The unseen hand

Alasdair Macleod – 23 June 2012

The assessment of economic growth based on Gross Domestic Product is a fallacy, because GDP is merely a measure of the amount of money in an economy. The one thing it does not measure, which is central to economic progress (note progress, not growth), is the level of entrepreneurial activity. This has important implications for the efficacy of government interventions and solutions to the current economic crisis.

I have written about GDP before, but to refresh the reader’s memory, GDP is basically the sum total of recorded business activity at the consumption level plus government spending expressed in money terms. If the government spends more, GDP rises; give more money to consumers, GDP rises; give more bank credit to consumers or business, GDP rises. Cut government spending, GDP falls. This is not contentious and has nothing to do with economic progress. Importantly, it excludes future entrepreneurial activity, except to the extent that an entrepreneur has actually spent some money putting his future plans into action. The obsession with GDP means that entrepreneurial activity, which is Adam Smith’s unseen hand that guides our future, is invisible to economic planners.

If that was the only consequence of confusing a money quantity with economic progress the results would not be so serious. Instead, misleading statistics such as GDP are leading all governments into bad policy decisions, and their choice has narrowed down to either ever-greater reflationary attempts to pump up GDP, or alternatively facing a collapse in the GDP number as bank credit contracts. The situation facing the eurozone already precludes any compromise between these extremes, while other nations believe they can print their way out of this difficulty.

The twin errors of misunderstanding GDP are the failure to see that monetary inflation is concealing a deepening economic depression, and it encourages policies that destroy entrepreneurial activity, or economic progress itself. This is a deadly combination, the equivalent of being in a hole and continuing to dig.

We cannot expect politicians to stop digging deeper and faster when their economic advisors are calling for more shovels. All politicians are fully committed to the fallacies that result from confusing GDP with economic progress. They pursue economic policies that are the equivalent of eating their own children. The children being eaten are savers, increasingly raided to sustain the status quo: savers whose savings are a precondition for entrepreneurial activity, and without which increasing numbers of us become reliant on the state.

There can be little hope that this lunacy will be abandoned while statistical nonsense such as GDP growth persists. The underlying economic depression, evidenced by high levels of unemployment, is symptomatic of economies burdened by misallocated resources. The solution is to do exactly the opposite of actions currently being pursued. To quote Calvin Coolidge: “Perhaps one of the most important accomplishments of my administration has been minding my own business. Government shouldn’t play a part in everyday life.”

It is still possible to do this. What is required in our leaders is a sound understanding of economics instead of belief-based neoclassicism. Thus armed, a politician should be able to explain the proper course of action to the reasonable majority, and implement it with their support.

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FinanceAndEconomics

Alasdair started his career as a stockbroker in 1970 on the London Stock Exchange. In those days, trainees learned everything: from making the tea, to corporate finance, to evaluating and dealing in equities and bonds. They learned rapidly through experience about things as diverse as mining shares and general economics. It was excellent training, and within nine years Alasdair had risen to become senior partner of his firm. Subsequently, Alasdair held positions at director level in investment management, and worked as a mutual fund manager. He also worked at a bank in Guernsey as an executive director. For most of his 40 years in the finance industry, Alasdair has been de-mystifying macro-economic events for his investing clients. The accumulation of this experience has convinced him that unsound monetary policies are the most destructive weapon governments use against the common man. Accordingly, his mission is to educate and inform the public in layman’s terms what governments do with money and how to protect themselves from the consequences.

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