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Economics

The paradox of choice

Here is a puzzle for Keynesian and other neo-classical economists.

When a consumer buys something, he must choose; and if he increases his purchase of one product, he must reduce his purchases of other products by the same amount. In other words he cannot buy both. This must be true for whole communities as well. How then can you have economic growth?

It is of course impossible without monetary inflation. This is because any statistical average, in this context GDP, can only grow if people are not forced to choose between alternatives, a condition that can only occur if they are given extra money. Not even a draw-down on savings to spend on consumption creates extra spending, because it is merely reallocates spending on capital goods to consumption goods. This simple point has been ignored by all neo-classical economists. The result is that in their pursuit of so-called economic growth, they have committed themselves to monetary inflation. Their concept of growth is to make that extra money available to consumers, so that they are not limited to what they earn and forced to choose. It has also become the basis for economic modelling, which takes known demand for products and services and from it extrapolates growth for an average of all of them.

The means by which GDP is adjusted for inflation is inadequate, because if it was adequate, this law of choice proves that the real GDP statistic will remain the same. Reported real growth in GDP is therefore no more than a statistical gap. Anyway, it is irrelevant: not only is it impossible to have wholly accurate statistics, but it is also impossible to predict the future consumer preferences that should be the basis of economic forecasting.

So the gap cannot ever be closed, and it does not help that the neo-classical establishment yearns for results that confirm their misplaced concept of economic growth. Government has money on the result as well, with a variety of bonds and welfare benefits indexed to prices. There are therefore compelling reasons to under-report the effects of monetary inflation and so to ensure that real growth is always recorded.

Understanding these dynamics is central to a proper understanding of our economic condition. It is not just a question of modern statistics measuring quantity and not quality as some critics assert. The whole basis of macro-econometric measurement is flawed and as long as we think in terms of GDP, CPI and other aggregated data we will continue to mismanage our affairs. Any reported GDP growth is statistical rather than real, a point that should be borne in mind every time the subject of economic growth crops up.

The establishment has been deluding itself in this matter ever since the Second World War, when price indices and GDP began to be widely used. The answer to the conundrum we have posed is that growth in GDP cannot be a measure of economic activity, because of the paradox posed by choice. Instead an economy progresses as entrepreneurs come up with products consumers will want tomorrow. Even though we pay lip-service to their role in society, none of their future input is reflected in the static economic models of the neo-classicists, which is why they resort to base subterfuge.

This article was previously published at GoldMoney.com

10 comments to The paradox of choice

  • Simon Bennett

    An interesting article. However, I believe it is an over simplification: GDP can grow if people consume more than than they did previously. However, the question we should ask ourselves is this: do we want people to consume more? In a world of finite resources and ever growing human population we should be seeking ways of reducing consumption not increasing it. So the whole idea of GDP growth is destructive and counter productive.

    • It could be argued that if we want to lower consumption then the government should stop meddling in the economy and imposing taxation thus forcing everyone to work longer and harder, (therefore creating more unnecessary consumption/pollution), and ultimately forcing everyone to start again from zero as hyper-inflation reduces the value of savings to zero. People could then achieve the economically independent level they desired, safe in the knowledge that their money would buy tomorrow what it can buy today.

  • john in cheshire

    Can anyone explain, in simple terms, how this rationale explains the ‘Sony Walkman Phenomenon’, in that this was a thing that no one knew they wanted until it had been produced. Where did the money come from (in the proposal above) for it to be purchased? Is it not the case that unless people have surplus funds, then items such as the Walkman will never be produced? If so, where do the surplus funds originate if not from either increasing efficiency of production of existing products, thus reducing their price and freeing up funds, or from borrowing?

    • Simply, you have to have supply before you can have demand. People work, under consume and save (the Capital in Capitalism – it literally means ‘Savingsism”) hoping to consume more in the future. Those producers whose goods or services are foregone either reduce their overhead or production costs or their resources are allocated to a more efficient producer via bankruptcy. Efficiencies in production are really the only method of growing an economy in reality. Printing money/inflation and debt are illusions that give a temporary imaginary advantage that will be paid for by people yet to be born and therefore unable to hold those, (usually just about to die or old age/stress from being a wealth transferring thief), to account. In fact extra legal protection is granted to those too old to stand trial and now you know why.
      Everything in the world can be bought for all the gold/precious metals/stones/commodities/assets in the world and is in perfect balance. Printed money convinces people to accept a promissory note worth nothing for something of value and distorts the economy throwing it out of balance to what we see today. This can only be resolved by a.) Keynsian Inflation or b.) Austrian Debt liquidation/Forgiveness.

  • Silbertibor

    While I agree with the article as it relates to the mistaken view of the neo-classical economists with respect to GDP growth, the article should have explained how real economic growth occurs even when no new currency is injected by the banks or the FED.

    Real growth comes from higher productivity which lowers prices thereby enabling people to purchase more with their incomes and savings. Higher productivity, in turn, comes from savings and investments, not from consumption.

  • The solution to the “Macleod paradox” is extremely simple. The average Keynsian or neo-classical economist should have no difficulty whatever in solving it. It is thus.

    On Macleod’s ASSUMPTION that the money supply and rate of money spending is constant, and assuming zero inflation, then obviously economic growth is not possible. But the latter are absurd assumptions.

    For example, if the real cost of making stuff declines and the stock of money and rate of money spending in nominal terms remains constant, then the value of money rises (i.e. inflation is negative). This scenario obtained in some periods during the 1800s.

  • gamefreeze

    Interesting article on the philosophy of attempting to determine aggregate results from a fallacious assumption. GDP being destructive in this enviroment may certainly be true the system seems to be operating on a system of diminishing returns. An interesting example of GDP being far less destructive would be if someone where to send lots of tankers to collect used vegtable oil from restaurants filter it then distribute to biofuel stations to be used in cars (perfectly safe and compatable for diesel cars) unfortunately no can do inland revenue alternate fuel duty you see, interesting eh :)

  • Macleod claims that if the consumer “increases his purchase of one product, he must reduce his purchases of other products..” and that increased consumption is “impossible without monetary inflation”. Not true. The consumer can increase total consumption despite a constant money supply if the velocity of circulation of money speeds up.

    The velocity of circulation of money in New York State by 1932 had slowed down to a third of its 1929 level.

    Contrary to Macleod’s claims, it’s not Keynsians and neo-classical economists who are confused here. Rather looks like it’s Austrians that are confused.