Sunday, January 22, 2012

Austrian Substitutes for GDP – They are Aggregates!

How often do we hear endless nonsense from Austrians that GDP is unsound because it is an aggregate value?

And yet – astonishingly – the only serious Austrian measures of real national output proposed in place of GDP, such as Rothbard’s Gross Private Product (GPP) and Mark Skousen’s Gross Domestic Output (GDO) are nothing but aggregates!

GDP is the following:
GDP = C + I + G + (X-M).
Rothbard’s Gross Private Product is little more than GDP, with G removed. That is to say, Rothbard’s Gross Private Product is merely this:
GDP = C + I + (X-M).
This is an aggregate of aggregates too: the total 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).

Think of C as an example: the aggregation of the sale price of consumer goods in money terms in one year must be perfectly valid and meaningful, though such goods are heterogeneous. If you could not, for example, meaningfully aggregate the value of sales of heterogeneous goods in one year for a firm, how could a firm calculate its total income from sales?

Now gross investment is, as I have said, new housing, replacement purchases, net additions to capital assets and investments in inventories. Obviously, these goods are heterogeneous, and not all capital goods investments in one year will lead to a profit in the future, but you can still aggregate the sale price of these new capital goods bought (or value of new capital goods added into the capital stock). Rothbard’s Gross Private Product requires gross investment.

Government spending (G) is (1) final consumption expenditure by government and (2) government gross capital formation (infrastructure investment or research spending). Government expenditures that are transfers of money (social security payments, pensions, etc.) are transfer payments. Transfer payments are not included in government purchases. Rothbard’s Gross Private Product removes income originating in government and government enterprises.

Mark Skousen appeals to “Gross Output (GO)” – which is intermediate input plus GDP – as a more accurate measure of national output. In The Structure of Production (1990), Skousen attempted to create a new output statistic: Gross Domestic Output (GDO), as his “Austrian” alternative to GDP. However, he seems to regard Gross Output (GO) as an acceptable version of this, and Gross Output (GO) is nothing but an official Commerce department aggregate measure of output that aggregates GDP and the value of intermediate input (or what Skousen calls the “goods-in-process sector of the economy,” including commodity factor inputs, manufacturing, and wholesale stages of production).

Now, if GDP is not a meaningful or valid measure of output, how could Skousen’s Gross Output (GO) be meaningful or valid? The answer is: it couldn’t, and Gross Output can only be meaningful, if we also accept the meaningful nature of GDP.

Without a measure of the value or volume of real output, most attempts by any type of economist (Austrians included) to analyse an economy collapse: for how could you know whether Keynesian stimulus or Austrian liquidationism have the effects allegedly claimed for them, without looking at real output in some aggregate form? How could you even know whether the economy is in a recession or an expansionary phase?

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.

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

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

12 comments:

  1. Sorry, but no Austrian says these measures are perfect, they are just better than the current estimates.

    Austrians (even Rothbard) used price level inflation rates as an economic historian. No one says that this is completely accurate (or even possible), but just that is somewhat accurate and provides a reasonably good estimate of what went on.

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  2. "Austrians (even Rothbard) used price level inflation rates as an economic historian. "

    And Hayek rejected averages like CPIs.

    Sorry, but no Austrian says these measures are perfect, they are just better than the current estimates.

    Rothbard's GPP isn't a "better" estimate: it's just the result of his cultish hostility government.

    As for Gross Output (GO), that includes GPD, so if GDP wasn't meaningful, then Gross Output wouldn't be meaningful either.

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  3. "Sorry, but no Austrian says these measures are perfect, they are just better than the current estimates."

    Of course, but Keynesians could use that same excuse for GDP measures. Obviously, GDP measures are not perfect, to think that GDP (or any aggregate measure using prices) is 'perfect' is an extremely close minded position. That is not the debate, instead it is on how meaningful a certain aggregate measure is.

    The whole point of the post (at least how I interpret it) is that Austrians need to be consistent on their claims. Patch, you have to admit that it is inconsistent for an Austrian to be against GDP based on aggregation but yet that same Austrian creates (or advocates) an 'Austrian' aggregate measure.

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  4. I consider myself "Austrian" and I do not reject aggregates as such. I only reject using aggregates as empirical proof for a theory or for constructing economic theory. I consider aggregates extremely useful in economic analysis, however, GDP in that sense has some certain flaws such as including cost-based government spending and the exclusion of intermediary goods.

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    1. Isaac Izzy MarmolejoJanuary 23, 2012 at 4:23 AM

      "I consider aggregates extremely useful in economic analysis,"

      Can you be more specific?

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    2. Aggregates can be useful in applied economics, i.e., applying deduced theories to reality.

      Delete
    3. So, for example, you would support some aggregate historical data collected by the BLS if it best explained deductive theory?

      Delete
  5. "Of course, but Keynesians could use that same excuse for GDP measures. Obviously, GDP measures are not perfect, to think that GDP (or any aggregate measure using prices) is 'perfect' is an extremely close minded position. That is not the debate, instead it is on how meaningful a certain aggregate measure is.

    The whole point of the post (at least how I interpret it) is that Austrians need to be consistent on their claims. Patch, you have to admit that it is inconsistent for an Austrian to be against GDP based on aggregation but yet that same Austrian creates (or advocates) an 'Austrian' aggregate measure."

    (Post pretty much applies to LK reply as well)

    Austrian "modifications" are trying to correct for what they perceive as some of the serious flaws (outside of the aspect of "aggregation") in GDP estimates. Rothbard's GO, discussed in Power and Market and America's Great Depression, tried to correct GDP estimates for including government spending as "productive". He used this to show that during 1929-1932 the government burden in the economy rose.

    Similarly, Skousen and Huerta de Soto have tried to correct GDP for not "double counting", that is, to count only fixed capital spending in investment but not spending in circulating capital along each stage of the production structure. The point of this revision is not to avoid Austrian criticisms of "aggregation", but provide (in their mind) a more accurate estimate of GDP that does not overemphasize consumption spending and shows the (true, in their mind) volatility in investment spending/capital goods industries during booms and busts.

    I know that people who stress GDP do not say that it is perfect (hell, the income and expenditure sides rarely equal nowadays). By perfect I didn't mean that. Austrians know that their GDP revisions are still flawed in terms of the overall criticisms of aggregation, but better than regular GDP because they try to correct for some of its other flaws (overstating consumption/understating investment, government spending as productive, etc).

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    1. So you agree that the core of aggregation is flawed, yet you advocate using 'Austrian' aggregate measures. Do you not see a problem here?

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  6. Austrians know that their GDP revisions are still flawed in terms of the overall criticisms of aggregation, but better than regular GDP because they try to correct for some of its other flaws

    "Flawed" in what sense? If GDP and aggregation of the value of purchases of goods were not meaningful, then all the Austrian output measures would also be completely useless and valueless.

    The point is whether you think an aggregated measure of the value of real output is valid and meaningful. It must be - otherwise there is no point whatsoever to Rothbard's GPP or Skousen's GO.

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  7. "He used this to show that during 1929-1932 the government burden in the economy rose. "

    Burden in what sense? As a percentage of GDP it did, but that was because GDP collapsed.

    Also, the state and local governments appear to have been running budget surpluses in many of these years - contractionary fiscal policy, the antithesis of stimulus, so of course there was a "burden" in draining away income and not spending it.

    Also, as a matter of interest, there is something seriously wrong with Rothbard's figures in his appendix in America's Great Depression, p. 339ff.

    Rothbard's own figures, in America's Great Depression, p. 343, show massive fiscal contraction in 1932 in comparison in 1931, by both federal and state and local government.

    That can't be in the case of the federal government, for in fiscal year 1932 federal spending was higher than in 1931.

    Another exmaple of Rothbard's incompetence.

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  8. ""Flawed" in what sense? If GDP and aggregation of the value of purchases of goods were not meaningful, then all the Austrian output measures would also be completely useless and valueless.

    The point is whether you think an aggregated measure of the value of real output is valid and meaningful. It must be - otherwise there is no point whatsoever to Rothbard's GPP or Skousen's GO."

    I've got work to do, so I'm not going to write an entire essay, but Austrians stress that its important not to let aggregates "determine" economic outcomes, and realize that aggregation conceals the heterogeneity of capital, nor can meaningfully show malinvestment, or "bad" times of spending from intertemporal discoordination.

    "Also, as a matter of interest, there is something seriously wrong with Rothbard's figures in his appendix in America's Great Depression, p. 339ff.

    Rothbard's own figures, in America's Great Depression, p. 343, show massive fiscal contraction in 1932 in comparison in 1931, by both federal and state and local government.

    That can't be in the case of the federal government, for in fiscal year 1932 federal spending was higher than in 1931.

    Another exmaple of Rothbard's incompetence."

    Unfortinately, Lord Keynes, only you are showing the incompetence right now. If you read, literally in the paragraph on the same page, Rothbard says "(we have so far been dealing in calendar years). In AGD Rothbard used calendar years (I believe, don't know for a fact) because 1)he wanted to show government burden, and he had to use calendar years for GDP and 2)Federal budget in calendar years in 1932 went down, and he wanted to be as accurate as possible.

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