Measuring the level of economic ignorance

Came across this today, Economic Growth, an article published by the Reserve Bank of Australia. The RBA was doing no more than trying to explain how statistical agencies around the world measure economic growth which is published as a figure as Gross Domestic Product – GDP. The increase in the size of this figure between periods is supposed to be the measure of how much an economy has grown during that time. It is one more artefact that has come down to us from the disastrous introduction of Keynesian economic theory.

The level of economic ignorance as a result of Keynesian theory is fantastic with this a particularly stunning example. I have discussed this in both of my more recent books, my Free Market Economics (2017 – 3rd edition) and then again in my Classical Economic Theory and the Modern Economy (2020. Y “is identically equal to” C + I + G + (X – M) [ written  Y ≡ C + I + G + (X – M) ] which is the basis for calculating GDP in the national accounts. It is an identity, which means that Y is defined by C + I + G + (X – M).

  • Y is Gross Domestic Product
  • C is the measure of Consumption
  • I is the measure of Private Investment
  • G is the level of Government Spending
  • X – M is the difference between the level of exports (X) and imports (M)

This is in contrast with Y = C + I + G + (X – M) – notice the equal sign – which is the fundamental equation of Keynesian economics. This tells you that if any of the elements on the right side of the equation rise, then the level of Y will also rise, which has led to the idiocy of arguing that raising the level of Public Spending will raise the level of economic output. As the equation shows, higher G must as a matter of arithmetic lead to a higher level of Y.

This is utterly imbecilic and ought to be seen as deeply shameful to the economics profession. But such is as it is.

To see this discussed in my Free Market Economics, see Chapter 9 on “Measuring the Economy” and in my Classical Economic Theory, see pages 181-182 on “The Relationship between Keynesian Theory and the Measurement of GDP”.

Virtually no one, alas, gets it. I often used to point out to my classes, who also did not get it, that there is no comprehensible meaning for the growth in GDP between say 1895 and 1920, during which time our economies were electrified, the automobile was introduced, the cinema was invented, we introduced radio, we began to travel using aeroplanes, we mechanised agriculture and so much more besides.

And, of course, at the heart of the flaws in GDP is the role of government spending which seldom if ever actually constitutes an increase in the real level of output per individual. The construction of wind farms are just one more example of government unproductive spending that appears like growth in the way we calculate output, only in this case it is worse since we don’t even allow for the coal-fired power plants we have knocked over at the same time.

This is ignorance on stilts and the RBA once again emphasises how little they understand. That I hear how our GDP has supposedly risen over the most recent period even as so many of our businesses have been driven out of business and we are restricted all over the place in what we can buy or the places we can travel to, reminds me again how primitive economic thinking really is. We actually understand less today than John Stuart Mill did about the economy in 1848.

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