The consequence of supplying a good or service for which there is not adequate demand to make it profitable to do so, is that resources are misused. Misused in the sense that those resources would better serve people if they were applied to a different good or service. If a businessperson tried to supply a good or service for which there was not adequate demand, bankruptcy would result, and the misuse of resources would end. Those resources would then be available for others to use. That is because in a free market, resource allocations are self-correcting.
The efficiency of the market place is terrifying to some people. It requires business leaders to be on their guard against shifts in consumer preferences at all times. The current situation in the computer industry illustrates this phenomenon. IBM's leaders thought that mainframe computers were always going to dominate the market. Rather than develop their own line of personal computers, they bought off-the-shelf pieces from suppliers and assembled them. Personal computers took off while the demand for mainframe computers sagged dramatically - to the point that a once-great company is now in search of a mission. William Akers, the former Chairman and President of IBM, was fired and someone new was hired to try and save the company.
Meanwhile, Microsoft, a software company that writes operating systems and programs for IBM and compatible personal computers, is doing very well. Its Chairman and co-founder, Bill Gates, is worth over $100 billion according to Forbes magazine's list of the wealthiest individuals in the world. This example illustrates the point that when the free market is allowed to function without artificial constraints, whatever people want is what businesses furnish. When dollars are diverted from the market place by government spending, strange things begin to happen. Instead of products that consumers want being produced, the money is spent on other goods and services; goods and services that people would not choose if they had control of the purchase decision. If people were to see directly that the spending the government was doing was forcing them to forego goods and services they wanted more, people would be up in arms. This is why the government tries to find a way to pay for its spending programs without doing the obvious thing of raising taxes to balance the budget. Money spent by the government serves to get politicians reelected. We all want the programs we favor to be continued. If spending is to be cut, we want our politician to cut it somewhere else. It is this kind of pressure that causes elected officials to favor continued spending for every existing program, for nobody wants to go on record as wanting to cut your favorite program. They vote to continue spending even though they know they are destroying the Dollar. When our Dollar will no longer buy anything, they will all point the finger at someone else.
The governments' alternative of raising interest rates high enough to cause people to save enough (buy bonds) to support the spending programs has a lot of problems. When the government raises interest rates, it hurts business. Higher interest rates mean higher costs, which in turn means higher prices. People who are just barely able to make ends meet at current rates cannot afford the higher prices or monthly payments. Further, money that is diverted to government programs is not available for private investment, and not subject to the self-correcting efficiency of the free market.
In terms of the effect on each citizen, private investment generally leads to more goods and services that are in demand being produced. Business people produce whatever their customers will buy. People let businesses know what they want by which of the firms products they buy. Business, when unencumbered by laws and regulations, responds almost instantly to consumer desires. Those who fail to respond eventually go out of business; those who sense the changes earliest have a leg up on their competition.
If we don't do something, we will reach a time when our money will no longer serve as a medium of exchange and a store of value. Unless some hard choices are made soon, the interest on the national debt will exceed the total taxes collected. Still, in the midst of the budget crisis, the President and Congress are adding new spending programs.
We, by giving our government a mandate to spend our money, are insuring that its value will continue to fall. Returning to a gold standard is not a sufficient answer. Roman emperors were on a gold standard, but it didn't stop them from shaving their coins. The U.S. was on a gold standard until the squeeze in the late 1960's forced us off of it. Modern politicians will just as easily devalue the currency when it suits their purposes.
Copyright 2006 by T. D. Blackburn Permission hereby granted to reproduce with this copyright notice included.