The Junk Science of Modern Macro-Economics

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:

And their debate explains a great deal of the current tension between those who would make final consumption – or what we call consumer spending – the be-all and end-all of economic policy, and those who feel that productivity and income should instead be the focus.

I don’t know if Hayek ever wrote that “productivity and income should…be the focus” as opposed to “final consumption.”  I do know that Austrians consider value subjective – and subjective value cannot be measured, except crudely, through prices.  Further, it is difficult to reconcile Austrian economics with the concept of “economic policy”- unless the economic policy is to keep hands-off.

So as not to get thrown out of the club, Mauldin offers a caveat:

Let me hasten to note that I have no problem with the concept or the calculation of GDP in general.

But what if it is meaningless and incalculable, John?  Is central planning so important that even a meaningless and incalculable measure must be respected?

If the only tool you use to affect (determine, guide – choose your word) economic growth and the creation of jobs is the hammer of GDP…

Mauldin is vague about the word for a reason, I suspect.  I will choose the word(s) he is not willing to write: centrally plan.  How about that for the word?  Just admit it, and then we can have an adult conversation.

The rest of Mauldin’s post examines this issue through a book by Diane Coyle: “GDP: A Brief But Affectionate History.”

Ms. Coyle starts with the predecessors to Adam Smith and takes us through the 17th century right up until today with the development of GDP, so we see the ebb and flow of ideas through time.  Who knew the early developers of the model did not want to include defense spending, as they saw it as a wasteful, nonproductive activity? … Importantly, money spent on warfare or the interest on government debt was also being used unproductively.

[Simon] Kuznets, when he originally developed an approach for measuring GDP for the American economy, did not want to include expenses on “… armaments, most of the outlays on advertising, a great many of the expenses involved in financial and speculative activities, and much of government activity,” including the building of subways, expensive housing, etc.  Such thinking could not stand the scrutiny of politicians, however….

One of many examples where the wisdom of our elders has been ignored.

The quarterly release of GDP statistics is more akin to a religious service than anything resembling a scientific study.

A “religious service.”  Faith and mystics.

He goes on to list the easy items that make the measure meaningless: mowing your own lawn, activities such as prostitution, etc.  What is in, what is out?  He then goes on to identify one of the true purposes behind the witch’s brew of the GDP calculation:

It will not surprise most readers to know that governments decided they need to know what the gross domestic product of the country was in order to be able to both tax that productivity and decide about a nation’s capabilities to wage (and pay the wages of) war.

Theft and murder – the purpose behind today’s macro-economics profession.

Coyle:

Before long, the president would want a way of measuring the economy that did indicate its total capacity to produce but did not show additional government expenditure on armaments as reducing the nation’s output.

Of course, the president would not want economists to state that government spending reduced GDP.  An imperfect statistic would have been slightly less imperfect if this was still the rule, but it would have stood in the way of theft and murder. 

The president decided on the make-up of the statistic.  Given the level of government spending in support of the entirety of the economics profession, I imagine if an economist wanted a well-paying job he probably had to go along.

There was a “heated debate between Kuznets and other economists, especially Milton Gilbert of the Commerce Department, about the right approach. The discussions were highly technical, but the underlying issue was profound: what was the meaning of economic growth and why were statisticians measuring it? Gilbert and his colleagues were clear that the aim was to construct a measurement that would be useful to the government in running its fiscal policy.”

GDP – defined and calculated solely in support of “government…fiscal policy.”  Inherently – even setting aside the reality that subjective value cannot be measured – a useless statistic; one good only for central planning.

More from Coyle, emphasis from Mauldin:

Crucially, the development of GDP, and specifically its inclusion of government expenditure, winning out over Kuznets’s welfare-based approach, made Keynesian macroeconomic theory the fundamental basis of how governments ran their economies in the postwar era. The conceptual measurement change enabled a significant change in the part governments were to play in the economy. GDP statistics and Keynesian macroeconomic policy were mutually reinforcing. The story of GDP since 1940 is also the story of macroeconomics. The availability of national accounts statistics made demand management seem not only feasible but also scientific.

Or, conversely, the desire for Keynesian economics drove the development of the measurement and definition of GDP.

There is no such entity as GDP out there in the real world waiting to be measured by economists. It is an abstract idea, and one that after a half century of international discussion and standard-setting has become extremely complicated.

It is not extremely complicated; it is impossible.  It is also political – the entire purpose of calculating GDP was political: macroeconomic policy; central planning; “demand management.”  Even Mauldin agrees:

GDP has always been a political construction….

As mentioned, Mauldin gets “almost-there.” 

[Hayek’s] proponents are right to argue that the match was rigged and the judges were bought....

Despite spelling out clearly that measuring GDP is complex to the point of impossible, political, and used for central planning, Mauldin cannot conclude the obvious.  Instead:

It is a necessary part of the management of the country, because, as with any enterprise, if you can’t measure it you can’t determine if what you are doing is productive. That said, the act of measuring GDP precipitates the observer effect writ large.

Can “management of the country” be interpreted as anything other than central planning?  Is there a difference between this American system and the laughable five-year-plans of the communists, other than language – and degree?  Significant central planning is OK, but don’t call us communists?

GDP cannot be measured – not only for the reasons given by Mauldin and Coyle, but because value is subjective.

This is the experiment we all live under – via subjective and politically-determined measurements our economic lives are centrally planned.  Mauldin can see this entire picture, yet cannot bring himself to state the only appropriate conclusion.

The entirety of macro-economics is a fraud perpetrated by the state and its mouthpieces to control the population and extract maximum wealth from the productive.  It is a tool in support of theft and murder.

Nothing more.