'..saving, wise investment and production are what creates wealth, not spending and consumption..'

'It can also be assumed that not too many economists in the Anglophone world were fully aware at the time of the extensive debate that had earlier raged in the German-speaking parts of the world over economic methodology — a dispute between economists who asserted the existence of universally and time-invariantly valid economic laws and the German historicists, who denied that such economic laws existed.

..

The idea that economic growth is created by “spending” is fundamentally misguided anyway; saving, wise investment and production are what creates wealth, not spending and consumption. One cannot put the cart before the horse and expect to actually get somewhere that way.'

<blockquote>'However, the astonishing advances in the natural sciences had an unfortunate side-effect: many scientists in the field of the social sciences — especially in the most developed branch of the social sciences, economics — began to develop a fascination for the methodologies of physics. They inter alia assumed that what had been lacking so far in economics was the availability of reliable statistics.

Armed with the proper statistical data, so it was held, economists would not only be able to “test” the theorems of economics, but would ultimately also be able to engage in proper macroeconomic planning..

..

In parallel with this, Alfred Marshall’s partial equilibrium approach as well as mathematical economics and Leon Walras’ general equilibrium approach gained greatly in prominence in economics, in stark contrast with the causal-realist approach of the subjectivist economics propagated by the Austrian School. In spite of Carl Menger having been one of the fathers of modern economics, his economic school of thought soon found itself overshadowed.

It can also be assumed that not too many economists in the Anglophone world were fully aware at the time of the extensive debate that had earlier raged in the German-speaking parts of the world over economic methodology — a dispute between economists who asserted the existence of universally and time-invariantly valid economic laws and the German historicists, who denied that such economic laws existed.

..

The positivists actually have it the wrong way around: one cannot use economic statistics or economic history to explain or advance economic theory. It is exactly the other way around: one must (inter alia) employ sound economic theory if one wants to properly interpret economic history.

..

A term Mr. Dalio has made famous in this context is “beautiful deleveraging” — as opposed to the ugly liquidation of unsound debt by means of write-downs. As he points out, every debt is someone else’s asset, and the liquidation of unsound debt is therefore liable to create a kind of “reverse wealth effect”, by destroying the wealth of creditors. He believes this should be avoided, because it would undoubtedly be quite painful and would hamper “aggregate demand”.

However, it would actually be more precise to state that the wealth that would be “destroyed” is simply wealth which creditors erroneously thought existed. By the time debt becomes unsound, this wealth has in reality already been consumed. Easy money invariably leads to the misallocation of capital, as it distorts relative prices in the economy. This in turn falsifies economic calculation, leading to malinvestment and a distortion in the time structure of production.

..

The idea that economic growth is created by “spending” is fundamentally misguided anyway; saving, wise investment and production are what creates wealth, not spending and consumption. One cannot put the cart before the horse and expect to actually get somewhere that way.

..

No Painless Way Out

As much as one might want to wish for it: there is no “beautiful” or “painless” deleveraging. Both unsound credit and unsound investments will have to be liquidated eventually. All attempts to delay this process only make the prospect of this liquidation more formidable. Moreover, by now it should be obvious even to empiricists that these attempts not only create no economic growth, but are actually hampering it considerably.

It is of course true that giving market forces free rein would likely create quite a bit of short- to medium-term economic pain. The process of economic cure takes time, and the more malinvested capital and unsound debt there is, the more effort and time will be needed to restore a sound capital structure. Many assets may well change ownership in the process — economic power would shift from the beneficiaries of inflation to other members of society.

However, this period of economic pain is required to restore a sound economic foundation and with it, the basis for a resumption of sound and strong economic growth. It should not be feared. What should be feared are the ever more desperate experiments of central bankers and financial repression measures imposed by governments. The choice is only between short-term pain and long-term gain, or a long-lasting malaise followed by an even bigger catastrophe at the bitter end.'

- Acting Man, Is the Economy a Machine? May 26, 2016</blockquote>


Context

<blockquote>(Praxeology) - '..his or her subjective values .. to explain all economic phenomena as the results of what people do..'

(Haptopraxeology) - '..the senses were the windows of the soul and that reason had a divine right to feed upon fact..'

'..my clients find it far easier to talk about sexual problems than money problems. Definitely more shame there..'


‘…there must be prior savings and investment…’

'..the Great Depression .. was caused – like our crisis today – by too much debt.'

Mises - Money and Credit - '..the recession was a problem of under-saving, and over-consumption..'</blockquote>