ransfer payments for expenditures on consumer goods. This creates the demand for consumer goods that are part of the GNP. However, households generally save about 5 percent of their earnings (1994, p. 87). Businesses then borrow these savings from banks to spend on their running expenses and to invest in capital improvements. However, because businesses as a general rule lays out more money for wages, salaries, raw materials, semi-finished goods, land, and capital than the total amount it takes in by selling its own output, the household savings that it borrows are significant to its ability to invest (1994, p. 88). Should the level of household savings drop, capital investment will necessarily decrease, productivity will decrease, and finally GNP will decrease.
Heilbroner and Thurow advocate that at times when the economy is experiencing slow growth due either to inflation and/or a decrease in savings, the government should step in to spur growth by either spending the household savings if businesses will not or by manipulating the level of household savings through taxation (1994, p. 93). By advocating such activity, however, Heilbroner and Thurow have entered into one of the areas where economics and politics intersect directly. Whether a government will choose to intervene in its country's economy depends on the government and the people's view of the government's role. The capitalist system is based on the idea of free-enterprise; a belief in the idea that the economic system is best left alone and will correct itself through supply and demand. However, Heilbroner and Thurow point out that the government is necessarily involved in the economy because it must regulate the activities of businesses (1994, pp. 70-74). Every regulation has some impact on the economic situation of the businesses it affects. In addition, Heilbroner and Thurow reject the idea that the economy will always correct for lags in supply or demand....