The amount of ignorance that pervades today’s graduates of institutions of higher learning is astounding by any measure. Ideas and facts that could of once been reiterated verbatim by any primary school graduate are foreign to many alumni of the world’s finest universities. It is no wonder that so many think what they see in the papers can respectively called a recovery. Even a cursory understanding of the basic laws of economics would call into question the course the United States and the world is on. It is the disregard of economic fundamentals that is the reason the economy is still floundering.

The truth is economic growth is the natural state of a capitalistic system. Even massive corrections are but blips in the continual state of improvement in a society that lets spontaneous forces of capitalism do what they do naturally. Using Milton Friedman’s famous pencil analogy makes the point well. The common pencil is a miracle of international collaboration. The wood, paint and graphite often all come from different continents. They are then transported on a global transportation system in order to get to the factory. The lumberman cutting the trees, the men gathering latex and the miners digging up the graphite for the process do not know each other and may even hate each others country or religion. All of this does not matter. They cooperate for the greater good in a process that spreads across the globe without any central intelligence telling them to do so. A hugely complicated act of cooperation for which no planning is necessary.

If there is a man who has a good to sell that someone else wants the impetus for trade exist. It is natural force that needs no external incentives or macro-economic directives to initiate it. All that is needed is to remove barriers to trade and commerce and to create an atmosphere of confidence by applying the Rule of Law and property rights. The rest is accomplished by human nature itself.

A sluggish economy is inevitably a dysfunctional one, an economy whose natural processes have been interrupted. It is no coincidence that the worst recoveries in history have always involved times of increased economic interference. Even so called economic stimulus packages ultimately put a drag on economic growth, especially when the underlying problems are ignored.

Low interest rates sabotage savings and inflate alternatives like the stock market. They also disconnect rates from risk in a way that increases the likelihood of market bubbles and tend to redirect capital towards riskier ventures. Stimulus packages like those done in 2009 direct resources towards political ends while pulling investment dollars from where their needed most.

These all fall under the category of market distortions. Invariably such distortions create short term gains for particular sectors of the economy like housing or renewable energy but only at the expense of others. Additionally, even the limited benefits are short term in nature. Lasting only as long as the distortions are in place and sometimes not even that.

This leads to a law of economics that today is being ignored to everyone’s peril. Distorted markets are inherently unstable markets. A housing market built on low interest rates for example is bound to be take a steep downturn when the rates go up. Something that looks to be already happening. Stock markets inflated by people seeking a better return on their money also creates havoc. The markets primary function, determining the value of businesses, is lost in bubble of inflated values. In such an atmosphere the mere hint that the extra liquidity driving the value of stocks is to be toned down or removed is enough to send markets reeling.

The Federal Reserve and central banks nowadays it seems are in the business of creating market distortions. So are governments with their Keynesian stimulus programs. In the process they are avoiding dealing with the underlying reasons the economy is in distress. Attempting to substitute an economy’s natural growth with artificial monetary manipulation only covers the festering wound at the heart of the problem. All the while it sets up the economy for further failure when the distortions are withdrawn.

“The Conservative Mind”

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