Consumption Does Not Drive the Macroeconomy
Mark Skousen, through his Economic Logic and The Structure of Production, has been leading the fight for years for a measurement of economic activity that more closely aligns with a capital structure based macroeconomics. GDP is truly a Keynesian–based view of the economy; a data set that often hampers rather than helps advance Austrian macroeconomics. Misguided use of the data set encourages counterproductive active management of aggregate demand.
Both Hayek and Rothbard highlighted the inadequacies of national product measures of the economy. From a Hayekian perspective, investment as measured by product and income accounts, greatly understates the role of capital or future-oriented expenditures in the economy. Hayek raised the point in his criticism of Foster and Catchings’s misguided underconsumption approach to fluctuations. Expenditures on “raw materials, semi-finished products and other means of production” greatly exceed the value of consumption goods that are simultaneously offered in the markets for consumption goods. According to Rothbard, “It is certainly legitimate and often useful to consider net incomes and net savings, but not always illuminating, and its use has been extremely misleading in present-day economics.” Consumption spending is overemphasized and investment and saving is dwarfed relative to their overall importance in maintaining and expanding the structure of production.
Fortunately Mark Skousen stayed diligent in pressing for a better data set. Now what started as windmill jousting has ended in a minor victory for those who desire a better understanding of how an economy works. Mark explains more in today’s Wall Street Journal in his commentary, “At Last a Better Measure of Economic Activity.”
In many ways, gross output is a supply-side statistic, a measure of the production side of the economy. GDP, on the other hand, measures the “use” economy, the value of all “final” or finished goods and services used by consumers, business and government.
GDP is a useful measure of a country’s standard of living and economic growth. But its focus on final output omits intermediate production and as a result creates much mischief in our understanding of how the economy works.
In particular, it has led to the misguided Keynesian notion that consumer and government spending drive the economy rather than saving, business investment, technology and entrepreneurship.
The critical importance of business activity is clear when you look at employment statistics and leading economic indicators. Employees in the consumer side of the economy (retail outlets and leisure businesses) account for about 20% of the labor force, and another 15% work for various levels of government. Yet the vast majority of employees, 65%, work in mining, manufacturing and the service industries.
Finally, as a broader measure of economic activity, gross output is more consistent with economic-growth theory. Studies by Robert Solow at MIT and Robert Barro at Harvard have shown that economic growth comes largely from the supply side—increased technology, entrepreneurship, capital formation and productive savings and investment. Higher consumption is the effect, not the cause, of prosperity [emphasis added].
The new measure: Gross Output, while not perfect, is a marked improvement that should enable more and better historical analysis of the economy from an Austrian perspective. What an opportunity for the growing ranks of Austrian influenced scholars.