Economic Growth:productivity and per capita GDP


The rich do two things with their money: (1) buy consumer goods and services or (2) invest it to earn interest or dividends or value appreciation. Money just doesn’t sit around doing nothing or just pass around from one rich person to another, again doing nothing productive. Most of it is used to create additional money, goods and services. In this way the GDP usually continues to increase.

We should investe our money in companies that use it to buy plant and equipment to create additional value or we could invested in stocks, funds and bonds in domestic and foreign markets. That money is used by the recipient firms to create additional value. In that process, executives, managers and laborers receive money to spend and invest. In return, we receive interest or dividends on our account that we use to buy goods and services and reinvest. The money doesn’t just circulate pointlessly. While circulating it is *USED* to create more value to its holders. That’s the whole point of money. In itself, it is valueless – mere paper. It is what it can do that is valuable.

The only money that is useless is that which is hoarded. That happens on a large scale when people and businesses lose confidence that their money will bring a satisfactory return, i.e., more money, so they stop buying and investing. They just hold it. That can cause a recession or depression. The reason we don’t have depressions much any more is that the government can put money in circulation and make some investments itself and *HOPE* that people will gain confidence use it to spend and invest to keep the economy running. No guarantee that will happen, of course, so depressions are always possible.

Another possible problem is created by the imbalance of consumption and investment, but that is another story. The relationship between tax amounts, tax rates and productivity (goods & services output / labor input) and “prosperity” (per capita GDP at constant price levels) is not obvious from a priori reasoning. Increases in per capita GDP depend on increases in productivity. Productivity increases are made either by (1) workers producing more goods and services per unit time than they did before, i.e., working “harder” or “smarter”, not longer), or (2) substituting machinery for labor, which requires investment, which requires saving some of the earnings. The question is whether nongovernment (“business”) workers using their own earnings or government workers (“governments”) using the nongoverment worker earnings in the form of taxes is more productive. That depends on what each group does with its earnings and taxes.

If workers either (1) do not work harder and smarter, or (2) spend all their earnings on consumption, i.e., save and invest nothing, either on machinery, infrastructure or social services (educated and healthy workers tend to work “harder” and “smarter”), then productivity and per capita GDP will not increase. The question then becomes whether  workers are more productive or save and invest more to obtain increases in productivity. The answer is determined by trial and error, i.e., experience, and not by theory.
Through experience, we have seen many cases of nonproductive pursuits by both workers. In the U.S. since its founding, trial and error has resulted in the present mix of government and nongovernment economic activities.

An American Economist Stanly said recently “Assume that we are a business executive and earn million per year. We spend little of our cash each year on goods and services, such as food, clothing, shelter, medical care, private schools for children, cars, boat, vacation, gardener, housekeeper, etc. The poorer sort, i.e., wage earners, use what we give them to buy mostly consumer goods. A small part might be saved and invested like us or our friends, although on a much smaller scale.

If we invest our cash in bank acccounts, stocks, mutual funds and bonds of other companies or governments, all of which use it to invest in technology (producer goods), and consumer goods and services. Again, wage earners get some of the money. For the use of our money, we receive more money as interest and dividends.

If we decide to sell our stock and invest it in other securities so as not to be top heavy in one stock. The recipients of that cash invest it in producer and/or consumer goods to improve their businesses. To do that, some of the money goes to other laborers, managers and executives who use it just as we do. Again, we receive interest and dividends.

He further argued “The same things are happening to all our rich friends. The money isn’t just shuttling back and forth among our friends, which would be a useless exercise. We are all using it partly to experience the “good life” and partly to become still richer by prudent investment.