Healthy Economy-

We often hear phrases that make sense, but have you considered their meaning? One such phrase is a “healthy” economy. How is good or bad “health,” in this context, determined? Well, a healthy economy is one that is productive. Production is the process of creating values that other people in the marketplace want to purchase. When individuals are free to pursue their own happiness and trade amongst themselves on a voluntary basis, it forms the basis of a healthy economy.

The Nature of a Healthy Economy

In a healthy economy, there appear to be two types of people: producers and consumers. However, this is something of a misnomer. There are few, if any, people in a healthy economy that only consume, but never produce anything. That is actually the sign of an unhealthy economy as those on public assistance continually consume but do not produce. In a healthy economy, everyone must produce something to acquire money needed to trade. For example, let’s assume that a butcher goes to a shoe store and purchases a pair of shoes. The butcher is consuming the pair of shoes, but also acts as a producer himself since he cuts and prepares meats for others. In this sense, trade happens between two producers. Even professional investors are productive. They produce growing seed capital to fund future productive efforts for other people in exchange for a share of profits in any venture they invest in.

Economies depend on productive people to produce goods and services for others, but they also require political and economic freedom to do so. The more economies are regulated, the more restrictions on production which may curtail or eliminate producers’ ability to create valuable goods and services profitably.

Profits and Loss

Economies thrive when businesses are profitable and are depressed when businesses operate at a loss. In a free economy, profits indicate that a company has made good choices with where to deploy its resources and has more money to invest for its future. Losses indicate that a company has made poor choices with its capital and thus has no money to invest for its future. When there is more money to invest in the economy, as a whole, it grows. When there is less money (due to losses), it effectively “dies.” Thus, profits are an important aspect of a healthy economy. While government intervention creates inefficiencies which may allow uneconomic enterprises to thrive (due to subsidies) or economic enterprises to fail due to severe regulations.

Unemployment

Unemployment is a phenomenon where the workforce in an economy has no work to do. Companies cannot stay in business and operate at a loss, so they eliminate jobs. This creates unemployment. However, an underlying cause for unemployment is a business’s persistent capital losses. Capital losses can be the result of poor business decisions or government regulation that eliminates a business’s ability to compete or operate in a free market.

Foreign Exchange Rate

When all other factors influencing an economy are encouraging growth, it affects the foreign exchange rate of a nation. When a nation is doing well, its currency will reflect this fact. All modern nations have a central banking system that controls the flow of capital through member banks. The foreign exchange rate represents the value of the currency flowing through a nation’s banking system, from the central bank to all of the member banks in the system. In the U.S., when the value of the dollar is high, relative to other countries’ currencies, i.e. the dollar is “strong” the U.S. is able to import more because products from other countries appear cheaper. However, if other countries’ currencies have a high value relative to the dollar, then products from other nations become relatively more expensive to consumer whose income is based in dollars.
Editor’s Note:

Other factors creating an unhealthy economy would include taxes and inflation. Both are the result of excessive government spending. As the government runs up deficits this puts an undue strain on the economy through either high taxes, which would stifle entrepreneurship or through massive printing of currency resulting in inflation. Governments think that somehow they magically create wealth. However, the only way wealth can be created is through production (and governments don’t produce anything.)

For instance, if a house is built, wealth is created. The builder may start with a $25,000 piece of land. He adds $50,000 worth of materials and $25,000 worth of labor and comes up with a $150,000 house. So he put in $100,000 and creates $50,000 worth of value out of thin air. That is how wealth is created. And the more productive a country is the healthier its economy. The more inefficient a country is, the less healthy its economy is.

Inefficiency can be the result of government regulations, or a vast welfare state allowing a large proportion of its citizens to siphon off the productive capacity of the citizens that are actually producing. Currently the European Union is laboring under massive bureaucracy mandating inefficiency in the name of equality. For instance it recently mandated that Portugal destroy half its fishing fleet because it was too efficient (unfair to the other countries). It also mandates that certain countries export all their fruit to a neghboring country where preserves (jam and jelly) can be produced so that they can then be shipped back.  See Government Roadblocks to Prosperity for more information. All these regulations create inefficiency and then they wonder why they need to bail out Portugal, Italy, Greece and Spain.

See Also:

• So Long, US Dollar As World’s Reserve Currency
• Comparing Keynesian and Austrian Economics
• Financial Changes Can Happen with Lightning Speed
• ‘Fiscal Cliff’ … an Illusion or Reality?
• About Those US Jobs
• Unemployment Rate Chart

Photo Credits: by 401(K) 2012  Healthy Economy