GUEST POST: The Finite Planet Fallacy

"The pie is fixed. The Earth is a closed system. You cannot have infinite growth on a finite planet." We hear this constantly, and it's delivered like a law of physics — case closed, only a compromised economist could disagree. Yet it's dead wrong, as Pedro Santa Clara explains in this Guest Post. And the mistake is revealing, because it isn't in the physics. It's in the economics smuggled inside the physics.

In short, we are not running out of matter. We are getting steadily better at making it serve us....

The Finite Planet Fallacy 

by Pedro Santa Clara

A critique I often get, whenever I defend economic growth, runs like this: “The truth is that the pie is fixed. The Earth is a closed system. You cannot sustain exponential growth on a finite planet.” It is delivered with the confidence of a physical law — as if invoking the conservation of mass settles the matter and only an economist too compromised to see it could disagree. It is the founding intuition of degrowth, of much of the environmental movement, and of the Club of Rome before them. It is also wrong, and wrong in an instructive way, because the error is not in the physics. It is in the economics smuggled inside the physics.

The argument commits a category error: it confuses matter with value. The Earth is indeed a closed system of atoms. But economic growth does not count atoms — it counts the value those atoms deliver to human beings, and that value lives in arrangement and knowledge, not in mass. The same kilogram of silicon is worth a few cents as sand on a beach and several thousand euros as the microchips etched from it. Nothing was added to the planet between those two states; not one atom. The entire difference is human ingenuity rearranging what was already there. Growth is the rising value we wring from a fixed stock of matter — and there is no law of physics that caps how cleverly atoms may be arranged. The Mona Lisa and a pile of pigment contain the same chemistry. One is worth incalculably more, and the difference is not material.

This is why the deepest engine of growth is not a resource at all but knowledge — and knowledge has two properties that demolish the finite-pie premise. It is 'non-rival'paul: if I use a recipe, a theorem, a line of code, you can use the very same one at the same instant, and neither of us has less. A barrel of oil burned is gone; an idea shared is doubled. And knowledge compounds, because every new idea is a recombination of existing ones, so the stock of possible combinations explodes rather than depletes as it grows. The pie, in other words, is not made of stuff. It is made of recipes — and the recipes are unbounded. A finite planet sets no ceiling on how much we can know about how to use it.

The closed-system picture fails on the brute facts as well. Earth is not even energetically closed: it is bathed continuously in solar energy that dwarfs all human consumption many times over, and with nuclear power the practical ceiling recedes further still — so the thermodynamic limit the argument gestures at is astronomically distant, not pressing.

Meanwhile the historical record simply refuses to cooperate with the prophecy. Resource after resource declared to be on the verge of exhaustion became, instead, more abundant and cheaper, because scarcity raises prices, and prices trigger substitution, efficiency, and discovery. This is the mechanism that cost Paul Ehrlich his famous wager with Julian Simon over the price of five metals Ehrlich himself selected, certain they would soar as the world ran out; every one of them fell. And the “decoupling” that environmentalists insist is impossible — growing an economy while shrinking its physical footprint — is now measured fact in more than thirty countries that have raised output while cutting absolute emissions and material use. 

We are not running out of matter. We are getting steadily better at making it serve us.

The surest sign that the finite-planet argument is broken is that it proves too much. If exponential growth in value were genuinely impossible on a finite world, then it could not have happened — and yet real income per person has risen something like thirtyfold over two centuries, on the same Earth, with the same inventory of atoms. The theory confidently predicts that the central economic fact of the modern era did not occur. When a model is refuted by the entire history of the thing it claims to govern, the mistake is not hiding in the history. It is in the premise — in the quiet, disastrous assumption that an economy is a warehouse of finite stuff to be divided and used up, rather than what it actually is: a growing body of knowledge about how to make a fixed world yield ever more of what human beings want.

The conservationists are right about one thing only. Atoms are finite. But wealth was never the atoms. It was always what we learned to do with them — and there is no end to that.

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Pedro Santa Clara is a professor and entrepreneur -- Professor of Finance at the Nova School of Business and Economics and UCLA’s Anderson School of Management, and head of Shaken Not Stirred a company that promotes and manages education projects, and the Shaken Academy, which offers corporate development programmes in AI.

Pedro is also a founder and member of the Board of Trustees of Instituto Mais Liberdade, a think tank that promotes the liberal ideals of individual freedom, market economy and democracy, and a founding partner of Atrium Portofolio Managers, an asset management firm created in 1999, and of Data4Deals, a fintech startup created in 2021. 

"Artificial intelligence may be the most transformative technology of our lifetimes — and a graveyard for the companies built to own it."

"Artificial intelligence may be the most transformative technology of our lifetimes — and a graveyard for the companies built to own it. 

"That isn't a contradiction. It's economics. The railways remade the world and ruined the people who financed them. Aviation shrank the planet and destroyed investor capital for a century. The pattern is old and the reasons are precise: when a productivity gain becomes available to everyone, it stops being worth anything to anyone who sells it. It becomes a gift to consumers. ...

"AI could deliver staggering welfare gains and barely register in GDP — [because] 'transformative' and 'profitable' are two very different words."

~ Pedro Santa Clara from his article 'The Vanishing Value '

 

How often do we hear that government "austerity" is destructive —that it is the job of government, or their central bank, to "stimulate demand"? Or that growth can be gussied up by gobs of government cash? In this guest post, Frank Shostak is here to dismantle those ideas, and to explain that monetary pumping does not create new wealth, it destroys it ...

Does Government Spending and Money Expansion Create New Wealth or Destroy It?

by Frank Shostak

Many economists claim that economic growth is driven by increases in the total demand for goods and services, additionally claiming that overall output increases by some multiple of the increase in expenditures by government, consumers, and businesses. Thus, it is not surprising that most economic commentators believe that a fiscal and monetary stimulus will strengthen total demand, preventing an economy from falling into a recession. [And conversely, that a withdrawal of govt spending will send it there. - Ed.]

These economists believe that increasing government spending and central bank monetary pumping will increase production of goods and services and strengthen total demand. This means that demand creates supply. However, is this the case?

Why Supply Precedes Demand

In the market economy, producers do not produce solely for their own consumption. Some of their production is used to exchange for what others produce. Hence, in the market economy, production precedes consumption. Something is exchanged for something else. This also means that an increase in the production of goods and services leads to an increase in the demand for goods and services.

According to David Ricardo,

No man produces, but with a view to consume or sell, and he never sells, but with an intention to purchase some other commodity, which may be immediately useful to him, or which may contribute to future production. By producing, then, he necessarily becomes either the consumer of his own goods, or the purchaser and consumer of the goods of some other person.

An individual’s demand is constrained by his ability to produce goods. The more goods an individual can produce, the more goods he can demand. For example, if five people produce ten potatoes and five tomatoes, this is all that they can demand and consume. The only way to consume more is to produce more.

James Mill wrote,

When goods are carried to market what is wanted is somebody to buy. But to buy, one must have the wherewithal to pay. It is obviously therefore the collective means of payment which exist in the whole nation that constitute the entire market of the nation. But wherein consist the collective means of payment of the whole nation? Do they not consist in its annual produce, in the annual revenue of the general mass of inhabitants? But if a nation’s power of purchasing is exactly measured by its annual produce, as it undoubtedly is; the more you increase the annual produce, the more by that very act you extend the national market, the power of purchasing and the actual purchases of the nation. . . . Thus it appears that the demand of a nation is always equal to the produce of a nation. This indeed must be so; for what is the demand of a nation? The demand of a nation is exactly its power of purchasing. But what is its power of purchasing? The extent undoubtedly of its annual produce. The extent of its demand therefore and the extent of its supply are always exactly commensurate.

The Expanding Pool of Real Savings Key to Economic Growth

Without the expansion and enhancement of the structure of production, it is impossible to increase the supply of goods and services in accordance with the increase in total demand. Expanding and enhancing the infrastructure depends upon expanding the pool of real savings, which is composed of consumer goods and supports those employed producing those necessary goods and services.

Consequently, it does not follow that increasing government spending and employing loose monetary policy will increase the economy’s output. It is impossible to lift overall production without the necessary support from the real savings pool.

For example, a baker produces twelve loaves of bread and saves ten loaves. He then exchanges them for a pair of shoes with a shoemaker. In this example, the baker funds the purchase of shoes by means of the ten saved loaves of bread, which maintains the shoemaker’s life and well-being. Likewise, the shoemaker has funded the purchase of bread by means of shoes that he had produced.

Assume that the baker has decided to build another oven to increase production of bread. To implement his plan, the baker hires the services of the oven maker, paying the oven maker with some of the bread he is producing. If the flow of bread production is disrupted, however, the baker cannot pay the oven maker, so the making of the oven would have to be abandoned. Therefore, what matters for economic growth is not just tools, machinery, and the pool of labour but also an adequate flow of consumer goods that meet the producer’s needs.

Government Does Not Generate Wealth

Government does not produce wealth, so how can an increase in government outlays revive the economy? People employed by the government expect compensation for their work. One way the government can pay these employees is by taxing others who are generating wealth. By doing this, the government weakens the wealth-generating process and undermines prospects for economic growth.

According to Murray Rothbard, 

Since genuine demand only comes from the supply of products, and since the government is not productive, it follows that government spending cannot truly increase demand.

If the pool of real savings is large enough to fund government spending, then a fiscal and monetary stimulus will seem to be successful. However, should the pool of real savings decline, then regardless of any increase in government outlays and monetary pumping by the central bank, overall real economic activity cannot be revived. In this case, the more government spends and the more the central bank pumps, the worse off wealth generators will be, eliminating prospects for a recovery.

When loose monetary and fiscal policies divert bread from the baker, he will have less bread at his disposal. Consequently, the baker cannot secure the services of the oven maker, making it impossible to increase the production of bread.

As the pace of loose government policies intensifies, the baker may not have enough bread left even to sustain the workability of the existing oven since he no longer can afford the services of a technician to maintain the existing oven. Consequently, the production of bread will actually decline.

Because of the increase in government outlays and monetary pumping, other wealth generators will have fewer real savings at their disposal. This in turn will hamper the production of their goods and will weaken overall real economic growth. The increase in loose fiscal and monetary policies not only fails to raise overall output, but on the contrary, it leads to a general weakening in the wealth-generation process.

According to J.B. Say, 

The only real consumers are those who produce on their part, because they alone can buy the produce of others, [while] . . . barren consumers can buy nothing except by the means of value created by producers.

Conclusion

Most economists and economic commentators claim that increases in government spending and central bank monetary pumping strengthen the economy’s overall demand. This, in turn, sets in motion increases in the production of goods and services. Thus, demand supposedly creates supply.

However, to be able to exchange something for goods and services, individuals must first have something by which to exchange. To demand goods and services individuals first must produce something useful. Hence, supply drives demand, not the other way around.

Increases in government spending divert savings from the wealth-generating private sector to the government, thereby undermining the wealth-generating process. Likewise, monetary pumping results in wealth diversion from wealth generators toward the holders of pumped money. Far from stimulating economic growth, government actions hinder it.

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Frank Shostak has over 40 years experience as a market economist and central bank analyst. He is an adjunct scholar of the Ludwig von Mises Institute and a member of the board of editors of the Quarterly Journal of Austrian Economics. He is highly regarded for his skills to convert complex economic issues into plain English. He has written articles that have appeared in The Wall Street Journal and in academic journals in Europe and the US. A follower of common -sense economics and damage inflicted from reckless money creation, his Sydney-based consulting firm, Applied Austrian Economics, provides in-depth assessments of financial markets and global economies.

His post first appeared at the Mises blog.

"Gross output (GO) is the centre of a revolution in macroeconomics with major policy implications"

"Today I would like to follow in Milton Friedman’s footsteps by making the bold case that business investment, broadly defined, is far more important in the dynamics of US economic growth than either consumer spending or government stimulus....
    "It is the contention of this lecture that gross output (GO) is the centre of a revolution in macroeconomics by forming the foundation of a 'new architecture' in national income accounting with major policy implications. As Steve Forbes said, 'This is a great leap forward in national accounting. Gross output, long advocated by Mark Skousen, will have a profound and manifestly positive impact on economic policy'...
    "My thesis flies in the face of the conventional wisdom that the US economy is a 'consumer society' and that consumer spending and government stimulus drive the economy.
    "It is not surprising that the financial press frequently focuses on monthly reports of retail sales and consumer sentiment to determine the outlook for jobs and the economy.... Based on a superficial reading of GDP data, the financial media is quick to focus on, first, consumer spending, and second, government spending as the key drivers of economic growth. Business investment rates a poor third. Trade doesn’t even matter.
    "And yet numerous studies have shown that economic growth is ultimately determined by savings, capital investment, technology and entrepreneurship, all supply-side statistics. According to Robert Solow (1957) and Robert Barro (2011), growth is more a function of technological advances, productive investment, and entrepreneurship than consumer spending. Consumer spending is largely the effect, not the cause, of prosperity (Hanke 2014)....
    "As a Forbes economist John Papola recently concluded, 'Economic growth (booms) and declines (bust) have always been led by changes in business and durable good' investment, while final consumer goods spending has been relatively stable through the business cycle.” (Papola 2013).
    "The source of this conflict centres around the misuse of GDP as 'the' measure of the economy: Since personal consumption expenditures represents over two-thirds of GDP in the United States, the media naturally concludes that consumption is the most important factor in the direction of the economy, followed by government spending and lastly business activity.
    "GDP is entirely appropriate as a measure of final use in the economy, but fails to encompass the total production process. GDP does a good job of determining spending by consumers and government, but does not tell the whole story of commercial activity. Critics have pointed out many of the defects of GDP, including the lack of reporting black-market activities and household production, and its failure to recognizing how important trade is in the economy. But GDP fails in another way: It only accounts for fixed capital expenditures, and omits a vital component of business investment–spending by business to move the production process along the supply chain, what economists call goods-in-process or circulating capital. Business cannot survive without financing the entire supply chain. This omission of business’s contribution to the supply chain in the United States amounted to $22.1 trillion in 2017, substantially larger than GDP itself....
    "I do not wish to suggest that GO replace GDP, but rather that they are complementary and measuring different things.... The benefit of GO is that the supply chain is included, so GO is truly the full measure of economic activity.... With GO, we can at last have a national statistic that is compatible with economic growth theory.
    "But there are many other advantages to GO. For example, it does a better job of demonstrating the magnitude of the business cycle.... GO may also be a powerful leading indicator. David Colander (Middlebury) states: “For forecasting, the new measure [gross output] may be more helpful than the GDP measure, because it provides information of goods in process.” ... In economics, the development of GO also provides a vital link between microeconomics, the theory of the firm, to macroeconomics, the theory of the economy as a whole....
    "In many ways, GO is a triumph for Hayek, Hicks and other neo-Austrian supply-side economists ...
    "In sum, gross output is a paradigm shift in economics.... the missing piece that completes the macroeconomic puzzle."

~ Mark Skousen, from his post 'GO Beyond GDP: Why Business is the Real Driver of the Economy'

 

Green politicians are politicising the weather. Again. [Updated]

EVEN AS PEOPLE ARE cleaning up and recovering -- and mourning -- after the worst weather event in New Zealand this century, Green politicians and other warmists are out there politicising these recent weather events.

Sub-tropical Cyclone Giselle, claims James Shaw, Green leader and minister of cyclone's devastation, is proof that global warming "is real ... is clearly here now, and if we do not act, it will get worse." (His standard of proof, clearly, being different to that of formal logicians. And his proposed "solution"-- i.e., that New Zealand drastically reduce its agriculture and industry, and all us non-politicians spend less on air travel than he does -- is perhaps further proof of that.) 

Meanwhile, his fellow Green MP Julie Anne Genter took the opportunity of the devastation around the North Island to ... not to get out there and help, but to take the opportunity to jump on Twitter to lambast the Act Party, whose "extreme ideology," she says, "has never been less relevant."

You'd think she'd have better things to do. Like get on her bike and deliver help, perhaps. And James might have better things to do too. Like think, perhaps about the difference between climate and weather, and about the dangers of generalising from the latter to the former. Especially, you would think, about the dangers of generalising from weather here to "global action" everywhere -- action that is, in truth, just government action to ban private actions.

YES, THIS IS THE worst weather event here this century. No question. So, no matter how passionate you might feel about your reckonings, you'd think even a politician might wait a day or two before spewing them forth. But because these political creatures have no gag reflex, it requires others to respond to their bile, however briefly. For that, I apologise.

First quick point: while we probably do all agree that this is New Zealand's worst weather event this century, it shouldn't need to be said however, that it's not the worst weather event New Zealand has ever had. The fifty-four people who died in the 1968 Wahine disaster, for example, are one tragic reminder of that. That was Sub-Tropical Cyclone Giselle. And we've been through several alphabet's worth of cyclones since then, everything from Bola to Hola, and worse, to come around again to Gabrielle's letter 'G.'

And there have been many worse cyclones in the South Pacific over the centuries before human industry began. But they either didn't hit these islands, thank goodness, or there was no-one here to record them.

Another thing to note: bad as things are and have been these last few days, fewer people have died in the more recent weather events than those in previous centuries. More than fifty died in that 1968 storm. More than 200 died in an 1863 storm and blizzard in Otago. Storms have taken ships aplenty, and landslides, caused by heavy rain, have been endemic. One in 1846 took 60 souls on the shores of Lake Taupo, in a place called Waihi.

Indeed, if we "think global," as Air-Miles James and his party faithful frequently implore we do, we can see that climate deaths worldwide haven't increased either over the decades that human industry has increased. Instead, just as they have here in New Zealand, climate-related deaths have decreased. Dramatically. In fact "as population has quadrupled," records Bjorn Lomborg, "deaths have dropped twenty-fold. Death risk from climate," he calculates based on data from the OFDA/CRED International Disaster Database, "is down 99% from 1920s."And that's despite temperatures increasing, and the globe enjoying more people, living in more places that get threatened by severe weather -- and enduring more and more politicians talking bollocks.

Explain that one, James. Or at least, you know, take it on board while keeping your damned mouth shut.

ONE REASON FOR FEWER climate-related deaths is that severe weather events globally are themselves generally either decreasing or showing no particular trend. And that's not just me and climate scientists like Roger Pielke Jr saying that. It's the IPCC, who find no trends in flooding globally; no long-term trends in meteorological or hydrological drought; no upward trend either in so-called atmospheric rivers, and no upward trend in landfalling hurricanes or tornadoes either in the US or globally. None. And the US Govt, whose official metric records a general decrease in heatwaves since the 1930s -- or the international insurance industry, who record a decline in both US and European disaster-related losses. And the World Bank agrees. Meanwhile, even as alarmists like James talk about sea level rise inundating coastlines in the near future, the US National Oceanic and Atmospheric Administration (NOAA) records that ongoing sea level rise since 1880 amounts to only 240mm, i.e., just 17mm per decade -- measurable, but steady, and not accelerating -- and recent research shows many coastlines worldwide to be prograding rather than retrograding (i.e., shifting seaward) and at a globally-averaged rate of 260mm per year, reducing even this slow but steady threat. And the Department of Atmospheric Science at CSU records that cyclone frequency in the South Pacific (the very reason we're here talking about this stuff) has, since 1980, been declining. (Click those links if you'd like to see the peer-reviewed data, graphs and studies, or to send them to James and Julie Ann.)

But the other main reason for climate-related deaths to fall so dramatically is that the very thing James and Julie Ann decry so loudly and monotonously, human industry, is the very thing that keeps folk safer from weather events like these recent ones. It was the Netherlands' rising wealth, for example, that allowed them to build the dikes and dams that immunised that protected their sub-sea level provinces from flooding. And mortality from extreme heat in the US for example, as heat waves have recently kicked up and more and more people have moved to live in desert regions, has fallen pretty much all over the country over the past 50 years. In this case, it's because of things like air conditioning and better medicine that more and more people can afford.

And in the general case, as Bjorn Lomborg explains is succinctly, it's "because richer and more resilient societies are much better able to protect their citizens." 

The climate catastrophists don’t want you to know this [points out energy advocate Alex Epstein] because it reveals how fundamentally flawed their viewpoint is. They treat the global climate system as a stable and safe place that we make volatile and dangerous. In fact, the global climate system is naturally volatile and dangerous—we make it liveable through development and technology—development and technology powered by the only form of cheap, reliable, scalable reliable energy that can make climate liveable for 7 billion people.
    As the climate-related death data show, there are some major benefits—namely, the power of fossil-fuelled machines to build a durable civilisation highly resilient to extreme heat, extreme cold, floods, storms, and so on.

It's not just that GDP is correlated with fewer climate-related deaths and disasters, although it is; it's that the whole relationship between economic progress and human flourishing itself is actually causal. The richer and wealthier a society is, the better able it is to train the engineers and raise the capital and devise and build the infrastructure that allows human beings in all the many places on this fragile planet to master all the many things that nature is ready to throw at us. 

And James's and Julie Ann's governments action to ban private actions -- like banning the exploration and extraction of the fossil fuels that help power all the industry that makes us wealthier and keeps us all safer -- will only make that harder. 

So I suggest they both shut the fuck up. At least until people have cleaned up, and are ready to debate this stuff with a clearer head.

"There was once talk of closing the gap between New Zealand and Australian incomes/productivity by 2025..."

"In a couple of weeks it will be 2023. And then in a couple of years it will be 2025.
    "Those with longish geeky memories may recall that there was once talk of closing the gap between New Zealand and Australian incomes/productivity by 2025. Without any great enthusiasm no doubt, the incoming National government led by John Key agreed to ACT’s request for a (time and resource-limited) official 2025 Taskforce that would offer some analysis and advice on what it would take to achieve such a goal. The Taskforce’s first report had been dismissed by the Prime Minister before it was even released and after the second report the Taskforce was quietly disbanded....
    "[D]espite all its mineral riches, Australia is not a stellar productivity performer, so aiming to catch them was hardly reaching for the stars....
    "In 2007, just prior to the last recession, OECD estimates have Australian real GDP per hour worked about 23 per cent higher than that in New Zealand.
    "What has happened since? On that same (annual) OECD metric the gap last year was about 31 per cent....
    "[And] there is no sign either main political party actually cares enough to think hard about overhauling policy here in a way that might one day mean New Zealand might offer the world-matching living standards it did not that many decades ago."

~ Michael Riddell, from his post 'NZ and Australia'

'Has Aoteanomics Become Labour's Plan for NZ?'

"The Head of the Productivity Commission has just announced his disdain for GDP. He says it 'is not a great measure of anything useful' and blames the profit-oriented shareholder model for our society’s ills. Even though it forms the basis of wealth creation in this nation.
    "The Reserve Bank is backing him. As for the Climate Change Commission, had it cared about both the environment and economic growth, it would’ve advocated for carbon taxes with the revenues being used to cut other tax rates. But it didn’t. Furthermore, the keynote address at the NZ Association of Economists 2021 Conference by the Ministry of Primary Industries’ Chief Economist called for a 'systemic transition' to a new 'holistic,' 'post-growth,' 'doughnut' approach to management of the country’s affairs.
    "The keynote gave this new approach a name. Aoteanomics. What is it? A full blown rejection of the idea that [economic] growth is desirable. And it is way more radical and experimental than Rogernomics ever was. So why won’t the PM and Finance Minister come clean to the nation about the new post-growth agenda that’s the talk of the Wellington elite?"

          ~ Robert MacCulloch, from his post 'Has Aoteanomics Become Labour's Plan for NZ?'

Good news you didn't know

These last fifty years have enjoyed "the fastest period of economic growth in history" --  "the average income per person has almost tripled since 1960. Hundreds of millions of people have been lifted out of poverty." 

    "How? Millions joining the workforce every year. Improved productivity, thanks to technological progress, and better management of resources." Oh and of course the death of Mao Zedong, which almost at a stroke rescued nearly a quarter of the world's population from grinding poverty.... 

NB: Data here. Source here. Note that the measure is GDP, which measures flow not stock, and as we know is at best only a proxy for production. But still ...

[From Beautiful News Daily. Hat tip Stephen Hicks]

What (and who) drives the economic system?

 

Who drives the economic system? What creates economic growth?

Is it consumer spending?

Is it government spending and stimulus?

Is it the investment of capitalists and business-to-business spending of entrepreneurs?

Or maybe it’s all just rainbows and unicorns.

Politicians seem to think it’s the latter, who can be seduced by fine words and solecisms. Too many economists think it’s the first two – and they have a measurement, GDP, that seems to prove it – that’s constantly misunderstood as a thing that measures “growth,’ that “shows,” or seems to, that consumer spending represents two-thirds of the economy.

But that’s bullshit out of both holes.

GDP doesn’t measure all economic acitivity in the econoic system; only measures so-called final output and by so doing assumes it captures it all. Yet business-to-business spending is almost double the total amount of consumer spending – and is most volatile across the business cycle -- it’s just that too few economists bother to notice any of this.

Mark Skousen explains the gross error, and explains the new measure, Gross Output (aka Gross Domestic Expenditure), that corrects it.

 

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[Pic by and hat tip to Richard Ebeling]

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GDP: Still a rockstar?

 

All the rockstar headlines are being wheeled out again after official GDP figures indicating “the economy grew this year by 3.6 per cent” – “growth this quarter ... being driven by strong domestic and export demand. Household spending was up 1.9 percent, with Kiwis spending more on going away, eating out, and furnishing their houses.”

Great news, especially while dairy prices are low, huh? Well, not so fast. Let’s look at how we did it.

How did we do it? Well, here’s a clue: remember that despite what the acronym stands for GDP doesn’t measure production, it measures spending. It measures consumption – stuff like going away, eating out, and furnishing our houses. So despite the number of times you’ve heard it said, it doesn’t measure how much the economy is “growing,” which if it means anything means that we’re adding value and creating wealth: instead it measures how much you and I and the goverment are spending, which tells us nothing about either wealth or value.

To put it in rockstar terms, it doesn’t measure how many great songs you’ve produced and sold, but how many lines of coke you’ve put up your nose. And to paraphrase our sober statistician, New Zealanders have been doing the blow like there’s no tomorrow.

But where did all the money come from to spend on holidays, restaurants, soft furnishings and new en-suites? Simple: on the back of exploding house prices NZers have been borrowing to spend, and borrowing at record levels (household debt is now a whopping and unustainable 162.9 percent of gross income!). No surprise then that this “growth is driven by strong domestic demand...” when its made possible by of a virtual gold-medal in housing unaffordability.

The central bankers have blown up an asset bubble which has blown out the debt bubble. Crowing about that is like a rockstar crowing about the size of his drug bill.

And we might notice midst all the crowing that while this borrowing itself is growing at a record rate (an 8.6 percent increase in money borrowed into existence in this way last year alone), the “payoff” in the figures is only a 1.9 percent increase in the GDP number – 8.6 dollars to produce just one. Turns out that even the consumption of capital has diminishing returns. (And that credit creation does not create credible growth.)

Note too that “service industries” were another contributor to GPD which “continued to grow, with a 0.7 percent increase. The main drivers [here] were rental, hiring, and real estate services; retail trade; and health care.” All, you will have undoubtedly noticed, examples of more consumption spending – only in this case with an even more diminished return.

But exports, what about exports? The figures say that

Strong international demand saw exports increase 4.0 percent, with exports of goods posting its biggest quarterly increase in nearly 20 years. This increase was driven by exports of dairy products, meat, and fruit.

Great news? Not necessarily.

A fixture of GDP is the mercantilist mentality of treating exports positively and imports negatively. Why are exports additive to GDP while imports are deductive? If the goal of GDP is to measure the goods and services provided to people within a geographic region, then importsare the real benefit— not exports. Exports are but payment for imports.

So it’s the imports that really matter, and how we pay for them. But that’s not what GDP really measures (like most business-to-business spending these numbers too are netted out), so we can’t be clear whether this is win or losss.

The fact is

The textbook GDP equation is not false; it is a tautology and so of course it is true. Nonetheless, it is a destructive framework for thinking about macroeconomic events. Abuse of the equation leads economists and pundits to blame savings and praise reckless consumption, to hate imports and love exports, and (in principle) to attribute a doubling in the flow of goods coming out of factories to a nonchange in the level of a nonexistent stock of inventory.

And more: it allows us to think we’re doing well when we’re not, and politicians to crow about achievements which they haven’t.

Here’s Amanda Palmer.

 

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RELATED POSTS:

• We're rock stars – NOT PC, 2014
• Sorry Mr Keynes, credit creation does not create credible growth – NOT PC
• The Reserve Bank's war on capital – NOT PC
• Herald business editor praises latest asset bubble – NOT PC
• “12 reasons why New Zealand's economic bubble will end in disaster" – NOT PC, 2014
• Skousen celebrates new non-destructive growth measurement – NOT PC, 2014

ECONOMICS FOR REAL PEOPLE: ‘The GDP Delusion”

Here’s the word on tonight’s discussion from our friends at the UoA Economics Group:

Tonight we will discuss one of economics' most frequently cited statistics - Gross Domestic Product (GDP).  GDP is often used to measure economic growth and it forms an important part of most courses in economics while also playing an important role in shaping government policy. However, often we accept such ideas without critical examination and without assessing the extent to which it achieves what it is claimed to do.

So in this seminar we will define GDP and show where and how it is applied by economists. But more importantly, we will examine its apparent deficiencies and weaknesses. How is it that in the midst of the current recession, GDP is shown to be rising but that the underlying real-world economic fundamentals continue to deteriorate? Should the concept of GDP be shown to be an empty concept, then the implications and consequences are far reaching for us all. We will discuss what these consequences might be.

        Date: Tonight, Tuesday 18th October
        Time: 6:00pm
        Location: University of Auckland Business School, Level 0, Case Room 5
        NB: Note the change in room, to Case Room 5.

QUOTES OF THE DAY: On the GDP Delusion …

“The whole annual produce of every county is distributed into two great parts; that which is destined to be employed for the purpose of reproduction, and that which is destined to be consumed. That part which is destined to serve for reproduction, naturally, appears again next year, with its profit. This reproduction, with the profit, is naturally the whole produce of the country for that year.”
        - James Mill

“It is possible to determine in money prices the sum of the income or the wealth of s number of people. But it is nonsensical to reckon national income or national wealth. As soon as we embark upon considerations foreign to the reasoning of a man operating within the pale of a market society, we are no longer helped by monetary calculation. The attempts to determine in money the wealth of a nation or of the whole of mankind are as childish as the mystic efforts to solve the riddles of the universe by worrying about the dimensions of the pyramids of Cheops.”
        ­- Ludwig Von Mises

“The gross domestic product (GDP) or gross domestic income (GDI) is a measure of a country's overall economic output...”
        - Wikipedia

“However, GDP is not meant to be a complete measure of all activity and spending in the economy. GDP measures only final output of goods and services. It deliberately leaves out all intermediate production or goods-in-process... Why? ... To include spending at every stage of production would be ‘double’ and ‘triple' counting....”
        - Mark Skousen

“Keynesian macroeconomics is literally playing with half a deck. It purports to be a study of the economic system as a whole, yet in ignoring productive expenditure it totally ignores most of the actual spending that takes place in the production of goods and services. It is an economics almost exclusively of consumer spending, not an economics of total spending in the production of goods and services.”
        - George Reisman

Schiff explains the GDP delusion [update 2]

There is a delusion stalking economic reasoning that is the cause of more mal-think than any other -- a delusion peddled in nearly every mainstream report you read. Let's call it the GDP Delusion (about which I'll have more to say tomorrow).

The biggest and most destructive myth of the GDP Delusion is this: that consumer spending is "the biggest part of the economy" -- a ridiculous delusion repeated in today's report at Bloomberg on the US economy [hat tip Bernard Hickey] worrying that US retail sales dropped in the last quarter? So?  And that's a problem why, exactly?  In a recession retail sales have to drop -- that's part of the solution, dummy.  Expecting them not to drop, or hoping they don't -- or, worse, throwing taxpayers' money at shopping subsidies to keep them propped up -- that's just one more example of how bad economic thinking, which got us into this unholy mess, is making it ever more difficult for us to get out.

Peter Schiff explains this whole delusion in this short but enlightening video blog.



But there's more.  Given that Bloomberg is dead set mainstream, and that the same Bloomberg report peddles yet another economic fallacy -- that falling producer prices somehow represent a threat, instead of another part of the solution -- then it's no wonder that mainstream economics has little ability to understand what the hell is going on, or what the hell to do about it besides shovelling cash we don't have at a problem they don't understand.

UPDATE 1: You can see the GDP delusion at work in this abjectly ignorant column from National Business Review's Michael Coote calling for "emergency US fiscal stimulus, with Uncle Sam becoming the face of enlarged public consumption" in place of shrinking private consumption -- which amounts to nothing more than idiocy squared.

UPDATE 2:  The GDP fetish is a delusional nonsense: it sees no difference between consumption and production; between productive expenditure and money thrown down the drain; no difference between capital accumulation and eating the seed corn--which means "stimulus" to boost GDP figures is simply money down the drain, or worse.
   In fact all GDP really measures is the growth in the money supply. No wonder countries deep in recession can still pretend to show “positive growth.”  If you want to know more about the whole failed measuring device that is the Gross Domestic Product, check out these pieces on the GDP Delusion in increasing order of thoroughness:

• Recession & Recovery: Six Fundamental Errors of the Current Orthodoxy – Robert Higgs
• What is up with the GDP? – Frank Shostak
• Beyond GDP: A Breakthrough in National Income Accounting [pdf] – Mark Skousen
• Today’s Gross Product is Nett Product [pdf] – George Reisman