Tuesday, September 21, 2010

Government Policy Versus Capital Accumulation

As I explain in the final chapter of my book, Foundations of Economics, if we want to increase our standard of living over time, we need to take advantage of the three sources of economic expansion: the division of labor, capital accumulation, and entrepreneurship. All three of these require the social institution of private property, which fosters the division of labor by allowing voluntary exchange. Private property also provides the ability and incentive to save and invest in capital accumulation by allowing people to keep what they earn, and also enables entrepreneurs to calculate profit and loss in market prices denominated in a common medium of exchange. To the extent that the state intervenes with economic policies such as socialization of industry, confiscatory taxation, monetary inflation, and regulation of business, it hinders the operation of the market, leading to economic regression and a lower standard of living.

Robert Higgs has done us all a great service by digging into the details of the latest releases of various government reports, providing a sober picture of our economic situation. He notes that there since the advent of the Great Recession there has been a great divergence between private investment and government power. Private investment has shrank while government power is on the rise. This does not bode well for our economic future.

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