The fallacy of economic growth
The most important objective for
any government is to achieve economic growth. Out of
this growth develops employment and taxes to fund
government itself. It is in other words the primary
focus of all economic planning. Much effort is also
spent perfecting the statistics deemed vital to
quantifying everything that might contribute to the
attainment of this end. Furthermore, “independent”
monetary policy long ago migrated from the principal
objective of controlling inflation to stimulating the
economy into more growth. Almost everyone in developed
economies knows and supports this objective, even if
they argue over the means. However, not only have
governments consistently failed to achieve this
fundamental objective, they are now increasingly worried
that government spending cuts will propel us all into a
deep economic contraction.
But are we right to think in terms
of economic growth or contraction? The concept is
essentially Keynesian and stems from mainstream economic
analysis. It presupposes that governments actually have
a positive interventionist role and can improve economic
outcomes, a supposition that is on examination
completely flawed. Instead, an economy that successfully
delivers the products and services people actually want
does so in an unplanned, random fashion. It is the sum
of all activity, which organises the production of goods
and services by entrepreneurs and business proprietors
in the considered belief they will be wanted.
The strength behind a free-market
economy is the randomness of productive actions, and
progress of mankind’s condition is the result. It only
expands if the factors of production expand; otherwise
the distribution of available resources depends on
entrepreneurial anticipation of people’s needs and
wants. When government intervenes in this unplanned but
productive chaos it destroys this random quality,
harnessing economic actions into in a common direction.
Destructive cycles of boom and bust
have always been the result. Governments seek to
co-ordinate randomness for an outcome they commonly call
growth, and for a short time they might appear to
succeed. But it is not long before these co-ordinated
economic actions inevitably drive up prices, because
extra factors of production (raw materials, labour and
capital goods) only become available at higher price
levels. Higher prices inevitably lead to higher interest
rates, to the point where those who have fallen for the
bait of artificially cheapened credit have to cut and
take their losses. Capital theory predicts this outcome,
events always confirm it, yet mainstream economists
continually ignore it[i].
Intervention is as likely to
succeed as water is to run uphill. Economic growth or
the lack of it, the success or failure by which it is
measured, is its child. The question then arises as to
whether or not we can have economic growth without
intervention.
The logical answer is no. A
free-market economy in the absence of external factors
does not grow: it progresses, which is a very different
thing. It discards those things consumers do not want
and produces things they are likely to want. It adjusts
the price of products to a level which satisfies the
consumer and is at the same time profitable.
Overproduction is punished and underproduction invites
competition. No one knows what the consumers will buy
tomorrow or how much they are prepared to pay, but
randomly-acting entrepreneurs are generally pretty good
at guessing, because they put their own time and money
on the line. They have to anticipate levels of demand
and also prices for their output for at least as far in
advance as it takes to plan, produce and market any
product. This is progress, not growth. Progress is about
better products and services tomorrow than today, using
the resources actually available. Progress is about
better value for money tomorrow, which means that prices
tend to fall. And as prices tend to fall, more things
can be bought for the same money. What governments do
instead is destroy this process of progression in an
attempt to replace it with statistical growth.
The statistics devised to measure
it, principally gross domestic product, cannot measure
anything other than the money in the productive economy,
which it does imperfectly. Government spending, which is
an economic cost, is included pari-passu with valued
production. Efficient producers such as the
manufacturers and suppliers of electronic goods and
services, who reduce their prices over time, see their
output diminished as a proportion of the statistical
whole, while those that maintain their prices by
monopolistic or subsidised means keep and even increase
their weightings. This is simply the result of the
indiscriminate use of a money-aggregate to measure the
fallacious concept of economic growth. So GDP and
related statistics do not measure progress: if anything
they promote economic regression.
Instead, we must conclude that GDP
is an approximation of the amount of money deployed in
an economy. It is equal to a combination of measured
production, government spending and price changes. Let
us assume for a moment that extra factors of production
at a given price level are not available, so production
only progresses depending on how existing factors of
production are redeployed. Let us further assume
government spending and regulation of the private sector
is also unchanged. These two conditions being the case,
economic growth must be a reflection of price changes,
which in turn is the result of changes in the quantity
of money deployed in the economy. And in recording
“real” economic growth, that is economic growth adjusted
by a price-inflation index, statisticians avoid
recording most of the effects of monetary inflation.
Therefore, economic growth is not growth at all: it is
just an alternative and flawed measure of unreported
monetary inflation.
We would not take the central
planners’ flawed attempts to manipulate an economy and
the statistical outcomes seriously were it not for the
ultimate consequences. Not only have they completely
deceived the public over economic growth, but they
deceive themselves. For this reason they are unequipped
to deal with the developing crises, which are the result
of earlier interventions. They now claim that economic
growth, the ultimate source of tax revenue and
government solvency is jeopardised by spending cuts.
Statistically, this is obviously true, because if you
take away government costs and support for unwanted
economic activities, GDP will fall. But the important
point that is commonly missed is that a government which
stops draining an economy of its private sector
resources actually releases them to be deployed more
effectively for the common benefit by those
randomly-acting entrepreneurs.
And that, ultimately, is the way
out of all economic difficulties.
Alasdair Macleod
6 February 2012
[i] There
are some excellent analyses of Capital Theory,
but the error of converting random actions into
common objectives, central to understanding the
destructive effects of central planning, gets
little attention. This is a mistake.
