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Economic Neanderthals

The five finger arithmetic of GDP-obsessed economics...

IN A RECENT op-ed, republished in the Globe & Mail, Davos Man's indefatigable mouthpiece for failed, mainstream thinking, Martin Wolf, passed the following verdict on the UK authorities:-

"What Mr. Cameron recommends is even nigh on impossible. Why is that? Is it not common sense that if one has borrowed too much, one must pay it back? Alas, what makes sense for individuals does not make sense for an economy, because one person's spending is another person's income. Consider a closed economy. Income and spending must match. If the private sector decided to spend less than its income, to pay down debt and if the government also decided to stop borrowing, aggregate incomes would fall until they could no longer achieve what they wanted. All they would obtain, by following Mr. Cameron's advice, is a race to the economic bottom."

Were it not that their own confused thrashings about in the wellsprings of knowledge so muddy the waters that laymen—above all those most dangerous of laymen who have their hands on the levers of power—quickly lose all faith in their own ability to deliver a sensible analysis of the world around them, this would almost be funny, writes Sean Corrigan for the Cobden Centre.

Never ones to be overnice about maintaining a rigorous distinction between 'money' and wealth'; always eager to present the results of their own serial befuddlement and blind-alley reasoning as examples of 'paradox' or 'fallacies of composition'; so entirely ignorant of the role of time or capital in the system that it condemns them to live in a kind of economic Flatland—they truly should be greeted with nothing more than a vitriolic, Swiftian scorn whenever they dare to start pontificating, rather than being accorded the hushed respect which so many confer upon their profound-sounding inanities.

In taking the latest outpouring from Mr. Wolf as an example, the first thing we should notice is that Keynesians are entirely happy to dismiss our Austrian idea of a 'structure of production' (of which their hallowed GDP components are only one, subjectively-selected subset), yet, when they start to espouse (as Wolf is doing here) their tautologous 'circular flow of money' argument, much less their insupportable 'multiplier effect', they are suddenly willing to rely upon the actual existence of a larger, 'subsurface', Hayekian component to the lesser, above-water, final sales part of the iceberg of spending and making upon which they are so fixated.

Moreover, even if we accept the lack of a deeper appreciation of the role of higher order activity which categorizes these economic Neanderthals, this childish simplification of only considering the various 'sectors' as if such a statistically-compliant, but monstrous aggregation had any real world validity is really an intolerable reduction to the absurd of the workings of a vastly complex, ever-changing, economic network.

To say that 'if the household sector doesn't borrow, then government must' is to roll the very different tastes, circumstances, and capabilities of – let's take the case of the US – 300-odd million individuals, living in 100-odd million households, into one, indistinguishable blob of clay and then to throw it into the scales against the only true monolith in existence – Leviathan. 

Likewise, they do this when they talk about the 'company sector' as if the innumerably rich range of business enterprises, all eagerly beavering away to try to generate their various interested parties an income, is nothing but a mass of mindless automatons, marching monotonically to the same beat, as if they were part of a birthday parade for Kim Jong-Il.

They make a similar – but possibly even greater – error when they say that 'if no-one at home will borrow, then someone abroad must do so' and then fret that if that uncountable, planet-girdling, to-them-utterly-homogenous, 'offshore sector' does not wish to run the trade deficit which is that net borrowing's usual counterpart (the crude mercantile implication being, of course, that 'it' will not wish to do so), then we're all doomed. This is now to lump the 6.7 BILLION people outside our current exemplar of the US into a single, unthinking ant hill of identical preferences and possibilities!

An extension of this approach is the constant appeal to the shibboleth that 'we can't ALL export our way out of difficulties' – in direct contradiction of the truth that this is exactly what we each attempt to do, every single day of our working lives!

I try to export my skills to you and those like you endeavor to do the same – sometimes to me, but often to a group which does not (and, moreover, NEED not) actually include me at all. As we each expand our ability to produce those goods and services of economic value which we constantly seek to 'export' across our interpersonal boundaries – so as to profit from our comparative advantage of talents – and irrespective of whether these boundaries coincide with the artificial divisions which a 'territorial monopoly of violence' lays down (i.e., of whether they synch with political borders) – the chances are that we will all become richer in the process.

This is no less the case when—as is well-nigh inevitable— we find the odd, residual imbalance between A and B (and even the less common one between C and everyone else from D through Z) on that single instant when we take the misleading, if regular, snapshot upon which we depend for accounting and tax-related purposes of the inconceivably extended, thrummingly dynamic matrix of global interchange in which we cannot help but be participants.

Yes, to sustain spending above one's means may lead one into difficulties, especially when that spending is not being directed to wealth-creation or future income generation and even more particularly when it is being financed (rather than savings-funded) by an inflationary increase in money and credit. Hence the present difficulties of US mortgagees, Chinese property speculators, and the many European sucklers at the fast-drying teat of the tutelary Provider State.

But, otherwise, such exercises in five-finger arithmetic are, at best, a travesty of economic reality and, at worst, a breeding ground for ill-judged macro-intervention and invidious, nationalistic finger-pointing.

A similar distortion comes about when it is argued that if present policies reduce spending and if, therefore, prices begin to fall, profits will evaporate and set in train a feedback of even lower incomes and outlays in the future.

Again, this is true only insofar as it goes and, typically, the Keynesian propounders of this deflationary doom do not go anywhere near far enough.

The key to resolving this supposed conundrum lies in those last two items—incomes and outlays. Profit is the difference between income and outgo (less such legal deductibles as depreciation, etc). So, even if most prices were to fall for the reasons the likes of Mr. Wolf often suggest they should, there is nothing to say that a given entrepreneur's unit costs may not go down faster than his selling prices—particularly if the difficult climate induces him to maximize his efficiency, eliminate all sub-marginal activities, and focus narrowly on what is his most remunerative unertaking. In this case, it is impossible to argue that he will not be left with a profit.

Moreover, even if the monetary count of whatever profit that left him with turns out to be lower than it was before, there is nothing to say that this will not now allow him to buy just as many – and possibly more – goods and services as was his wont (including the direct purchase of labor services) since, as was first postulated, prices have meanwhile fallen, boosting the real or effective value of his net income!

Granted, this does require the unstinting exercise of an unsentimental flexibility on the part of all counterparties involved and it may even require the renegotiation of any monetarily-fixed obligations, such as debt contracts. It also presumes that, at root, whatever credit contraction there may be underway is not allowed simultaneously to shrink the core money supply, else that latter's real value has no chance of re-equilibrating itself.

To say that none of this is easy to achieve under today's political and institutional framework is, alas, a truism, but neither is that admission one of finally accepting defeat. Certainly it does not mean that, instead of seeking to apply a judicious dose of social and legal lubricant to the state-stiffened joints of the exchange mechanism, we should douse the whole structure in gasoline and set light to it, as recommended by the sort of economists who are accorded the greatest number of column inches in our most prestigious national newspapers.

Truly, there is no hope for the world while we allow our self-serving political elite to derive post hoc justification for its members' depredations from dilettantes such as Wolf – 'second-hand dealers in ideas' all – who are irredeemably prey to the many logical fallacies and faults of truncated reasoning which allow them to persist in propagating such errant nonsense with such unshakable conviction

Thinking about a Gold Investment?...

Stalwart economist of the anti-government Austrian school, Sean Corrigan has been thumbing his nose at the crowd ever since he sold Sterling for a profit as the ERM collapsed in autumn 1992. Former City correspondent for The Daily Reckoning, a frequent contributor to the widely-respected Ludwig von Mises and Cobden Centre websites, and a regular guest on CNBC, Mr.Corrigan is a consultant at Hinde Capital, writing their Macro Letter.

See the full archive of Sean Corrigan articles.

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