This lesson is a companion to Lesson 5: Jobs Don't Make Money. I recommend reviewing it for a fuller grasp of this subject. The pie is a common analogy used to explain Socialist misunderstandings about wealth. The Socialist believes that wealth is limited, like a single pie that must be carved up fairly. Therefore, if one person's piece is too big, then someone else got ripped off. But the capitalist says we can bake more pies. We already have. Every dark corner of the world has more lights, cars and cells phones than it did 100 years ago. The entire world is wealthier than before. Because Socialists don't actually believe that wealth can increase, they don't actually believe in economic growth. Instead of wealth, they measure activity. They refer to the economic "engine," and use related metaphors about the economy "stalling" or "over-heating." This way of thinking begat the theory of Stimulus. After all, engines sometimes need to be primed or jump-started. And what better way to jump-start the engine of economic activity than by forcing people to be active? That is done by forcing money to change hands: Taking it from one person (tax) and giving it to another (spend). If we follow this theory to its extreme conclusion, then the more that government taxes and spends, the more circulation of money that occurs, and the healthier the recovery. It's like CPR. The problem is that the economy is not a pie or an engine or a beating heart. Oliver Wendell Holmes Jr. said "We must think things not words." Here are the basic things we must think: 1. Prosperity is the ability to fulfill your needs and your wants. We prosper by exchanging goods and services. We track that exchange by using money. 2. We are limited, both individually and worldwide, in the resources we have to seek prosperity. We are limited by time, land, talent and stuff. 3. All of your wants and most of your needs are best known by you. Only a few of your needs are better known by your local government, fewer by the state and the least by Washington D.C. By design, government cannot spend your money more wisely than you can, even if you're rich. It is inherently wasteful and inefficient. (See Lessons 3 , 4 and 9). 4. When government spends our money, our limited resources, on things we don't want or need, it has squandered our ability to prosper. For all the economists who subscribe to this block-headed engine theory, another quote from the great Oliver Wendell Holmes Jr. "Do not be bullied out of your common sense by the specialist."
Lesson 27: The Myth of Stimulus (Pies Vs. Engines)