Deck the Halls with Macro Follies

A Holiday Special from http://econstories.tv
If you've already saved for the future and are craving some consumption today, visit the EconStore: http://store.econstories.tv

CREDITS:
Executive Produced and Directed by John Papola
Produced by Lisa Versaci and Debra Davis
Written by John Papola, Adam Albright-Hanna and Jason Rink
Edited by John Papola and Josh Meyers
Post Producer Josh Meyers
Music by Layng Martine III
Cinematography by Wilson Wagoner
Production Design by John Robinson
Graphic Design by Jorge Gonzalez
Animation by Matty Young
Compositing by Thom Lynch
Sound Design by Marty Lester

Special Thanks to Russ Roberts, Steven Kates, Larry White, Steve Horwitz, James Adams and Steve Fritzinger

EconStories is a production of Emergent Order in collaboration with the Mercatus Center at George Mason University. Visit us at http://emergentorder.com and http://mercatus.org.

THE ECONSTORY:
Each year, our attention turns to the holidays... and to holiday consumer spending! We're told repeatedly that, because consumer spending is 70 percent of measured GDP, such spending is vital to economic growth and job creation. This must mean that savings, the opposite of consumption, is bad for growth.

This view of macroeconomics was first popularly asserted by Thomas Malthus in 1820, nearly 200 years ago. Malthus believed recessions where caused by "underconsumption" because there was a "general glut" of goods unsold. To recover from a recession and grow, we needed to stop all the saving and spend more to buy up all the goods on store shelves. Savers are like the miserly Ebenezer Scrooge. If you want a happy holiday, you've got to clear those shelves and give people a reason to produce more and create jobs. Or so Malthus thought.

John Maynard Keynes resurrected this approach and built on it with his influential "General Theory", which now underpins much of our government policy and public discussion of spending and economic growth. Keynesians believe aggregate spending drives the economy and savings is a "leak" out of the flow of spending. Indeed, this economic philosophy underpins many people's widespread obsession with retail sales each holiday season. Keynesian Macro Santa's sack is filled with spending.

But there is another view on recessions, recoveries and growth.

Classical and Austrian economists such as Adam Smith, Jean-Baptiste Say and Friedrich Hayek viewed savings as the vital lifeblood of economic growth and production as the means by which we live better and consume more in the long term. Our savings aren't simply taken out of the economic system, but become the source of capital that entrepreneurs use to create new goods and increase productivity. These economists believe this increased productivity is the key to a wealthier world. Before we consume, we must effectively produce what others value -- at prices that cover the costs. This fundamental idea, that our demand for goods is enabled and constituted by our supply of other goods came to be known as the "Law of Markets" and later "Say's Law". For classical and Austrian economics, recessions happen when producers make mistakes. They create goods that can't be sold at a profit. These malinvestments tend to cluster in a recession as a result of systematic problems, such as disruptions in the financial system that cause monetary "disequilibrium", often as the result of government interventions in the economy since they can be system-wide.

Recovery and growth in the classical and Austrian view is driven by restructuring production so that entrepreneurs discover again the best -- i.e. the most valuable and sustainable -- ways to serve customers. That process is lead by new entrepreneurs and driven by savers who make capital available to fund new investments and new ventures. Sustainable saving and investment means creating more value for others while using fewer resources. This process lies at the core of healthy economic growth, including better job opportunities and a rising standard of living. If there are problems in the financial system such that our savings aren't effectively being invested but sitting idle in bank vaults, or people are hoarding cash under their mattress in distress, a classical approach seeks to get the root of that problem and resolve the monetary problems with monetary solutions such as increasing the money supply to meet demand and other approaches. Using up more real resources through additional consumption in such a case is a applying the wrong medicine to the disease.

Consuming is our end goal, but producing value must be the means to that end. That is to say, Macro Santa's sack is filled with saving.

So which approach do you think is right? We favor the Smith-Say-Hayek approach to economic growth. Share your thoughts!

• Category

  News & Politics

[random94212]

WHY CAN'T I BUY THIS??????????

[danewheeler]

I would love for these to become full songs explaining a broader view of the stances on each of these economic geniuses. This would be a fantastic way to explain the concepts. Great work though guys. I loved it.

[RPFS2008]

You completely dodged his argument.

[Illyrien]

OMG, please make this for real!

[Harpsichord246]

Brilliant!

[LibertarianSamurai]

Ironic isn't it? Best infomercial I ever saw actually sales us the value of saving money and delaying consumption LOL!

[dsrosas93]

WE WANT MORE VIDEOOOOOOOS!

[Ws Wa]

I know that interest is usury and it is bad for society. But if you can prove to me that interest is also subject to loss and good to society, please educate me. I like to learn something new. maybe I can learn something from you.

[Malthus0]

You are arguing against interest yes? You said that interest or 'usury' is different from normal trade in that it doesn't "involve in profit and loss". I gave an outline of a simple interest loan transaction, that was subject to profit & loss. You respond by talking about big money corruption & manipulation. Which is not a valid argument in establishing that interest loans in principle are usurious.

[Ws Wa]

Have you watch the video about economic hitman? How they operate and how they impoverish many countries in this world using debt? Isn't it enough poverty in this world for you to evaluate your opinion? Well then if you are on their side, you are free to asked for more debt and see how they enslave you until you reach your grave.

[Malthus0]

"Lending with interest always guarantee a profit to the investor" I don't see how you can sustain such a claim. If I am thinking of lending to someone who I think has a bigger chance of default I may make a condition of the loan a higher interest rate to compensate for the extra risk. If my evaluation is right then I profit if he defaults I make a loss. Even with collateral I may make a loss if the assets value has changed. There is no certainty.

[Ws Wa]

Lending with interest always guarantee a profit to the investor even it request a collateral or not. They will never let anyone borrow their money without a certainty that they will gain a profit. They even manipulate the economy and market in order to gain more. Many people lose their business and home. The increasing homeless society in US prove that.