By Dr Frank Shostak
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 a living entity apart from individuals.
For example, various experts report that the “economy” grew by such and such percentage, or the widening in the trade deficit threatens the “economy.” What do they mean by the term “economy”? Does such an entity actually exist?
Within this framework of thinking, the “economy” is assigned a paramount importance while individuals are barely mentioned.
The “economy” produces goods and services on this way of thinking. Once the output is produced by the “economy”, what is then required is its distribution among individuals in the fairest way.
In reality goods and services are not produced in totality and supervised by one supreme commander. Every individual is pre-occupied with his own production of goods and services. Consequently, there is no such thing as the total national output.
By lumping the values of final goods and services together, government statisticians concretize the fiction of an “economy” by means of the GDP statistic and other economic indicators.
It is held that once the “economy” is concretized by means of various economic indicators policy makers could navigate the “economy” along the growth path that is considered by the experts as desirable.
Again, by means of constructed economic indicators such as GDP government and central bank policy makers can now have control over the so-called “economy”.
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.
It is true, of course, that even deprived of all statistical knowledge of the nation’s affairs, the government could still try to intervene, to tax and subsidize, to regulate and control. It could try to subsidize the aged even without having the slightest idea of how many aged there are and where they are located; it could try to regulate an industry without even knowing how many firms there are or any other basic facts of the industry; it could try to regulate the business cycle without even knowing whether prices or business activity are going up or down. It could try, but it would not get very far. The utter chaos would be too patent and too evident even for the bureaucracy, and certainly for the citizens. And this is especially true since 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.
Once expressed in terms of various economic indicators such as the GDP statistic, the “economy” is expected to follow the growth path outlined by government planners. Thus, whenever the growth rate slips below the outlined growth path, government and central bank policy makers are expected to give the “economy” a suitable push by means of fiscal and monetary policies.
Periodically though, government officials also warn people that the “economy” has become overheated i.e. it is “growing” too fast. In this case, government and central bank officials declare that it is their duty to prevent inflation.
It must be realized that at no stage does the so-called “economy” have a life of its own, independent from individuals. Furthermore, it is not possible to establish the total real output given that arithmetically we cannot add potatoes to tomatoes. The employment of various price indexes does not solve this issue. This in turn means that various macroeconomic indicators compiled by government statisticians are detached from the real world. Consequently, various policies to influence a nonexistent entity – the “economy” – via fictitious indicators inflict damage on the well-beings 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.
The “hampered” environment and macro-economic data
To succeed in a hampered market environment, entrepreneurs tend to respond to the 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/her business.
In a hampered environment, businesspersons must try to interpret various economic indicators in terms of how authorities will respond to them and how this response is going to affect their business environment in the months ahead.
Note that the government, in order to construct various economic indicators, is busy collecting 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.
Do we need to know about the economy in a free market environment?
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 is 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)? How can the information that GDP rose by 4 percent help an entrepreneur to succeed in his/her business? 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 pay attention to is profit in the concerned activity. The higher the profit, the more a particular business activity is in tune with the consumers’ wishes.
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 macro-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 will have to establish his own network of information concerning a particular venture. Only an entrepreneur will know what type of information he requires in order to succeed in the 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 framework penalizes those businesses that have misjudged consumer priorities and rewards those who have exercised a correct appraisal.
The profit and loss framework makes sure that resources are withdrawn from those entrepreneurs who do not pay attention to consumer priorities to those who do.
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. We have seen that in a free unhampered market businesspersons in the pursuance of their goals will not require macroeconomic indicators. This we suggest means that there is going to be little interest in the services of economists, statisticians and mathematicians.
Summary and conclusion
Macroeconomic data are the means that are employed by government and central bank policy makers to navigate the so-called “economy” towards the growth path that was set by these policy makers. As a rule, this navigation culminates in the boom-bust cycle menace and the weakening in the process of wealth generation. Hence, to prevent the menace of the boom-bust cycle and economic impoverishment there is a place to consider not compiling and publishing various so-called economic data.
As we have seen this data is detached from reality hence, policy makers’ continuous response to a mirage undermines the process of wealth generation thus undermining individuals’ well-beings.
On this Murray Rothbard held,
Statistics, to repeat, are the eyes and ears of the interventionists: of the intellectual reformer, the politician, and the government bureaucrat. Cut off those eyes and ears, destroy those crucial guidelines to knowledge, and the whole threat of government intervention is almost completely eliminated.