by Paul F. Cwik
Mises.org
“As long as it is kept within certain limits, inflation is an excellent psychological support of an economic policy which lives on the consumption of capital.” (Ludwig von Mises, Socialism, pp. 448-9)
What causes economic growth? Is it a reduction in tariffs? Is it a cut in tax rates? Is it cutting red tape and bureaucracy? While each might stimulate or encourage economic growth, none of these choices causes growth. Economic growth is the result of an entrepreneur employing a new method that reduces the cost of production. Costs can be reduced in several ways. Newly discovered resources will reduce costs. A new technique that saves time, labor, or resources also reduces costs. And, often overlooked, are the cost reductions, which come from resource allocation according to the law of comparative advantage.
To clarify, suppose that there is an entrepreneur who can make 1,000 units of cloth per day. If this entrepreneur spends $5,000 per day in wages and on maintenance of the capital equipment, then his average cost of production is $5 per unit of cloth.