Tuesday, March 18, 2014

Demand is entropy

Dennis Prager produced this short apologetic for capitalism with George Gilder, author of Wealth and Poverty and Knowledge and Power.

Since the Great Depression and the 1936 publication of John Maynard Keynes’s The General Theory of Employment, Interest and Money, most mainstream economists have seen aggregate demand as the leading indicator of economic health. High demand translates to high employment and high wages, and vice versa. Accordingly, when demand flags, government goes into debt to boost demand.

Consumerism has thrived on the aggregate demand model. Consumer spending comprised 71 percent of the economy in 2013. The less you save, the more you spend, the higher the demand. The deeper the debt, the “healthier” the economy. But demand cannot rise unabated without a commensurate rise in productivity. The Great Recession started from a collapse in demand caused by the drying up of credit.

Aggregate demand is entropy, a measure of capital that isn’t being invested in the future. The key to a growing, thriving economy isn’t demand. It isn’t consumption. It’s innovation, which requires self-denial and self-sacrifice to bring new products and services to market.

“Entrepreneurs by the very nature of what they do must shun greed ... Entrepreneurs must begin by saving: forgoing consumption to achieve long-term goals.” –Gilder

This long-term orientation of parlaying current wealth into future wealth tracks with the generative cycle of human civilization. Parents leave their children more than they were left with, and so on. Wealth is too valuable to waste on the fleeting here and now.

Related: “You need to read George Gilder.”

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