But once in a while, people decide to buy fewer cars. Or the federal government may cut back its spending on the space program. Perhaps local governments defer building a new school. Or industry decides to spend less on steel, for example, thinking that there is enough stockpiled in the nation's warehouses. And when spending or demand slows, then the machine’s speed is reduced. Fewer people are needed to work the Total Production Machine. As some incomes are cut out, total buying is even less than before. The machine works still slower and more people are laid off. This state of economic affairs -- the imbalance between demand and supply -- is called recession. Sometimes the opposite happens. Instead of cutting back, people, industry and governments may decide to buy more. Demand goes up and our Total Production Machine gets busier. As the demand for its output becomes greater and greater, the machine must work harder and longer to produce more cars, more space capsules, more schools, more steel, more health care -- more of the things that are wanted. More people are hired to work the machine. Earnings rise. And spending increases. We push the machine to even greater efforts. However, there's a limit to what the machine can produce -- at stable prices. Working at full throttle, the machine must use obsolete and inefficient parts. This is costly. Further, untrained people must be hired who may be less productive. So costs go up still more. And as costs go up, prices go up,too. How can we produce more without rising prices? How can growing demand be satisfied at stable prices? To solve this problem, we must improve and enlarge the machine. To produce more at prices that stay level we must add to the machine's capacity. Therefore, part of the machine's output must be assigned to expand its capacity. This means that we must postpone the demand for additional cars, washing machines and services, so that we can spend more on steel mills, electric generating plants and spare parts -- the things that are needed to expand the Total Production Machine. It seems, though, that people prefer not to postpone their demand. They would rather spend their incomes right away. Some suggest that we get funds for new parts for the Total Production Machine by creating more money. The banking system can create more money when people wish to borrow to supplement their spending out of current income. Borrowing may expand the Total Production Machine’s output. But when the machine is working near or at full capacity, the rapid creation of more money will not increase production fast enough. Since we cannot buy more than is being produced, the additional money only increases the competition for the available supply of products. Too many dollars are chasing too few goods. Prices of many kinds of goods will tend to go up. A dollar will not buy what it did before, and its value -- what and how much it will buy -- will go down. This state of economic affairs -- this imbalance between demand and supply -- is called inflation. Inflation hurts many people. Those receiving fixed incomes, such as pensioners, find that their dollars buy less. And people with savings accounts find that inflation reduces the value of their savings. Since too little spending may lead to recession and too much spending may lead to inflation, how much new money is needed to keep our economy growing, employment high and prices relatively stable? We are waiting for the answer. |