Alasdair Macleod – 6 February 2012
The most important objective for any government is to achieve economic growth. Out of this growth develops employment and taxes to fund government itself. It is in other words the primary focus of all economic planning. Much effort is also spent perfecting the statistics deemed vital to quantifying everything that might contribute to the attainment of this end. Furthermore, “independent” monetary policy long ago migrated from the principal objective of controlling inflation to stimulating the economy into more growth. Almost everyone in developed economies knows and supports this objective, even if they argue over the means. However, not only have governments consistently failed to achieve this fundamental objective, they are now increasingly worried that government spending cuts will propel us all into a deep economic contraction.
But are we right to think in terms of economic growth or contraction? The concept is essentially Keynesian and stems from mainstream economic analysis. It presupposes that governments actually have a positive interventionist role and can improve economic outcomes, a supposition that is on examination completely flawed. Instead, an economy that successfully delivers the products and services people actually want does so in an unplanned, random fashion. It is the sum of all activity, which organises the production of goods and services by entrepreneurs and business proprietors in the considered belief they will be wanted.
The strength behind a free-market economy is the randomness of productive actions, and progress of mankind’s condition is the result. It only expands if the factors of production expand; otherwise the distribution of available resources depends on entrepreneurial anticipation of people’s needs and wants. When government intervenes in this unplanned but productive chaos it destroys this random quality, harnessing economic actions into in a common direction.
Destructive cycles of boom and bust have always been the result. Governments seek to co-ordinate randomness for an outcome they commonly call growth, and for a short time they might appear to succeed. But it is not long before these co-ordinated economic actions inevitably drive up prices, because extra factors of production (raw materials, labour and capital goods) only become available at higher price levels. Higher prices inevitably lead to higher interest rates, to the point where those who have fallen for the bait of artificially cheapened credit have to cut and take their losses. Capital theory predicts this outcome, events always confirm it, yet mainstream economists continually ignore it[i].
Intervention is as likely to succeed as water is to run uphill. Economic growth or the lack of it, the success or failure by which it is measured, is its child. The question then arises as to whether or not we can have economic growth without intervention.
The logical answer is no. A free-market economy in the absence of external factors does not grow: it progresses, which is a very different thing. It discards those things consumers do not want and produces things they are likely to want. It adjusts the price of products to a level which satisfies the consumer and is at the same time profitable. Overproduction is punished and underproduction invites competition. No one knows what the consumers will buy tomorrow or how much they are prepared to pay, but randomly-acting entrepreneurs are generally pretty good at guessing, because they put their own time and money on the line. They have to anticipate levels of demand and also prices for their output for at least as far in advance as it takes to plan, produce and market any product. This is progress, not growth. Progress is about better products and services tomorrow than today, using the resources actually available. Progress is about better value for money tomorrow, which means that prices tend to fall. And as prices tend to fall, more things can be bought for the same money. What governments do instead is destroy this process of progression in an attempt to replace it with statistical growth.
The statistics devised to measure it, principally gross domestic product, cannot measure anything other than the money in the productive economy, which it does imperfectly. Government spending, which is an economic cost, is included pari-passu with valued production. Efficient producers such as the manufacturers and suppliers of electronic goods and services, who reduce their prices over time, see their output diminished as a proportion of the statistical whole, while those that maintain their prices by monopolistic or subsidised means keep and even increase their weightings. This is simply the result of the indiscriminate use of a money-aggregate to measure the fallacious concept of economic growth. So GDP and related statistics do not measure progress: if anything they promote economic regression.
Instead, we must conclude that GDP is an approximation of the amount of money deployed in an economy. It is equal to a combination of measured production, government spending and price changes. Let us assume for a moment that extra factors of production at a given price level are not available, so production only progresses depending on how existing factors of production are redeployed. Let us further assume government spending and regulation of the private sector is also unchanged. These two conditions being the case, economic growth must be a reflection of price changes, which in turn is the result of changes in the quantity of money deployed in the economy. And in recording “real” economic growth, that is economic growth adjusted by a price-inflation index, statisticians avoid recording most of the effects of monetary inflation. Therefore, economic growth is not growth at all: it is just an alternative and flawed measure of unreported monetary inflation.
We would not take the central planners’ flawed attempts to manipulate an economy and the statistical outcomes seriously were it not for the ultimate consequences. Not only have they completely deceived the public over economic growth, but they deceive themselves. For this reason they are unequipped to deal with the developing crises, which are the result of earlier interventions. They now claim that economic growth, the ultimate source of tax revenue and government solvency is jeopardised by spending cuts. Statistically, this is obviously true, because if you take away government costs and support for unwanted economic activities, GDP will fall. But the important point that is commonly missed is that a government which stops draining an economy of its private sector resources actually releases them to be deployed more effectively for the common benefit by those randomly-acting entrepreneurs.
And that, ultimately, is the way out of all economic difficulties.
[i] There are some excellent analyses of Capital Theory, but the error of converting random actions into common objectives, central to understanding the destructive effects of central planning, gets little attention. This is a mistake.