When politicians and journalists talk about “the economy”, they generally have an artificial computation in mind, typically either GDP, a computation of the amount of consumption spending in the country, or the percentage rate of change of that computation from one quarter or year to the next.
If there is such an abstraction as “the economy”, it is more properly thought of as all the businesses in the country that are producing goods and services for other businesses or for end-consumers to buy and use and enjoy. Economists refer to this assembly of businesses as the production function, but that, too, is theoretical. These are real businesses using real resources and employing real people to produce real goods and services.
With every act of production, whether a consumer good or a business or capital good, a business utilizes resources, adds value, and sells to a buyer who appreciates that value. Every productive resource has alternative uses and alternative forms of goods and services to which they could be applied, and so the most valuable use is selected. Value comes from the long progression of production and supply. The steel that is produced is dependent on the cost and effort of mining coal and iron ore, building and maintaining a steel plant, the trucks and ships that transport it, and the wages paid to steel mill workers and coal and iron ore miners. The production of everything requires an entrepreneur, natural or produced resources, work, and capital goods. It is these value-facilitating activities that make an “economy” grow and allow individuals to increase their incomes and wealth over time.
And time itself is an important contributor to production. What we produce today builds on production capacity, processes, and experiential learning of years, decades and sometimes centuries.
This real activity and historical accumulation of capital is almost invariably ignored in the conceptual thinking about GDP, which is a measure of current consumption.
Individual businesses are run in such a way as to produce more value than was present in the resources used in the production process. And the only way that can occur is if these businesses are operated by entrepreneurs who personally care about whether their businesses are adding value, because each individual entrepreneur’s own income will depend on whether their business earns a profit.
Actual entrepreneurs with their own personal incomes on the line worry about revenues, costs and profits. This can’t be said of government bureaucrats, regulators, and politicians. Their personal incomes are not on the line.
The real “economy” is driven from the supply side, that is, by businesses and the entrepreneurs who operate them, according to their judgment about whether or not a particular form of good or service that they produce will earn a profit.
And this “economy” can only exist in a moral and political order in which individuals are permitted to start, run and manage businesses that make a profit, and in a reality where profit-making is not envied or resented or criticized by governments and their partisan voters.
The “economy” can only thrive where governments do not confiscate profits and incomes through excessive taxes, don’t plunder value-adding businesses, and don’t constrain them via over-regulation, and don’t try to replace them by producing their own goods and services. The “economy” advances when it is widely recognized that everyone’s prosperity depends on allowing businesses to function as freely as they can to earn profits, in a market where the price mechanism operates without government interference and tariffs and trade taxes do not limit global competition to provide optionality and competition.
Businesses and production are real, using real resources to produce real goods and services for real buyers. Politicians and regulators don’t operate in this real world. They operate in their own conceptual world. The best illustration of this truth is their idea that the “economy” is consumption and can be measured as consumption, in the form of GDP. The computation of GDP includes government spending as a major contributor to total consumption. This false logic leads to the conclusion that increased government spending can lead to increased GDP and can therefore boost the “economy”. It has come to the point that the politicians will claim that any and all government spending, from welfare to nuclear bombs, drives economic growth.
This is, today, the state of government economics. It goes by the name of Keynesian economics. What that means is that the “economy’ is treated as an abstraction, a computation of consumption, and a numerical target at which unlimited government expenditures can be aimed without any thought of production, investment, or value.
In this sense, government is the enemy of reality. When the economy is understood as production, with real businesses producing real goods and services for real customers under conditions of real competition, then government spending and regulation is the opposite of production. It is extraction. It undermines production. It diverts and destroys.
Politicians and regulators have no sense and no appreciation of the real-life entrepreneurs and real-world businesses sourcing and assessing real resources to run real enterprises at a real profit.