Sunday, April 29, 2012

Current asks a question


"It's true that there was strong growth after WWII, this doesn't mean that there couldn't have been stronger growth without WWII.

What is the right measure depends on what were interested in. I remember having this discussion with Anthony Evans. He mentioned a colleague of his who said that GNP shouldn't interest us and we should use consumer spending instead because that's a measure of the wealth of the population. Anthony said well in that case we should use consumer surplus. That's true for measuring the result of long run changes, for measuring "material progress".

Output measures, like GNP and GDP are about estimating how things are going by looking outside of consumer goods. By looking at investment goods too as a proxy for future consumer goods. There is a lot to be said for doing this, but it's necessarily inaccurate. The prices of capital goods are principally tools of entrepreneurial calculation, using them to estimate the future is dicey. Mises discusses this problem in Human Action p.520-522, as far as I can remember. I'm sure Post Keynesians have reams to say on the matter. Statistics bear this out, if you look at the investment series in the Penn World Tables, they don't predict the future of the consumer goods series well, or the growth series well.

Using the prices of investment is likely to be particular dubious in a situation where the government are spending a lot of money which pushes up the value of investment goods (existing and new). So, the output we get isn't likely to be the same as sustainable output.

So, how is output useful in this case

The answer, I think, is relatively straightforward: we care about output because we care about employment. If we didn't care about employment we probably would only be interested in a consumption aggregate. Investment aggregates might be produced (or more likely capital stock estimates) as a predictor of consumption production. But it wouldn't be as important. We care about total output because we care about employment.

I would agree investment would be a funny thing to use to predict consumption - I'm not sure why anyone would do such a thing. You'd want to think about capital, not investment.


  1. We also care about output because we care about income. Accumulated savings is the actual "wealth of the population" more precisely defined.

    1. The value of total savings, or the capital stock, or the "wealth of the population" or whatever you call it isn't simply the integral of real savings over time. Daniel seems to be agreeing with me about that above.

      It's something that's valued/priced separately. It's value depends on the degree to which the capital we have is appropriate to serve future needs and wants.

      If we have a lot of cows for making butter and we need a lot of butter, all is good. If we have a lot of guns and we need a lot of guns, all is good. If we have a lot of cows and we need a lot of guns, then a lot of work must be put in to making guns. At the same time the value of the existing stock of cows will fall. In this situation we mustn't kid ourselves into thinking that we've become wealthier because we're producing so much more.

    2. I'm not talking about savings as the capital stock. Savings can also go into government securities and the foreign capital stock. Savings (as a use for in,come) is security today and consumption in the future for the individual. Remember the economy is a collection of individuals. Not a collection of bad long term business decisions as you seem to be making out to be.

      Also, the capital stock during WWII paid for itself, the firms who built it were compensated appropriately. They made rational business decisions in the construction of the capital stock during the war.

      Also, your "producing so much more" comment is kind of confusing Wouldnt the over consumption of butter show up in measures of consumption anyway? Also, you guys seem confused about what is measured when you measure investment. The current dollar costs of constructing the capital stock is what is measured. The viability of the investment shows up in subsequent years on GDP as the actual output of that piece of capital. Im not sure why NIPA is supposed to be predictive.

      Anyway, is this a room full of Austrians? I need to know if I should quit while I'm ahead.

  2. Not to mention that this argument misinterprets or selectively forgets say's law, let me offer a rebuttal:

    Output is not a relevant measure, and jobs aren't created by output. Jobs are created at stages throughout production. Many more inputs go into output. Furthermore, if you graph input/output and other non-consumer based measures of growth, it is much more in line with the economy than GDP. And if you trust the numbers so faithfully, then you have no idea that CPI is not really 3%. If it is say, 6%, and we call it 3%, then magically we have 3% Real GDP! What a hoax..

  3. I see the logic here.... Wages are sticky, so if wages are above clearing beforehand and NGDP rises then employment will increase. That's good for the unemployed certainly.

    But, it's not so easy to tell if it's good for everyone else, both in the short-term and long-term. Certainly the work that those previously unemployed people put in is useful. But, we can't tell in any simple way if it produces greater positive externalities than the costs of generating it. Suppose because of WWII the US government buys an extra million tons of coal to power ships. Many miners leave the dole queues and when they spend their pay income rises in other occupations. As a result jobs are "stimulated" elsewhere. Those jobs elsewhere may be useful, but on the other hand the million tons of coal that has been mined out and burned would have been useful too.

    As a sidenote, in Marxist economics there is a word that describes the idea that every act of converting one good into another good is valuable. Some Marxists recognize that this is an assumption they make not. I wish Keynesians would do the same.

    As far as I can see what Daniel is saying here is that GDP & GNP are "Keynesian statistics". That is, they are only useful if you agree with Keynesian economics as a whole. That's exactly what many critics of Keynesian economics have said and many Keynesians have denied.

    1. Exactly, Daniel's answer is convincing only if you are already convinced! He writes, "we care about output because we care about employment," as if everyone agreed that there's some straightforward relationship between output and employment (without an extensive list of caveats, which makes the proposition utterly ambiguous and vague).

  4. Current, Jonathan, etc., to whom it may concern, and if the shoe don't fit, don't worry:

    Nobody (at least not me) is saying that there is a straightforward, fixed, or rigid relationship between output and employment.

    There is, given a certain mode of production and capital stock, a close positive relationship between output and employment. This is not a fluke. There is such a relationship because you need labor to make output. This is all I mean. "Utterly ambiguous and vague" is a little much, Jonathan. The relationship is not at all ambiguous and not at all vague - even though it's true that it isn't a fixed relationship. Let's not regurgitate that dumb "Keynes misses Mill's most fundamental point" argument. I see it headed that way, and that would be disappointing.

    And obviously the corollary to what I said is that if you don't care about employment (as some actually have claimed they don't), it's less obvious why you would care about output. I think I'm fairly safe in assuming that most of us - no matter what our theoretical persuasion - care about employment. I certainly do.

    1. So, we're all square on Mill's 4th proposition.... Employment is related to output but the relationship is not simple. However, as demand for output increases so does employment ceteris paribus.

      Daniel, I still don't think that gets you to where you want to go.

      "There is such a relationship because you need labor to make output." Sure. But in this case aren't we talking about the multiplier relationship not that one? If you want to measure employment you can do so directly. You wrote above: "we care about output because we care about employment". Do you simply intend to mean that more jobs were created in WWII and that was a good thing despite all the other issues? I interpreted you to mean that increased output in one period will require increased employment which will cause increased output and employment in the next due to the multiplier.

      My point above is that there is a cost in creating this employment, and there are two arguments to justify it. Either that there is some empirical indication that the cost is smaller than the benefit. Or that some reasonable analytical assumption can be made (which is what Marxists attempt to do).

  5. Deep_thinker -
    Right, but remember that value added from intermediate steps (a portion of which is contributed by labor) is going to be incorporated into output statistics. Obviously there are time lag issues, so what we're really talking about is output being important for employment stretched backward in time somewhat. But the point still stands quite solidly.

  6. "we care about output because we care about employment."

    Do we really? Maybe I'm living in a bubble, but I always thought we cared about employment as a proxy for consumption.

    I mean, would we really be unhappy if everyone was unemployed but somehow had access to all the same goods and services they have access to today?


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