Pursued Economy

CHAPTER 3Introduction to the Concept of Pursued Economy

When borrowers disappear because of an absence of attractive investment opportunities, which was also the cause of the centuries of economic stagnation that preceded the Industrial Revolution, a very different mindset is needed to address the problem. This is because the reasons for this problem vary depending on the stage of economic development, and each requires a different policy response.

Today's developed economies all started out as agrarian societies, and the centuries-long paradox of thrift only ended with the arrival of the Industrial Revolution. The invention of new products and the machines needed to manufacture them produced a huge number of investment opportunities for the first time in history. Private-sector businesses that would not borrow money unless they were certain they could pay it back found numerous promising projects and started borrowing. The financial sector also developed to meet the newfound demand for funds. This process continued as long as there were debt-financed projects sound enough to pay for themselves.

Thus began a virtuous cycle in which investment created more jobs and income, which, in turn, created more savings to finance additional investment. Unlike the government investments in earlier centuries that eventually ran into financing difficulties, private-sector investments could sustain themselves as long as attractive new products were continuously brought to market. With new ...