For those who think economics at a national scale is not counter-intuitive relative to individual, household or business practice, here’s an example:
Any individual household or individual business that either gives all its goods away or sells all its goods at a significant loss, which amounts to the same thing only by difference of degree, goes bankrupt. Those that sell at a profit do well. The inverse is true, though, on a national scale, due to the nonsensical monetary and economic system we have.
At the end of the second world war the productive output of Germany and Japan’s manufacturing plant as a whole was pretty much zero. On top of this the countries had massive war debts to pay, primarily to the U.S. (although they owed the U.K. as well, the U.K. owed the U.S. to such a degree that most of the payments simply went through the U.K. to the U.S.).
Their main means of acquiring British and U.S. currency was to rebuild first their productive output of motorcycles, then automobiles, and sell them at a significant loss to buyers in the U.K. and the U.S.The result? Germany and Japan are the world leaders in both automotive and motorcycle production, while those industries in the U.K. and the U.S. have been devastated – only one motorcycle company out of 7 in the U.S. survived, none did in the U.K.
Vehicle production formed the engine of a phenomenal economic recovery making Germany and Japan economic powerhouses by the 1980s. Motorcycle production has only recently started to recover, bit by bit, in the U.K. and the U.S. That recovery began precisely when the war debts had been paid off. The automotive industry required bailouts even into the 2000s in the U.S., while being for all intents and purposes wiped out in the U.K., and has not really seen a significant recovery yet.
How this works is not as difficult to describe as economists would lead people to believe:
Money is created primarily not by governments, but by private banks. Since this money is created as debt, there is always more owed than is actually in circulation. Since those who owe, as well, are generally on the low side of the income scale while those owed are on the high side, money as interest naturally flows upwards to the wealthy. However in a closed economy this produces a situation where there isn’t sufficient available currency to purchase the produced goods. Worse, the currency that is available is generally in the hands of those that don’t need the goods. Extensive credit prolongs the ‘good’ runs but makes the inevitable contractions worse by increasing the flow upwards via more interest. Given that the economy is not closed, though, purchasing cheaper goods offshore, in our example from Germany and Japan, further damages local production, resulting in a further erosion of total wages and a faster flow upwards from those who need the produced goods to those who don’t.
In German and Japan, though, the automobile and motorcycle companies could not, individually, continue to produce vehicles while selling at a loss and still pay workers wages, nor could they cut production, since the overseas sales were necessary to pay war debts. These losses were covered by the respective German and Japanese governments. Simply creating more currency to cover losses would only devalue the country’s own currency, so the only option for the governments to obtain their own currency was to raise tax rates. Since raising tax rates on those who make very little causes public unrest and in any case doesn’t obtain the amount of funding needed, the wealthy, especially the rentier class, were taxed at much higher rates, as were the profitable banks and other corporations not themselves producing goods to cover the war debts.
The resulting maintenance of wage levels, combined with a tax rate sufficient to prevent currency from migrating up the economic scale and a growing overseas market for excess production, maintained a high marginal efficiency of capital, encouraging investment in productive capacity while discouraging investment in rentier property. This simultaneously increased quality and productive efficiency, while expanding disposable income among wage earners sufficiently to maintain demand, since non-optional rentier costs on workers were kept down by the lack of investment going to rentier property.
Within a couple of decades German and Japanese engineering had become superior to their American and British counterparts due to higher investment levels. American and British manufacturers had to cut prices in order to compete with the more desirable imports, culminating in the respective demolishing of the American and British vehicle manufacturing industry in the late 1970s and 1980s. This demolishing only added to the lower total wages, lower marginal efficiency of capital applied to productive capacity or technology advances, higher investment in rentier property leading to huge costs for housing and productive plant and larger financial market bubbles and crashes, and a large flow of currency up the economic scale from wage earners to rentiers, which was made significantly worse by the policies of Reagan and the Bush administrations.