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.