By Frank Shostak, Mises Institute
It is common for commentators and economists to refer to something called the “economy,” which sometimes performs well and, at other times, poorly. The “economy” is presented as an entity apart from individuals. Within this framework, the “economy” is assigned paramount importance, while the role of individuals is barely mentioned. It must be realized that, at no stage, does the so-called “economy” have a life of its own, independent from individuals.
According to this way of thinking, the “economy” produces goods and services. Once the output is produced by the “economy,” what is required is its distribution among individuals in the fairest way.
In reality, goods and services are not produced in totality. Every individual is preoccupied with his own production and consumption of goods and services. Consequently, there is no such thing as the total real national output. Furthermore, it is not possible to establish the total real output given that, arithmetically, we cannot coherently add potatoes to tomatoes (i.e., heterogeneous goods). All that we could establish is the numerical amount of money spent on goods and services (i.e., the monetary turnover). The employment of the average price metric to convert the monetary turnover into the real output does not solve this issue since the average price cannot be meaningfully established.
For example, suppose two transactions are conducted. In the first transaction, one loaf of bread is exchanged for $2. In the second transaction, one gallon of milk is exchanged for $1. The price, or the rate of exchange, in the first transaction is $2 for one loaf of bread. The price in the second transaction is $1 one gallon of milk. In order to calculate an average price, we must add these two ratios and divide them by two; however, it is conceptually meaningless to add $2 exchanged for one loaf of bread to $1 exchanged for one gallon of milk. This in turn means that various macroeconomic indicators compiled by government statisticians are detached from the real world.
Consequently, various policies to influence an undefined entity—the “economy”—via undefined indicators inflict damage to the well-being of individuals. Even government statisticians admit that the whole thing is not real. According to J. Steven Landefeld and Robert P. Parker from the Bureau of Economic Analysis,
In particular, it is important to recognize that real GDP is an analytic concept. Despite the name, real GDP is not “real” in the sense that it can, even in principle, be observed or collected directly, in the same sense that current-dollar GDP cannot in principle be observed or collected as the sum of actual spending on final goods and services in the economy. Quantities of apples and oranges can in principle be collected, but they cannot be added to obtain the total quantity of “fruit” output in the economy.
By lumping the values of final goods and services together, government statisticians concretize the fiction of an “economy” by means of GDP statistics and other economic indicators. Once the “economy” is concretized, policymakers could navigate the “economy” along the growth path that is considered by the experts as desirable.
Thus, whenever the growth rate slips below the outlined path, government and central bank policymakers are expected to give the “economy” a suitable push by means of fiscal and monetary policies. According to Rothbard,
Bureaucrats as well as statist reformers. . . in order to get “into” the situation that they are trying to plan and reform, they must obtain knowledge that is not personal, day-to-day experience; the only form that such knowledge can take is statistics. Statistics are the eyes and ears of the bureaucrat, the politician, the socialistic reformer. Only by statistics can they know, or at least have any idea about, what is going on in the economy.
. . .one of the major reasons put forth for government intervention is that it “corrects” the market, and makes the market and the economy more rational. Obviously, if the government were deprived of all knowledge whatever of economic affairs, there could not even be a pretense of rationality in government intervention. Surely, the absence of statistics would absolutely and immediately wreck any attempt at socialistic planning.
To succeed in a hampered market environment, entrepreneurs tend to respond to prevailing conditions, which are influenced by central bank and government policies. A businessperson cannot afford to ignore changes in various economic indicators such as GDP given that government and central bank officials react to changes in these indicators. For instance, if the central bank is expected to tighten its monetary stance in response to a strengthening in the GDP, a businessperson must take this into account in order to succeed in his business.
Note that the government—in order to construct various economic indicators—collects the data from businesses that are allocating resources to supply the government with the information. The construction of various economic indicators generates employment opportunities for economists and experts in other fields such as mathematics and statistics. These experts are employed not only to compile various economic data; they are also employed to interpret the data and provide guidance to businesses.
In a free market environment—free of government and central bank interference with businesses—it does not make much sense to measure and publish various economic indicators. This type of information will be of little use to entrepreneurs.
In a free market environment, what possible use can an entrepreneur make of information about the growth rate in gross domestic product (GDP)? Alternatively, what possible use can be made out of the data showing that the national balance of payments has moved into a deficit or a surplus? According to Rothbard,
The individual consumer, in his daily rounds, has little need of statistics; through advertising, through the information of friends, and through his own experience, he finds out what is going on in the markets around him. The same is true of the business firm. The businessman must also size up his particular market, determine the prices he has to pay for what he buys and charge for what he sells, engage in cost accounting to estimate his costs, and so on.
The only indicator to which entrepreneurs should pay attention to is profitability in their concerned activity. The higher the profit, the more a particular business activity is in tune with consumers’ highest priorities.
Paying attention to consumers’ wishes means that entrepreneurs have to organize the most suitable production structure for that purpose. The information on various macroeconomic indicators will be of little assistance in this regard.
What an entrepreneur requires is not general macroeconomic information, but rather specific information about consumers’ demand for a product or a range of products. Government-aggregated macro-indicators will not be of much help to entrepreneurs. The entrepreneur would have to establish his own network of information concerning a particular venture. If a businessperson’s assessment of consumers’ demand is correct then he will make a profit. An incorrect assessment will result in a loss.
The profit-and-loss paradigm penalizes those businesses that have misjudged consumer’s priorities and rewards those businesses who have exercised a correct appraisal. Hence, by the profit-and-loss framework, resources are withdrawn from those entrepreneurs who misjudged consumer’s priorities to those entrepreneurs who accurately appraised consumer’s priorities. According to Mises,
Thus, profit and loss are generated by success or failure in adjusting the course of production activities to the most urgent demand of the consumers.
We have seen that the construction of various economic indicators generates employment opportunities for economists and experts in other fields such as mathematics and statistics.
These experts are employed not only to compile various economic data, they are also employed to interpret the data and provide guidance to businesses. However, in a free unhampered market, businessmen in the pursuance of their goals are unlikely to require macroeconomic indicators. Therefore, there would be little interest in the services of economists, statisticians, and mathematicians in a free unhampered market.
Macroeconomic data is employed by government and central bank policymakers to navigate the so-called “economy” towards the growth path that was set by the policymakers. As a rule, this navigation culminates in the boom-bust cycle menace and a weakening in the process of wealth generation. By lumping the values of final goods and services together, government statisticians concretize the fiction of an “economy” by means of GDP statistics and other economic indicators.
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