by Alasdair Macleod, GoldMoney:
Governments and central banks are making the mistake of believing that growth in GDP is a primary measure of economic performance. This confuses growth, measured as a total of transactions without regard to their quality, with progress, where quality of life is the driving factor.
The origin of this error is mathematical economics, which has banned human action from all policy considerations. You cannot quantify progress, while you can add up all the transactions that make up GDP. GDP only rises, or grows, when the currency value of transactions recorded increases. And that can only be the case if the quantity of currency in circulation inflates.
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This article explains why this is so and describes why it is progress that should be everyone’s economic objective. But that can only be fostered by sound money, enabling economic calculation, and the state minimising intervention. That is on no one’s agenda.
Instead, the inflation of GDP is rapidly driving the world into an interest rate crisis, likely to be far worse than currently expected, indiscriminately taking out economies, financial systems, and being unbacked by anything other than diminishing faith and credit in them, fiat currencies as well.
The stated objective of nearly all economists, policy planners, and politicians is to achieve economic growth, which they measure by gross domestic product. Attempts to quantify an economy initially focused on gross national product, which differs from GDP by including net flows to and from abroad. GNP was devised by Simon Kuznets, an American Nobel Prize winner and economist, in the early 1930s and GDP followed as the common measure of economic conditions much later.
The federal government had been collecting business and economic data from 1865, but because the dollar was fixed on a gold standard of $20.67 to the ounce in Kuznets’ time and had been since the Gold Standard Act of 1900, the price data was broadly comparable over the previous three decades, permitting reverse engineering of GNP statistics. But Kuznets focused his first report on GNP estimates over the period of the Wall Street bear market, 1929-1932. At that time, the US government was gathering evidence with the objective of ensuring a stock market and banking crisis leading to a depression would be prevented by government action in the future.
GDP replaced GNP in US statistical usage in November 1991, though in many other national accounts the switch had already been made some time before. GDP has since become central to a statistical approach to economic and monetary policies. Coupled with Keynesian theories, economic statistics have superseded the classical economics of the past as the mainstream’s economic analysis.
The human factor which underlies all economic activity has become ignored. A new form of economics was born — macroeconomics. It removes the human factor, and state management of economic outcomes became perceived as a viable policy, along with socialist welfare redistribution of economic resources as the principal feature of modern economies, replacing free markets.
With its maths-based approach, fundamental questions over macroeconomics’ appropriateness and of its statistical relevance have been papered over. The government’s statistics are assumed to be as accurate as they can possibly be, and so they go unquestioned. They are accepted as a true representation of the economic condition and increases in GDP are associated with national wealth and improvements in living standards. But besides the rejection of human factors, the underlying questions remain.
Kuznets put together his statistics under a gold standard, and changes in price levels were broadly limited by the repetitive cycle of bank credit. With no currency linked to gold today, price stability is absent due to the continual loss of the purchasing power of all currencies. Attempts to manage this problem have centred on the effects of currency debasement on prices. When statisticians talk of constant dollars, they refer to a dollar adjusted over time by the consumer price index, and not as the phrase might imply, an adjustment by changes in the quantity of currency and credit. And anyway, with measures ranging from M1 to M4, a debate could then be had as to which measure of the circulating medium is most relevant.
It is easier to recognise the concept of a price effect adjustment than to have to understand the distinctions between money, currency, and credit. As non-monetarists are quick to point out, the link between changes in money supply and its effect on prices can vary considerably, making a price index the more reliable adjustment factor in their view. But with a statistic that has so many conceptual holes in it, one still wonders why GDP and its GNP forerunner should have been treated with such reverence in the first place.
No one seems to appreciate to whom the GDP statistic is most useful. It is constructed by and for the benefit of governments, giving them an indication of potential tax revenues capable of being raised from the private sector. It explains the obsession with growth, which leads automatically to higher revenues from taxes. The inclusion of the state’s own spending is justified because the state’s spending develops taxes on its own employees and on their spending. Spending on economic management by the state is intended to yield tax revenues as well, on the statist assumption that economic activity is stimulated by successful intervention policies.