Thursday, March 20, 2014

Why a Common Libertarian Objection to GDP as an Aggregate is Ridiculous

A common Austrian or libertarian objection to GDP is that it is a “meaningless” or “illegitimate” aggregate. Some brief examination of this vulgar libertarian objection shows how absurd it is.

Real or nominal GDP measures output in terms of the aggregate monetary value of consumer goods bought, real capital investments made, government spending, and exports minus imports.

GDP aggregates homogenous money units expressed as numbers that measure the price of a good when sold.

If you cannot meaningfully aggregate the money value of heterogeneous goods, then that has clear consequences:
(1) the aggregate value of factor payments from production in Say’s law and the aggregate money value of the purchasing of produced goods as aggregate demand falls apart: it follows that Say’s law – which Austrians support – is meaningless and invalid.

(2) any private business aggregating the monetary value of its quarterly or annual (i) purchases of factor inputs and (ii) sales of heterogeneous goods to customers, to calculate the value of total costs and sales respectively (and hence profits), must be engaged in meaningless activity too: therefore all calculations of sales and profits fall apart and must be meaningless and invalid.
So Austrians who really want to insistent that GDP is “meaningless” or “illegitimate” on the basis that it is an aggregate per se pay a very high price: they destroy Say’s law and the basis of modern business accounting and the calculation of profit and loss.

But aggregation of the money value of heterogeneous goods is precisely the whole basis of Mises’ theory of economic calculation and profit and loss:
“Capitalist economic calculation, which alone makes rational production possible, is based on monetary calculation. Only because the prices of all goods and services in the market can be expressed in terms of money is it possible for them, in spite of their heterogeneity, to enter into a calculation involving homogeneous units of measurement.” (Mises 1985: 71–72).

“Economic calculation requires homogeneous units that can be manipulated in arithmetic operations. Because money is the general medium of exchange and, as such, the one good that is universally and routinely accepted by market participants, it always constitutes one of the two goods that are exchanged in every market. Consequently, money is the item in which all economic quantities – cost and revenue, profit and loss, and capital and income – are expressed and computed. Economic calculation, therefore, always is and must be monetary calculation, i.e., calculation employing money prices that result, or are expected to result, from actual exchanges.” (Salerno 2010: 469).
Finally, we can see how even Rothbard himself dealt with extremists who denied that even an aggregate measure of the total money supply was possible:
“In his unpublished comment on my article on ‘Austrian Definitions of the Supply of Money’ at the Windsor Castle Austrian conference in September 1976, indeed, Israel Kirzner took the nihilist line that it was impossible to define the supply of money, since it was an aggregative concept. It is, on the contrary, a happy aggregate of homogeneous units, whether of dollars or gold ounces.” (Rothbard 2011: 205, n. 61).
BIBLIOGRAPHY
Mises, Ludwig von. 1985. Liberalism in the Classical Tradition. (3rd edn.; trans. Ralph Raico). Foundation for Economic Education, Irving-on-Hudson.

Rothbard, M. N. 2011. Economic Controversies. Ludwig von Mises Institute, Auburn, Ala.

Salerno, Joseph T. 2010. Money, Sound and Unsound. Ludwig von Mises Institute, Auburn, Ala.

12 comments:

  1. You may already be familiar with this:
    http://mises.org/daily/5710/Averages-and-Aggregates

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    1. There is not even any mention of GDP in that link: it refutes nothing I said.

      So I assume you just pasted it because you have no substantive point to make against anything said above.

      Delete
    2. Sorry I was not attempting to provide a refutation necessarily. I am not always trying to be hostile LK. I just thought the article was relevant to the subject and it may interest you, or it may not interest you and that is also okay.

      Delete
    3. @hanktheblog, As usual Austrian philosophy has nothing useful to say about scientific matters.

      To take a simple example, Newtons theory of gravity says that an aggregate (aggregate mass and centre of gravity of one object) acts on another aggregate. That appears to contradict Hayeks statement "neither aggregates nor averages do act upon one another" at least in our understanding from Newton's theory which says that two bodies do act on each other.

      The entire article is sophistry, as is much of what is written at mises.org.

      Delete
    4. Nic, I understand you are an anti-Austrian. That is fine with me.

      I will just point out one obvious thing. In the sense Austrians use the term, mass does not act, as in mass does not exhibit purposeful behavior.

      Delete
    5. Please do actually read the contents of the piece you posted. The author makes several examples of physical science, the "Heisenberg principle of uncertainty", and at no point does he imply that the same arguments applying to averages don't apply to the physical laws. He does imply that in economics there tends to be a much more broad distribution of behaviours, but this is irrelevant to methodology.

      The most important thing about the piece is that the key statement, "neither aggregates nor averages do act upon one another" and we should look at the meaning. We might infer the authors meaning to be that there are underlying 'atomic' interactions which make up an aggregate behaviour. This is correct, it is also correct for Newtons laws of gravity, and this principal doesn't argue against the use of aggregates in describing Newtons laws of gravity at all (in exactly the same fashion). On the other hand if the author (or a reader) infers that averages and aggregates are therefore somehow meaningless and are not able to be used to do economic (or scientific) analysis, then this is an assumption (originally inferred from Hayek's statement), and it is incorrect as the example of Newtons law of gravity obviously shows.

      What the author actually does is put up a large number of arguments for why observing aggregate behaviour could be miss-leading mostly (from his examples) its due to assumptions (or simplifications) about the underlying causes of the aggregate behaviour or trend. This makes a very good argument against the kind of abstract, un-empirically testable, reasoning in which Austrians engage.

      I used the word sophistry quite specifically.

      Delete
  2. LK,

    I can see that, as always, you are deleting my comments even though they are not in the least bit offensive and are extremely pertinent to what you have written and what prompted it. So let me repeat my point. This post fails to present the real objection that was raised (by me) to GDP as a meaningful economic aggregate. I did answer the point you are now raising in this post in a comment on Bob Murphy's blog. The real objection is not to aggregates per se but to GDP alone. I am not going to restate my objection here because the onus is on you to present the objection properly and THEN refute it.

    Of course, you can always exercise blog owner's privileges and block my comment but that is not going to invalidate my objection. I just hope that you realise that if my objection stands, your entire approach to macroeconomics collapses. Just imagine all the macroeconomics books you subscribe to with GDP expunged from them because it is nonsense. That would be something, wouldn't it?

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    1. Your first comment was little more than a rant born -- no doubt -- of a sheer ridiculous and arrogant belief that the post above was directed at you.

      It was not, but at the type of vulgar Austrian Gene Callahan refers to here:

      http://gene-callahan.blogspot.com/2011/09/vulgar-austrians-and-aggregates.html
      ----------------
      There are plenty of deluded and vulgar Austrians about the place, and you are nothing special.

      However, I will take the time to address your particular argument in due course, though I'll probably include it in a discussion of the Austrian Mark Skousen's views of GDP.

      Delete
    2. Also, if you want me to critique your view, first answer:

      (1) whether you think an alternative aggregate can be validly calculated using the value of intermediate goods and factor inputs, and if yes, then

      (2) write your alternative aggregate out as an equation specifying the variables, e.g., as something like:

      alternative real output aggregate (AROA)

      AROA = NWF + WF

      NWF = money value of non-wage factor inputs (including rent of durable capital goods or property, durabela nd non-durable factors, interest payments on debt??)

      WF = money value of wages

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    3. Actually, I am not asking you to critique my view. I am asking you to salvage your view on GDP by explaining why my explanation of why it is nonsense is wrong. As things stand, in our argument out there on Bob Murphy's blog, I have presented enough arguments for why GDP must be treated as economic nonsense. The onus is on you to defend your position, which I presume is that it is not nonsense.

      However, in deference to your current request, here is my position. What is economically meaningful as an aggregate (but not as a stand alone aggregate) is the sum total of all payments for the services of land, labour and capital goods in all production processes. This means that payments made for the purchase of whole capital goods not be included and instead the rent for the services of those capital goods be included. The reason I say this is meaningful is that it would be the total savings by capitalists to make the observed level of consumption possible. To the best of my knowledge, Austrians call this gross savings.

      If an equation is what you want, Gross Savings = Total wages + Total rents for land (including notional rent to capitalists applying their own land in their own production processes) + Total rent for services of capital goods.

      Interest on loans should not be included because that is just the interest income to the capitalists (lenders) who are offering their capital for the procurement of the services of factors of production.

      Any change in this figure in any period can only come from a change in consumption spending (net saving/dissaving) or addition to the money supply injected into the production system (credit expansion beyond the available pool of real savings) as loans to producers.

      So, there you have it. Now, i shall await your salvaging of your position.

      Delete
    4. "Actually, I am not asking you to critique my view. I am asking you to salvage your view on GDP by explaining why my explanation of why it is nonsense is wrong. As things stand, in our argument out there on Bob Murphy's blog, I have presented enough arguments for why GDP must be treated as economic nonsense."

      Statement 1:
      "Actually, I am not asking you to critique my view." = so I do not need to refute any argument you offer against GDP?

      Statement 2:
      "I am asking you to salvage your view on GDP by explaining why my explanation of why it is nonsense is wrong. ... I have presented enough arguments for why GDP must be treated as economic nonsense" = so now I need to defend GDP from your criticisms of it, logically requiring that I need to critique your view.
      ----------------------
      Since Statement 2 reduces to the negation of Statement 1, you are effectively violating the law of non-contradiction and asserting a proposition p and ~p as true at the same time.

      If you graciously admit you have made a bad mistake in logic above (or at least admit that you worded your comment badly), I'll be happy to critique your view, as harebrained as it is.

      Delete
  3. Speaking of Austrian objections to aggregate demand, I remember reading Hayek's review of "A Treatise on Money" that he had the following objection: "Mr. Keynes's aggregates conceal the most fundamental mechanisms of change." This point wasn't approached further in his debates with Keynes and Sraffa, as far as I learned, so what do you think?

    ReplyDelete