I figured I’d speak on the subject of economic growth or how an “overheating economy” causes inflation. The truth is, the overheating economy causing consumer prices to rise, is a lie.
Economic growth does not generate inflation or cause prices to rise; in fact, it does the opposite. The idea that a growing economy causes inflation would go against the supply and demand theory.
Supply and demand theory says if there’s an abundance of supply relative to the level of demand, then prices begin to fall. However; if supply drops then prices start to rise, it’s that simple.
There’s no way economic growth can cause inflation; as I stated in a previous post, inflation has nothing to do with rising prices. Inflation is a matter of increasing the money supply, and rising prices are a result of inflation.
It’s unfortunate that the average person truly believes in this nonsense. A country can never experience too much economic growth. Consumers and producers would love an overheating economy.
Everyone wants a low price whether it’s in producing goods (lower production costs) or consumer goods (lower consumer prices). Furthermore, this is how we raise our standard of living. Increasing our productive capacity allows goods to become affordable for the average person.
Assmebly Line’s Economic Growth
For example, Henry Ford did not build the first automobile; however; he was the first to produce cars that were affordable for the average American. Ford, made his fortune by reducing the cost of an automobile and making it accessible for the middle class.
By standardizing the manufacturing process, Henry Ford was able to increase his workers’ productivity which resulted
However, according to pundits, the assembly line’s economic growth should have caused the economy to overheat and therefore create inflation. Wrong.
It did the opposite, and the middle-class Americans were able to enjoy a luxury that was initially only available to the upper class. The real truth is, economic growth or the “overheating economy,” does nothing but benefits a society.
However; it is the scapegoat that governments like to blame so that the citizens won’t look to the government as the cause of their inflationary problem.
Inflation can only be caused by governments and their central banks, not by economic growth. An overheating economy is just a matter of workers and companies being very productive.
Everyone wins when the economy is very robust; an increase in the supply of goods means lower prices. And lower prices result in more affordability.