A large amount of macroeconomic thought is given toward the question: “what causes recessions?” Monetarists, Keynesians, Austrians, New Insitutionalists, Neo-classical all often approach macroeconomic thought in this manner (note well: I am not saying this question is central to the above-mentioned schools-of-thought, just that their practitioners will study this question). In my opinion, this is the wrong question to ask. The right question is not “what causes recessions” but “what causes growth?”
This may seem like a semantic game; aren’t I just stating the inverse of the first question? Yes and no. If we know what causes growth, we can (generally) inverse that and learn what causes recessions. But the second question remembers what I think is crucial to economic understanding: growth is not the state of nature; stagnation is. Humanity, by sitting on its collective ass didn’t generate the Industrial Revolution or invent medicine. Despite terms like “natural unemployment” or “natural rate of growth”, none of those are natural. The true natural unemployment rate is 100%. The true natural rate of economic growth is 0%. Growth requires effort to occur; it requires trading and production. It requires human action.
This lesson is important because it prevents us from making mistakes that can be detrimental to economic well-being. For example, some trade-protectionists worry about trade deficits because it means foreigners are buying more and more US assets. This, supposedly, is a bad thing. Here’s why, according to a commentator, Ed Rector, at Cafe Hayek [emphasis added]:
However if the Chinese use their trade-surplus US dollars to buy already existing US assets (USG debt, office buildings, hotels, etc.) there is no significant increase in employment in the USA [compared to building new factories]. So to that degree the existing wealth of the USA IS transferred to foreign ownership, where it will presumably generate investment returns to the foreign owners.
Here, Mr. Rector makes the mistake I mention at the beginning: he assumes growth is given. The counterfactual here is not whether an American or a foreigner owns an asset, but whether that asset is owned at all. The fact the asset is up for sale tells us it is likely no longer productive to its current owner; if it is not sold, the asset would likely become idle and produce nothing. When it is bought, the asset remains productive (indeed, this is how it generates returns for its owners). By remembering that the default is not growth but stagnation, we are counseled to not fret about who owns an asset, just that it is owned and productive. We cannot take the productivity as given.