Obama Stimulus Check

By Gerard Jackson

Although economic fallacies will always be with us economic myths can sometimes be eradicated. Now I get my share of economic idiots, most of whom are too stupid to warrant a reply. However, I received one today who does deserve a response even though his or her idea of economic analysis is to mindlessly regurgitate what’s been picked from newspapers and wacko publications.

I have stressed that living standards cannot continue to rise unless capital accumulation exceeds population growth. Now this twit responds with the penetrating accusation that I must be wrong because if productivity did raise living standards “then please tell me why Americans work more than four hundred hours a year more than their German counterparts? Why have real wages been falling for nearly two decades? And why has there been an increasing use of credit to supplement a drop off in purchasing power of the average American?”

First, it’s not productivity per se that raises living standards but capital accumulation. Capital is the material means of production that forms a structure consisting of highly complex stages of production which embody technical progress. It’s from here that a continuous rise in productivity ultimately springs. I have said, more than once, that if savings falls too low or the rate of population growth exceeds the rate of capital accumulation living standards will fall.

So have American wages fallen even as productivity increased. No, is the answer. Once adjustments for real price movements have been made it can be shown that real wages have been rising for “for nearly two decades”. Even a small annual rate of change in prices can make a considerable difference to real incomes over one or two decades. Therefore, overstating inflation by small annual amounts can significantly understate the growth in real incomes. If the error is big enough real incomes can even seem to fall. This is what happened in America.

Continued at Economic Myths Part 2