John Mauldin has published another almost-there Thoughts from the Frontline: GDP: A Brief But Affectionate History. I say “almost-there,” because like many of Mauldin’s pieces, he gets almost-there – almost to the truth about economics and economists – without going all the way to the evident conclusion.
In this piece, he questions the cornerstone macro-economic statistic, GDP; to set the stage, he first offers a definition of “pure science” by Gauri Shankar Shrestha:
“Measurement theory shows that strong assumptions are required for certain statistics to provide meaningful information about reality. Measurement theory encourages people to think about the meaning of their data. It encourages critical assessment of the assumptions behind the analysis.
“In ‘pure’ science, we can form a better, more coherent, and objective picture of the world, based on the information measurement provides. The information allows us to create models of (parts of) the world and formulate laws and theorems. We must then determine (again) by measuring whether these models, hypotheses, theorems, and laws are a valid representation of the world.”
Mauldin then goes on to apply this observation to macro-economics:
The problem we have today in economics is that many people, and not a few economists, seem to regard economics as “pure science,” as described above by Gauri Shankar Shrestha. If you delve deep into measurement theory, you find that all too often the way in which you measure something determines the results obtained from your experimental model.
…if you’re using models, as we do in economics, to determine policies that govern nations, your efforts can result in economic misdirection that seems for a time to work but that all too often can lead to a disastrous Endgame.
Mauldin casually offers the reason for macro-economics as it has developed over the last 75 years or so – “to determine policies that govern nations,” as if this is a natural condition. It is central planning.
He goes on to explain the fallacies behind the targets that are utilized in this all-encompassing method of central planning:
…GDP is a relatively late-to-the-party statistic, thoroughly malleable in its construction and often quite contentious in its application.
“Thoroughly malleable,” and I will add, thoroughly meaningless.
Mauldin points out the direct issue at hand – the issue with GDP in this instance, and, in my opinion, with all measures of macro-economic activity:
What we are going to find is that developing the concept of gross domestic product was more than a dry economic and accounting undertaking. At its very core, GDP is John Keynes versus Friedrich Hayek writ large…. The very act of measuring GDP as we do gives the high and easy intellectual ground to those of the Keynesian persuasion.
It is Keynesianism versus Austrianism; it is central economic planning versus free markets, subjective value, and imperfect knowledge; it is automatons versus human action. Unfortunately even here, Mauldin doesn’t get it quite right: