The Magic Formula

There is only two real obstacles to growth in today’s economy.

The first, as we have seen many times before, is money. The truth is, we don’t know the value of money today, that’s the problem. The price is literally fluctuating every second in the forex market. Is this desirable? Obviously it’s not.

It goes not much further than common sense to understand that money should be stable in value. Why? Because you are using money to value things. When you buy something that’s priced at 5 euros, or 5 dollars, you are using the currency to measure the value of the good. How can you properly assess the value of things when what you are using as a measure of value keeps changing value? What if 5 euros suddenly becomes worth less?

Think of money as a ruler of value. Now just think how stupid and unpractical it would be to be constantly changing the units of measure of a ruler.

Put very simply, we must return to sound money. Central Bankers should concern themselves with maintaining the value of money stable, not with manipulating interest rates and all this nonsense.

The solution to this is simple. Return to the gold standard. In other words, have currency managers adjust the supply of money to maintain the value of the currency stable in relation to gold, which is also stable. It’s not a coincidence that thousands of civilizations around the world used gold and other precious metals as money. It possessed the necessary characteristics of money, it still does, and it’s still the best we’ve got.

The second part of the magic formula is also simple; lower taxes. In other words, keep more money in the private sector, and obviously, reduce the size and involvement of the public sector in the economy.

Empirical evidence will support this, but so will reasoning. We know that bureaucracies are inefficient, we know that governments are corrupt, and we know that citizens will make better choices with their money than politicians will. It’s a bit like gift giving. When someone buys you a gift, he doesn’t truly know what you want, he has to guess. The most “efficient” thing would be if your friend would just give you the money he spent on the gift, and let you decide what to spend it on.

The same happens with government taxation. We give money so that politicians will shower us with “gifts” and services. Instead, why not leave the money in the hands of the people? And why not let the private sector provide these services?

The bottom line is, as Hayek would say, that the government does not have the specific knowledge to properly spend and supply services with taxpayer money. Just like your friend can’t be sure if you will like his gift.

This specific knowledge can only be found in the market. In the interaction of all the different consumers expressing their preferences and spending their money where they know they will obtain the highest utility.

That’s pretty much it. All you need to get the economy back on track in 500 words.


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