There has arisen a recent controversy over the direction of the U.S. economy.
Many analysts point to the potentially negative impact that a rising rate of
interest has had over the past two years and also the real estate market
slowdown. The real issue at stake, however, is that of production and that
will be the focus of this article.
The popular press likes to present a bleak picture of U.S.
manufacturing, but as the American Institute for Economic Research recently
pointed out there is more to this story than is being presented in the
Reports in recent months have focused on the woes of GM and Ford and
other automobile manufacturers in the U.S. as more plants are closed
and thousands are laid off. As the Institute report pointed out, "Some
analysts point to the record U.S.
current account deficit, almost seven percent of Gross Domestic Product (GDP)
and widening, as further evidence of the decline in manufacturing." But
as the report details, "the focus on manufacturing jobs and on the
declining fortunes of particular companies and industries can be
deceptive." According to the report, manufacturing output actually been
growing and in 2004 reached a record high in spite of a general decline in
manufacturing employment. Increased reliance on technology and automation are
responsible for the huge increases in productivity growth.
Does increased production through automation help or hinder an
individual’s economic prospects? History shows that it helps by
increasing the aggregate standard of living. As long as industrialization is
increasing within the boundaries of a given economy (as opposed to being outsourced
to foreign countries) the rising level of automation will only increase
productivity along with the standard of living.
In eighteenth century England
the invention of the "spinning jenny" promised to revolutionize the
cloth making trade and free up man hours for other, less toilsome
enterprises. This labor-saving device could make
clothes 10-to-20 times faster than could be spun by hand. At that time the
"home factory" system was prevalent in England and women were
principally engaged in this productive endeavor.
The invention of the Spinning Jenny, far from being greeted with open arms,
became an object of revile and thousands rose in protests against the
machine. The common argument leveled against the
Spinning Jenny was that it would ruin the economy of England to
have a machine that would make more clothes than could be produced by hand.
Clearly this was a fallacious argument, a point that becomes clear
with the benefit of hindsight. In subsequent generations other labor-saving devices have been greeted with the same fear
and rejection that was cast upon the Spinning Jenny: mechanized harvesting
implements, industrial robots, computers, etc. In France a machine that was
designed to produce tapestries was destroyed because the French feared this would
hinder their hand-made tapestry industry.
Today tapestries are produced in France with machines at a huge
savings in cost-per-unit and man hours. Workers in general have always feared
new inventions that promise to increase production at the expense of cutting
man hours. But as the American Institute for Economic Research aptly states,
"[T]he goal of economic activity is not to employ as much labor as possible to produce something, but to produce
more from a given amount of labor."
This latent fear of labor-saving devices is
a product of Keynesian economics. The reasoning behind this fear is lacking;
the assumption is that people don’t want more things than they already
possess. In 1932 the arguments of Keynes was that the Great Depression was
caused by over-production and only by controlling industrial output could
future depressions be averted. Dr. Stuart Crane addressed this fallacy in one
of his lectures back in the early 1980s: "This idea of satiation
economics or over-supply economics is what is taught today – the idea
that we must control and regulate what is being produced in order to make
sure they don’t get out of balance – fails to realize that
production is always out of balance."
No one understood more clearly or preached more fervently the basis of
production as a standard of monetary wealth than Henry Ford. The great
American industrialist and innovator fought against the Keynesian concepts of
his day, particularly during the Great Depression era. In his recent Ford biography,
"The People’s Tycoon," author Steven Watts summarized the
economic philosophy of Ford in the following words:
"He relentlessly insisted that Americans confused money with
wealth. Though money needed to circulate freely in order to facilitate the buying
and selling of goods, he admitted, it had no intrinsic value.
‘Money...may represent wealth, but it is not wealth itself,’ Ford
wrote. In the 1920s, however, businessmen had sought profits rather than
producing solid products. The result had been disastrous, because
‘wealth consists of useful goods, and money which is made out of thin
air does not add to the stock of goods and therefore does not add to
wealth.’ This trend also increased the power of financiers and bankers,
the old ideological bogeymen in Ford’s populist worldview. For Ford,
the economic crash had demonstrated that a ‘system of business in which
the money lender too conspicuously thrives is not a truly prosperous
Ford’s solution for the socio-economic malaise brought on by the
Depression could be summarized in a single word, according to Watts: production. Watts
highlighted Ford’s core belief that the production of "tangible
goods to meet the demand of consumers provided the bedrock of American
prosperity. In Ford’s words, ‘Plenty means production and still
more production; production means wealth, and scarcity means poverty; and the
entire social problem is poverty....Production and the effects of production
give the answer to practically all the things that trouble us."
A socialist-type government such as the U.S. government embraces the
Keynesian economic view. It not only attempts to control production but also
the capital and labor of the individual
participants within the economy, regulating their liberties to produce when
and what they want and in whatever quantities they desire. "The key to
production," writes A. Ralph Epperson in his book, The Unseen Hand,
"is the incentive of the marketplace, the right to keep what is
produced, the Right to Private Property! The right of the individual to
better his life by producing more than he consumes and to keep what he
produces." Government economic policy that has been contaminated with
Keynesian thinking will always be at odds with this.
Contrary to what contemporary economic theory teaches, in the
supply/demand equation it is usually demand over against supply that is the
culprit in economic downturns. More specifically, the problem usually lies in
the failure of the money supply to keep up with production and not in
oversupply (which economists are too quick to blame).
To former U.S.
President James Garfield is attributed the following quote: "Whoever
controls the volume of money in any country is absolute master of all
industry and commerce." This statement is self evident and has reached
its apotheosis in our day under the Federal Reserve’s control of our
What happens when the money supply is expanded out of all proportion
with the demands of industry and commerce is that money quickly loses value
and the prices of goods and services rise to exorbitant levels, in other
words, hyper-inflation. Notice that it isn’t
"inflation" that is the great evil, only hyper-inflation.
Inflation, which is to say expansion, of the money supply when commerce and
trade are growing is a vital necessity to ensure the economic health of any
nation. This is true as long as the inflation isn’t allowed to exceed
the demands of commerce.
It follows then that the best measure of whether the money supply
should be expanded or contracted is taken by measuring productive output and
keeping a pulse on the needs of the marketplace as measured by production.
This can never be adequately undertaken by out-of-touch bureaucrats or Ivory
Tower economists. Nor can it be based on the whims of a central bank
unconcerned with the everyday needs of individual capitalists.
Thomas Jefferson clearly had this view in mind when he said, "If
the American people ever allow private banks to control the issue of
currency, first by inflation, then by deflation, the banks and corporations
that grow up around them will deprive the people of their property until
their children will wake up homeless on the continent their fathers
While visiting London,
Benjamin Franklin was once asked what accounted for the prosperity of the
American colonies. He replied: "That is simple. It is only because in
the colonies we issue our own money. It is called Colonial Scrip and we issue
it in the proper proportion to accommodate trade and commerce." As one
writer has pointed out, the colonies didn’t abuse their power to create
inflationary monetary conditions; rather, the issuance of currency was done
so according to the current demands of the market and not according to the
immoral socioeconomic schemes of corrupt men. Would that our present monetary
authorities could regulate money supply the way it was done in Ben
Franklin’s day! Then the roller coaster cycle of boom-bust-boom could
be mitigated to a large degree and allow for a smoother, more extended wave
of prosperity than the Fed’s monetary policy allows for.
Clif Droke is the editor of the
3-times weekly Momentum Strategies Report, a technical forecast
and analysis of several leading stock market sectors and individual
stocks, which is available at www.clifdroke.com. He
is also the author of several books, including "Turnaround Trading
Editor, The Daily Durban Deep/XAU Report