What are the Austrian Objections to GDP?: A Critique

We have already seen in the last post that the vulgar Austrian or libertarian objection to GDP – merely on the basis of it being an aggregate per se – is utterly absurd, and indeed leads to the destruction of Say’s law and all private sector attempts to calculate costs, sales, profit and loss.

So what are the other Austrian objections to GDP? For clarity, let us remember that GDP is the following:

GDP = C + I + G + (X–M)
where
C = aggregate of the sale price of final consumer goods and services;

I = gross investment (new housing, replacement purchases, net additions to capital assets and investments in inventories);

G = government spending including final consumption expenditure by government and government gross capital formation such as infrastructure investment or research spending (transfer payments are not included in government purchases);

X–M = exports minus imports.

First, it is not even clear that all Austrians reject GDP at all. In fact, there is no universal and orthodox Austrian position on GDP.

Frequently, you find Austrians who cite and use GDP in a way that presupposes that they must accept it as a meaningful and valid aggregate.

At other times there is an implicit use of GDP made in arguments by Austrians. For example, when Austrians claim that the US recession of 1920–1921 and other recessions before 1929 ended “quickly,” they implicitly rely on real GDP data:

“… the 1920–1921 depression was short-lived that most Americans today are unaware of its existence” (Murphy 2009: 71).

“Generally speaking, most depressions (or ‘recessions’ as they came to be redefined after the New Deal) in U.S. history were over within two years, and all of them within five …. Krugman’s ‘explanation’ for the stagnant investment of the 1930s can’t explain why the U.S. economy managed to quickly recover from all of the earlier depressions in its history.” (Murphy 2009: 112–113).

If Austrians, however, think real GDP data is invalid, then they would need to defend such statements above with other data to justify the claims they make. But what real output measure can they use without GDP?

Rothbard’s objection to GDP was mainly that it included government spending, and in its place he proposed two aggregates called Gross Private Product (GPP) and Private Product Remaining (PPR).

Rothbard’s Gross Private Product is nothing more than GDP, with G removed. That is to say, Rothbard’s Gross Private Product is merely this:

GPP = C + I + (X–M).

This is an aggregate of aggregates too: the total money value of final consumer goods and total value of gross investment (new housing, replacement purchases, net additions to capital assets and investments in inventories), and exports minus imports. If Rothbard’s Gross Private Product is to be taken seriously, then it must be legitimate to aggregate the value of C, I, and (X–M).

But why does Rothbard exclude government spending?

The explanation is here:

“The Department of Commerce method fallaciously assumes that the government’s ‘product’ is measurable by what the government spends. On what possible basis can this assumption be made?

Actually, since governmental services are not tested on the free market, there is no possible way of measuring government’s alleged ‘productive contribution.’ All government services, as we have seen, are monopolized and inefficiently supplied. Clearly, if they are worth anything, they are worth far less than their cost in money. Furthermore, the government’s tax revenue and deficit revenue are both burdens imposed on production, and the nature of this burden should be recognized. Since government activities are more likely to be depredations upon, rather than contributions to, production, it is more accurate to make the opposite assumption: namely, that government contributes nothing to the national product and its activities sap the national product and channel it into unproductive uses.

In using ‘national product’ statistics, then, we must correct for the inclusion of government activities in the national product.” (Rothbard 2009: 1293).

At the heart of this is nothing more than an implicit moral argument: that government taxation is wrong and hence government spending covered by taxes is a “burden … on production” and a “depredation.”

That argument is utterly dependent on Rothbard’s natural rights ethics, which unfortunately is worthless, since even his foundational attempt to justify it is utterly unsound.

With the ethical basis for Rothbard’s critique of government in ruins, the economic ones need not detain us.

This economic objection consists of the idea that

(1) “governmental services are not tested on the free market” and are

(2) “monopolized and inefficiently supplied” and therefore

(3) “worth far less than their cost in money”.

But the “free market” that Rothbard invokes here, however, is a pure fantasy world of no interest to empirical economics. Rothbard’s belief that something monopolised by government will be inefficiently supplied is only based on his flawed theory that a free market will determine prices by supply and demand, tend to find an equilibrium (or market clearing) price, that price will tend to be equated towards marginal cost, and that free entry is available for competitors to enter and increase production and decrease prices.

But even for most private sector businesses, these things are untrue, since most of the private sector prefers mark-up pricing, shuns highly flexible pricing and shuns marginal cost as the basis of pricing or production. Use of inventories and excess capacity also severely deter free entry into many markets.

While taxes are certainly a cost to private businesses and individuals, the services provided in return for these taxes – such as law and order, justice, enforcement of contracts, property rights, and public goods in general – are the basis of any functioning market society.

In short, Rothbard’s whole economic critique of government services is just as worthless as his moral critique, and there is no convincing reason why government spending should not be included in GDP.

A second Austrian who has arguments criticising GDP is Mark Skousen. But his critique is even weaker than Rothbard’s, for Skousen needs to accept the validity of GDP for his own critique to work.

In The Structure of Production (1990), Skousen attempted to create a new output statistic: Gross Domestic Output (GDO), as his “Austrian” alternative to GDP. In a later version of The Structure of Production (2007), with a new introduction, Skousen proposed another such measure called the Gross Domestic Expenditures (GDE) aggregate (for details see his paper here).

Skousen defines Gross Domestic Expenditures (GDE) as:

“GDE is defined as the value of all transactions (sales) in the production of new goods and services, both finished and unfinished, at all stages of production inside a country during a calendar year.”
Skousen, Mark. 2010. “Gross Domestic Expenditures (GDE): the Need for a New National Aggregate Statistic,” Economics Working Paper No.113, November, p. 11
http://discovery.ucl.ac.uk/1370604/1/wp113.pdf

That is to say, GDE includes GDP and the former could not be a meaningful measure of output if its component GDP was not!

What Skousen proposes is, then, a second measure of real output in addition to GDP but including GDP, one which includes intermediate input, including factor inputs into capital goods production and consumer goods production.

The US government has apparently produced such an aggregate called Gross Output (GO) since 2001, and from 2014 this economic statistic will also be calculated on a quarterly basis (moreover, a basic statistic of this sort has been produced, or at least has been possible to calculate, since the 1940s via US benchmark input-output tables).

Yet Skousen admits the following:

“[Gross Output] … is a measure of the ‘make’ economy, while GDP represents the ‘use’ economy. Both are essential to understanding how the economy works.

While GDP is a good measure of national economic performance, it has a major flaw: In limiting itself to final output, GDP largely ignores or downplays the ‘make’ economy, that is, the supply chain and intermediate stages of production needed to produce all those finished goods and services.”

“Gross Output fills in a big piece of the macroeconomic puzzle. It establishes the proper balance between production and consumption, between the “make” and the “use” economy …. As Steve Landefeld, director of the BEA, and co-editors Dale Jorgenson and William Nordhaus state in their work, A New Architecture for the U. S. National Accounts (University of Chicago Press, 2006), ‘Gross output [GO] is the natural measure of the production sector, while net output [GDP] is appropriate as a measure of welfare. Both are required in a complete system of accounts.’”
Skousen, Mark. 2013 “Beyond GDP: Get Ready for a New Way to Measure the Economy,” Forbes, December 16
http://www.forbes.com/sites/realspin/2013/11/29/beyond-gdp-get-ready-for-a-new-way-to-measure-the-economy/

While Skousen argues that GDP has the “flaw” that it ignores the productive side of the economy, nevertheless his position, as noted above, ultimately requires him to accept the validity of GDP as a measure of the final goods sector of the economy.

For Skousen the virtue of the Gross Output (GO) aggregate is that it shows that consumption is only about 40% of total annual output and that the value of private investment with intermediate inputs is around 50% of economic activity. Also, Gross Output and its private investment and intermediate input component show more volatility than GDP.

These findings, however, do not refute Keynesian economics or even necessarily contradict anything in Keynesian theory except vulgar misunderstandings and versions of it: for Keynes always argued that private investment is a fundamental part of the economy and more volatile than the consumption component of GDP.

Nor does the large size of the value of intermediate input in production refute the clear evidence that demand and expected demand for final output generally drive production and employment decisions in the private sector.

One could have a debate about the merits of GDP versus Gross Output (GO), but that would be a quite different debate from one rejecting GDP completely, and the new debate would already presuppose, as we have seen, that GDP is at least a meaningful and valid measure of the final goods sector of output.

And, finally, one must note the obvious point that all Austrian substitutes for GDP are themselves... aggregates. Rather curious indeed for school that supposedly dislikes aggregation.

Appendix
Robert Batemarco (1987) discusses Rothbard’s Gross Private Product, and on p. 183 gives a table of US GNP and Gross Private Product for the period 1947-1983.

BIBLIOGRAPHY
Batemarco, R. 1987. “GNP, PPR, and the Standard of Living,” Review of Austrian Economics 1: 181-186.

Rothbard, M. N. 2009. Man, Economy, and State with Power and Market: The Scholar’s Edition (2nd edn.). Ludwig von Mises Institute, Auburn, Ala.

Skousen, Mark. 1990. The Structure of Production. New York University Press, New York and London.

Skousen, Mark. 2007. The Structure of Production. New York University Press, New York.

Skousen, Mark. 2001. “Beyond GDP: A Breakthrough in National Income Accounting,” Mskousen.com, April 1
http://www.mskousen.com/2001/04/beyond-gdp-a-breakthrough-in-national-income-accounting/

Skousen, Mark. 2010. “Gross Domestic Expenditures (GDE): the Need for a New National Aggregate Statistic,” Economics Working Paper No.113, November
http://discovery.ucl.ac.uk/1370604/1/wp113.pdf

Skousen, Mark. 2013. “My ‘Gross Output’ Statistic is Adopted by the Government,” December 5
http://www.eagledailyinvestor.com/13472/my-gross-output-statistic-is-adopted-by-the-government/

Skousen, Mark. 2013 “Beyond GDP: Get Ready for a New Way to Measure the Economy,” Forbes, December 16
http://www.forbes.com/sites/realspin/2013/11/29/beyond-gdp-get-ready-for-a-new-way-to-measure-the-economy/