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Affluent Christian Investor | October 26, 2021

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The Source Of Wealth Creation

Since humans are the primary element required to create wealth, it is important to invest in their knowledge, experience, growth, and wisdom which can only be done in a free market. Control and manipulation only retards the needed learning, whether it comes in the form of controlling the industry or manipulating the currency and capital movement.[1] Economist Murray Rothbard explains the damage and misinformation:

Artificial stabilization would, in fact, seriously distort and hamper the workings of the market….Furthermore, improved standards of living come to the public from the fruits of capital investment.  Increased productivity tends to lower prices (and costs) and thereby distribute the fruits of free enterprise to all the public, raising the standard of living of all consumers.  Forcible propping up of the price level prevents this spread of higher living standards.

Money, in short, is not a “fixed yardstick.”  It is a commodity serving as a medium for exchanges.  Flexibility in its value in response to consumer demands is just as important and just as beneficial as any other free pricing on the market.

…Freedom of prices necessarily implies freedom of movement for the purchasing power of the money-unit; it would be impossible to use force and interfere with movements in the value of money without simultaneously crippling freedom of prices for all goods.[2]

As Rothbard eloquently described above, prices are also a measurement tool – a comparative measure of value. From a macroeconomics view, interest rate is also a critical price measurement, whether it is the interest rate on loans, return on capital, or time preferences. Very significant economic issues – boom and busts – arise when interventions, driven often by government spending or the Federal Reserve manipulating currency or interest rates, change the natural economic cycle, often referred to as the Austrian Business Cycle.

Interest rate changes which are artificially adjusted by the Federal Reserve can cause considerable damage to the economy. It removes the natural interest rate based on actual needs of the market.  Austrian economist, Mark Thornton explains:

The problem of the business cycle arises when the loan rate of interest diverges from the natural rate of interest.  While this divergence could happen in a free banking system, the major divergence occurs under central bank regimes when large reductions of the interest rate are executed by injecting money into the banking system over a long period of time.  A larger volume of loans is thereby made possible.  The lower interest rate increases investment and consumption and reduces savings.  These changes in the economy provide the conditions for a boom in the economy.  If the new funds are funneled into a specific sector of the economy, a bubble could result…So the central bank is the ultimate cause of the business cycle.[3]

The best and most robust economy is a free economy which is a learning economy.

[1] This is central to the discussion about Robert Mundell and Art Laffers’ hypothesis in Jude Wanniski, Spring 1975, “The Mundell-Laffer Hypotheses – a new view of the world economy,” The Public Interest, No. 39, (National Affairs, New York, NY), pp. 31-52.

[2] Murray N. Rothbard, 2010 (originally published in 1963), What Has Government Done to Our Money? (Auburn, AL: Ludwig von Mises Institute), pp. 32-33.

[3] Mark Thornton, September 13, 2013, “Only Austrian Theory Can Explain and Expose Booms and Bubbles,” Mises Daily, (Auburn, AL: Ludwig von Mises Institute), [http://mises.org/daily/6533/Only-Austrian-Theory-Can-Explain-and-Expose-Booms-and-Bubbles].

This article originally appeared on Townhall Finance.

 

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