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While Australia goes through the media furore of budget week, both France and Greece held their national election over the last week.

There is a consistent message In both European elections and in Australia’s pre-budget dramas. We should spend to grow.

Reacting to the harsh austerity measures enforced by the German-led European Union, Greek and French voters demanded that the government spend more money to encourage economic growth and prosperity. In the Australian budget there are measures designed to encourage consumers to buy more, to stimulate the economy.

This is all wrong. An economy doesn’t grow stronger by spending more; it grows more by making more.

For what is “growth” exactly?

Growth is when an economy is creating more value. If an economy consists of two cars, one boat, a dozen books and one person with a secondary education then that is how much value is in that economy. (Cars, boats, books and services like education are all economically valuable; that’s why they can be referred to as “value”.) When more value is coming into existence, the amount of value in the economy is growing, thus, we say the economy is growing.

Spending does not create more value. Take this example.

Toyota has a car. I have $19,000. I spend $19,000 to buy Toyota’s car. Now we are both happy. Both of us have increased the value of what we own. I have a car which is more valuable to me than having $19,000. And Toyota has $19,000, which is more valuable to them than having one more car in the parking lot.

By the way- the money burning in Toyota’s pocket isn’t actually value: it simply represents the power to get value. Toyota only wants the money because the CEO wants to go on a holiday to Hawaii. The money itself is valueless. Money’s value is simply what you can buy with that money. So essentially I traded the car for the trip to Hawaii. The money was just a proxy to represent what value is to different people.

But has society increased the value of the things in its economy? Has the economy grown? Not really. We’ve just redistributed the stuff.  I had the money, now Toyota has the money. Toyota had the car, now I have the car. We’re both happier but our economy isn’t going anywhere.

So spending does not grow an economy, it simply redistributes it’s contents. But what if Toyota builds two cars?

Now they can sell me a car, and they can sell my uncle Bob a car too, both for $19,000. Now the CEO can take his wife to Hawaii too- and both Uncle Bob and I have a car. It’s the same spending story, but with a difference.

By making a new car, Toyota made new value. Before they made the car, the economy’s value was: 1 car, my $19,000 and Bob’s $19,000.

Now Toyota has made a second car, and the economy’s value is: 2 cars, my $19,000 and Bob’s $19,000. There is more value- the economy has grown!

That’s the answer. Production is what makes an economy grow. There is more value in an economy when we make new value.  The more production there is, then the more value there is to spend your money on.  But to focus on the symptom – spending, is to miss the cause of growth- production.

If the French president, the Greek voters and the Australian Treasurer want our economy to grow, then they need to encourage the production of new value, not the buying of old value. It’s as simple as that.

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