In order to explain an idea from GOLD economics that I refer to as the Upwards Spiral, let’s consider the example of a sculptor who finds some red clay in a field and molds and bakes it into a clay pot. I use this example a lot in the context of explaining the right to own private property, as it nicely encapsulated the reasons why the sculptor should own her clay pot, and why she deserves to own it even if she did not create the clay nor create the good luck of finding clay, because she made choices and decisions to shape the clay into the clay pot, using her labor to create something that wasn’t there before.
However, let’s consider it from a different angle here. What is the economic effect upon the economy as a whole of the creation of one new clay pot? In other words, what is the consequence of each additional marginal clay pot? If she hadn’t made the pot, then there would just be red clay beneath the dirt in a field. In the absence of the sculptor, there would be nothing. With the sculptor, there is now one additional clay pot. Evidently, she has created new wealth that did not exist before. What does this mean? There is now one new clay pot for someone, say a baker or a family that needs something to store flour in, to buy and use for their uses for a clay pot. They will purchase the clay pot. This then creates a new marginal unit of work for someone to do, say, to be paid by the purchaser to deliver the clay pot from the sculptor’s kiln to the house of the family that has bought it. That family then pays the deliveryman a fee for his work. None of these things--the purchase or the job it created or the salary for that job--would have existed in the absence of that one new clay pot. Then, in turn, perhaps the deliveryman takes his fee and buys a sandwich. This then gives a sandwich shop one new sandwich sale which it otherwise would not have had, it spends the money it made from selling that sandwich to buy a marginal additional amount of bread, the baker sells one more loaf and pays more to the farmer who sells him the flour, the farmer has marginally more money to buy seed and fertilizer for growing wheat, and so on.
In light of this example, we can see that each time a producer creates a new value, each time one new unit of wealth is created, it impacts the entire economy beneficially, creating new trades that would not have existed, and each new trade makes money that can pay for more opportunities to create more wealth. This is basically the Broken Window argument in reverse. The Fallacy of the Broken Window says that if you break a window, the money spent to repair it does not help the economy does not have a net benefit, because the net result is everything as it was before minus one window. The Upward Spiral theory says that if someone makes something, the entire economy benefits, in the traditional of Adam Smith, because everything is as it was before but there is now more wealth in the pool of value that is bought by everyone’s dollars.
Two conclusions result from this. First, that the key to economic growth is production. The Keynesians, who say that demand causes growth, as if consuming value is the engine of growth, are simply wrong. This should come as no surprise to most libertarians and Objectivists. The family’s need for a pot to store things in, their demand, would accomplish nothing if the sculptor did not actually make the clay pot from the clay. In contrast, supply side economics, which focuses on creating conditions favorable to production and the creation of wealth, is the best tool for economic growth. This is not Voodoo Economics, it is in fact basic logic, which sadly most leftists don’t care about, since they don’t think logically, they think in emotions, and not merely emotions, but negative emotions like envy and resentment. Note that creating more wealth benefits everyone, including the workers and the poor (see my other blog posts about the Great Recession for details), so supply side economics actually helps the poor. This is not a “trickle down” effect that I am asserting, I am instead asserting that economic growth increases prosperity and the standard of living, which helps lifts every tier of standard of living higher than it was before. Each marginal unit of new wealth created benefits the economy, so the more that is produced, the more trade creates additional opportunities to produce. Thus there is, obviously, the potential for--aptly named--an Upward Spiral.
Second, leftists who might agree with me about the lone female sculptor say that if a factory mass-produces clay pots, and is owned by a greedy capitalist owner, then all the created wealth is taken by the owner and does not benefit the people. Let’s consider this. First, the issue of scale. If one million clay pots are produced, then each one benefits the economy, for the same reason that one clay pot would--up to the point where there is unmet need for more clay pots, and once all need is sated, then supply meets demand and the additional creation of new pots is a waste of resources and does not create wealth. So, if a factory creates one million clay pots, they do good, but one million times more than one person could. The miracle of the Industrial Revolution, and the reason we don’t live in thatched-roof hovels in pig feces to die from Black Plague or work 18 hours a day for a bowl of gruel, like they did in medieval civilizations before capitalist economic progress and the Enlightenment that gave birth to that progress.
Second, if the factory creates the pots, the newly created wealth belongs to the people, in the sense that its benefit goes to the many people who buy them, the salary for the fleet of employees who now have jobs to deliver them, and to the sculptors, or factory machine workers, who make them, and get paid their salary. Maybe an owner takes a profit. Perhaps the majority of the revenue is the owner's profit, if a profit margin is high. But in the absence of the factory, one million clay pots could not be made, the jobs for delivering millions of clay pots, and salary for those jobs, would not exist, the salary for the factory workers to buy things would not exist, and the world would be the same except minus a vast amount of created wealth. So the owner takes what he deserves, and he gets the money that equals what the marketplace values his work in organizing a successful clay pots factory. You can either have thousands of working class factory workers making a low wage for unskilled fungible labor, or, in the absence of the capitalist owner, these thousands of people would have no job at all, no money, and they and their families would starve. (Of course, the leftists want to believe that the government could take wealth and give it to these people, but again, that wealth ultimately reduces to just a lot of clay pots, or created food, or created wealth, and someone must create it, and some factory must create it to make enough of it to make a difference--the government doesn’t create it.)