs of production go up, which then drives businesses out of that sector and frees up resources for other sectors.

Consumptive expenditure vs. productive expenditure:

Adam Smith made an important distinction between consumptive expenditure (or nonproductive consumption) and productive expenditure (or productive consumption). Consumptive expenditure uses up some good without providing for its replacement, such as when a person wears out an air conditioner in his home after a series of hot summers. Productive expenditure involves using something up in order to create still more (and/or more valuable) resources in the future. Investing in machinery that increases productivity is an example of productive expenditure, since a machine can often produce far more goods than were expended in building the machine itself. Consumptive expenditure uses up, exhausts, and destroys; productive expenditure provides for its own replacement in the form of an increased supply of goods in the future. Smith put it this way:

A thousand ploughmen consume fully as much corn and cloth in the course of a year as a regiment of soldiers. But the difference between the kinds of consumption is immense. The labor of the ploughman has, during the year, served to call into existence a quantity of property, which not only repays the corn and cloth which he has consumed, but repays it with a profit. The soldier on the other hand produces nothing. What he has consumed is gone, and its place is left absolutely vacant. The country is the poorer for his consumption, to the full amount of what he has consumed. It is not the poorer, but the richer for what the ploughman has consumed, because, during the time he was consuming it, he has reproduced what does more than replace it.

In effect, then,  when we’re being urged to consume more in order to “help the economy,” or when the government engages in “stimulus” packages meant to encourage consumer spending, they are suggesting we’d all be better off if we used up a lot of things without providing the resources for their replacement. Just take and take and take—and that will make everyone rich!

Savings is not bad for the economy!

And incidentally, money that people save is not a drain on the economy. Just the opposite. Savings provide the pool from which business can draw to build new, more productive equipment that can produce capital and consumer goods in ever-greater quantities at lower costs in the future. Without saving, without abstention from consumption, this process, and the increase in living standards that accompanies it, could not occur.

Society is wealthier today because of an increase in production, not an increase in consumption:

We are much wealthier now than we were 300 years ago not because we consume more today, We consume more today because we can produce much more, and it is this production that itself both fuels our ability to consume and increases our standard of living.

Stimulus packages that focus on increasing consumption will prolong the crisis or make it worse (or both):

“Stimulus” packages that encourage both private nonproductive consumption and public nonproductive consumption (i.e., federal spending) will only intensify the present crisis and hollow out the economy’s productive capacity still further. And on top of that, they seek to strengthen the economy by the obviously paradoxical means of building roads and bridges funded by more debt—like a homeowner who decides to solve his debt problem by borrowing more money to remodel his house.

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Recently, he has started The Simple Wisdom Project, which is intended to be “a source of perspective and common sense about topics relating to family, faith, and life’s daily challenges.”

His latest monthly article discusses socialism. He writes it in response to a reader who “wanted to understand why socialism is a bad thing, especially in the context of the Christian commandments to love thy neighbor, care for the poor and avoid materialism.”

The short article is well worth your read. Here are a few key excerpts.

Socialism doesn’t work:

First, it just doesn’t work. At least not for very long. That’s because people are flawed and, outside of a family, a religious order, or a small group of friends, they will not continually work hard for the ‘greater good’ if they do not receive the fruits of that work themselves. As an economics major in college, I learned that this theory had a name: ‘the free-loader effect’. It is the natural tendency of people to do less and less work when they realize that they won’t see a proportionate increase in what they can get for it.

Over time—and this is an inevitable consequence of the free-loader effect—socialist societies experience decreasing productivity, risk-taking, and innovation, along with increasing tax rates, promises of government programs, and expectations from citizens about what they can get from those programs. When the economy inevitably falters under its own weight, those expectations cannot be met.

Socialism diminishes the dignity of human beings:

The second reason why I believe socialism is such a bad idea is very much related to the first, but much more important to me as a Christian: it diminishes the dignity of human beings. In socialist societies, individuals grow increasingly dependent on the government for their well-being, and less and less confident that they are capable of and responsible for themselves. This is an inevitable recipe for cynicism, fatalism and depression.

Socialism advances through a subtle, “slow creep”:

… socialism does not usually spring up over night. Instead, it creeps. Little by little we grow accustomed to new and higher taxes (“it’s just a one percent increase in the sales tax”), more government programs (“how can I vote against free ‘fill-in-the-blank” for children?”), and the false lure of getting something for nothing.

What should we do if we really want to be compassionate and make a difference?

So what are we to do if we want to act on our desire to do good and make a difference? Work hard. Create jobs. Treat our employees with dignity and love. Give generously of our money and our time to good charities and directly to those in need. And demand that our government compassionately provide effective programs and services for those who are truly incapable of providing for themselves.

But we should never, ever, support a program, a tax or a proposal that makes us feel good but ends up making the lives of the people we are supposed to be helping, and the society in which they live, more difficult and dependent.

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Someone once said that Senator Hubert Humphrey, liberal icon of an earlier generation, had more solutions than there were problems.

Senator Humphrey was not unique in that respect. In fact, our present economic crisis has developed out of politicians providing solutions to problems that did not exist– and, as a result, producing a problem whose existence is all too real and all too painful.

Read the whole thing.

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We’ll look at each of these in turn, and then show how this relates to the topic of productivity.

Consumer Spending Does Not Drive the Economy

Over the years we’ve often been exhorted, such as after 9/11, to go out and spend money in order to help stimulate the economy. This is also the thinking behind the stimulus checks that are sometimes sent out.

The media also routinely assumes this notion in its reporting. A few years ago, many news outlets were astonished that we were not yet in a recession, and credited the American consumer as propping up the economy through ongoing spending habits (which they called “irrational”). In our current state, the drop in consumer spending is thought to be a bad thing for the economy.

But it is pretty easy to see the fallacy in the idea that consumer spending stimulates the economy. Here’s a short example to show why.

Let’s say that the “economy” of my family is in bad shape. Do my wife and I conclude that it’s “time to go spend more money” so that we can get things back on track? Clearly not. That would be a devastating course of action. Instead, we would embark on two strategies: (1) save more and (2) earn more money (= produce more goods and services of value).

The same holds true when we think of the economy as a whole. Nothing changes simply by increasing the number of people in the predicament.

To illustrate this, let’s say that there were 300 people in my family and we were running out of food. Would that change anything about the need for our fundamental strategy of saving more and producing more? No. We’d have more people to produce things, which would be a benefit, but nobody would say “hey, we’re short on food, so let’s start eating more!”

Does anything change if we extend this out to 3,000 people? Or 300,000? Or 300,000,000? Not at all. The reason is that there is still a finite amount of resources. We cannot invent economic goods out of thin air.

I’m not saying that there is no role for spending in the economy. I’m saying that saving and earning must come first. You cannot spend unless you have something to spend.

Government Stimulus Spending Does Not Stimulate the Economy

Now let’s talk about government spending. Does government stimulus spending, such as on public works projects, somehow stimulate the economy?

Well, the first thing to realize here is that wealth is not generated by the mere fact of spending. Simply spending money on just anything doesn’t help the economy. When money is spent, if it is going to be beneficial for the economy, it must be spent on the right things.

Let me build on the above example to illustrate this.

Let’s say that Heidi and I have earned more and saved more, and now we have some money to spend. We observe that the rest of our neighborhood remains in a depressed economic state, and we want to help out.

Should I go to my neighbor and say “hey, why don’t you dig a hole in my backyard here? I’ll pay you $100. Then, the next day I’ll fill it back up so that you can then dig it out again and receive another $100.”

Have we enhanced the economy of our neighborhood through this spending? Not at all. I’ve just transferred $200 from my pocket to his, but nothing of value has been produced. In fact, I’ve wasted his time. And I now have $200 less to spend on something that really would make a difference.

What we see here is that the mere fact of spending does not in itself advance the economy. It needs to be the right kind of spending — on useful things.

So, how do we know what things will be useful to people? This is what profit and loss are for.

A business has to prove that a project will likely be profitable (= desired by people to the point that it will generate more value than it cost). This weeds out projects that seem like “good ideas” but would not in fact be desired by society.

Further, if a business makes a bad investment, that project will not be profitable and the business will have to end it — thus freeing up resources that had been devoted to the unprofitable project so that they can be used for more desired things.

The government has no such test to demonstrate what initiatives truly will match consumer demand, because the government does not operate under profit and loss. Now, I’m not saying government should — that’s not the nature of government.

Which means: government should not be in the business of trying to do “public works” projects to stimulate the economy. It shouldn’t be in the business of doing that because it has no reliable method of truly knowing which projects would match consumer demand and be of benefit to the economy.

Yes, government can make educated guesses based on extensive studies. But since government does not operate within a profit and loss system, in the end that is like a scientist developing hypotheses but never testing them. In economics, the true test of whether an initiative meets customer demand is whether it makes money. Studies are great, but the proof is in the actual results of profit and loss.

Businesses exist to do business, not the government. The government should let businesses do their job, and not attempt to “help the economy” by embarking on deficit spending to fund public works projects.

In Fact, Government Spending on Public Works Impoverishes the Economy

Now, here’s the real tragedy.

Someone might say “what’s the harm? Let businesses do their thing, and government will supplement that with its public works spending.”

This objection forgets our finitude.

(In fact, all of economics is about acknowledging the fact that we are finite. Our finitude is not only individual. It is also collective.)

To see the problem here, we need to realize where government gets its money. Government doesn’t produce things which it then sells at a profit, like businesses do. Instead, it gets its money from people and businesses.

Here’s what that means: Since the government gets its money from the people and businesses, when it spends or invests that money in projects that do not match consumer demand, it is diverting money away from projects which would match consumer demand.

Hence, there is less money available in society to fund the initiatives that are in alignment with consumer wants and needs. As a result, the economy is impoverished, not assisted, by public works projects.

How This Relates to Productivity

This relates to productivity in multiple ways. First, as I discuss in some of the founding posts on this blog (see the About page), productivity is about more than simply our own personal productivity. We ourselves need to be productive, but so also do the organizations we work for and the society that we live in. It is not all about us.

We are part of a larger context, and so we need to seek the good and productivity of our organizations and society, not just ourselves. Just as there are principles on how to be effective personally, there are also principles that demonstrate what will be productive at the organizational and societal levels as well. We should know these principles so that we can be more effective in serving the broader world.

Second, this relates to productivity in that bad economic policy undermines your personal productivity. Working in a good economy amplifies your efforts. If you are productive personally, the results of that will have a broader effect because your effectiveness will then be amplified by the effectiveness of your organization and the economy generally.

But bad economic times can de-amplify the outcome of your productivity. When the economic environment is bad, the efforts of your company which you contribute to may be less effective generally — meaning that the impact of your productive efforts in support of your organization’s goals will be less than it would have been.

A bad economy, however, does present other unique opportunities. It forces an even greater “entrepreneurial gap,” for example, sparking greater creativity. And the need for productivity in general is even greater in a tough economy.

But making your organization more effective in tough economic times is not the end goal. We want things to turn around so that we can amplify the good results of our efforts even more. Understanding good economic policy, even in a small way, can perhaps in some way serve to help that time to come.

Summary

In sum, we’ve seen three things here. First, consumer spending does not drive the economy because it is saving and earning that improve the economic condition of society, not buying and consuming.

Second, government spending is no exception to this. In fact, government stimulus spending hinders economic growth the economy grows through investment in the right things, not just any things — and government does not have the means to know what those things are. As a result, government spending has a detrimental effect because it diverts money away from those who are in a position to invest it in demonstrably useful projects.

Third, we’ve seen that this matters to the issue of productivity because the productivity of society is an important component of productivity in general. Further, poor economic conditions can undermine the multiplied benefits of personal productivity. At the same time, the value of personal productivity becomes even more critical in difficult economic times.

Last of all, by understanding the big picture of sound economic policy we can, in some small way, perhaps see ways that we can be a part of the solution when it comes to the healing of the wider economy.

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