Posted by: graemebird | December 20, 2008

More On The Gross Domestic Revenue Issue

For those who don’t think this is a serious issue think again or decide in your New Years resolutions that you might think about taking up thinking. What we have been seeing here with Paulson is what may be the destruction of the United States by making its fiscal situation untenable. Its been one stimulus package after another. And yet none of these stimulus packages could have gone ahead but for the fallaciousness of the Keynesian multiplier and the foolishness of using Gross Domestic Product as the indicator of the level of economic activity.

But going further back then that. When George Bush first came in he figured he wanted to limit federal spending to 4% real growth per year. Ignoring the silly wording that means he was happy to jack up the already bloated spending by 4% per year. What kind of craziness is this? Its the craziness you get when you get your economics degrees from prestigious universities filled with morons who have fallen for the Keynesian multiplier. And of course the practice of spending was way worse than the theory. 

The Keynesian multiplier and the incorrect use of Gross Domestic Product as a measure of economic activity form a self-reinforcing duo. I argued this case over at the Great Randi’s site. Now its one thing to read a straight explanation of  Gross Domestic Revenue and why it is so vitally important. But its sometimes useful to see people arguing about it rather than just a straight description.

I’ll include some of my own posts from over there. Poor Randi. He probably doesn’t know what he’s done. He’s set up a blog that has become a citadel for the enemy. Its the stronghold of truest voodoo. As he keeps on writing his very good posts his young bully-boy morons feed “off the crumbs that fall from his table…” as they wage a never-ending war in favour of old fallacies and against new knowledge. 

It may be that he is too old to recognize what is going on after all these years.

 

POST I

Keynes was completely wrong. One must SAVE to get out of a recession. While it is good for the economy for people to save at any time its critical during recessions for people to practice fiscal triage. For the government to cut spending, and for people to cut back also, in their own interests.   

The reason for this is to devote as many resources as possible to business-to-business spending.

Looking at Gross Domestic Revenue we see that it is 

G+ Gross I (ie business-to-business spending) + C + X -M.

We see that if real resources are going to government expenditure and to consumption that is less real resources to go into business refurbishment. Or spending within the business. And it is money spent internally from which wages are paid out of.

The same goes for savings. Savings are re-lent and that winds up being spent within business. So Keynes was wrong. In fact he was a complete idiot. He didn’t understand economics at all.

POST ii SOME OF THIS REPEATED FROM EARLIER IN THIS BLOG
Here’s a little bit of an explanation as to what I’m talking about. Compare what I’m saying with a basic example given for the spending multiplier:  

Lets look at the components of spending that make up Gross Domestic Revenue.

Gross Domestic Revenue = Government spending plus Gross Investment (Business To Business Spending) plus Consumer Spending +Exports minus Imports.

Supposing we could freeze GDR in nominal terms. Leaving net exports aside that would mean that if government spending or consumption spending went up, business to business spending would be damaged. This is a straightforward mathematical relationship. But also consider that there are only so many resources and the question is WHERE ARE WE GOING TO DIRECT RESOURCES TO END THE RECESSION.

What you are trying to do with monetary policy is to not allow GDR to fall. But you don’t want it to grow too fast either. Since that is inflationary. But you need a greater proportion of GDR to be in that category above that is private business-to-business spending. Else you do not have the resources you need going into business improvement and productivity improvement.
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Look at it from the point of view of if we were a nation of primarily small businessmen. Supposing if people have cash-balances they like to keep on average, but the rest of the money they will spend. Hence we can analyze this question from the point of view of some amount of money that is always moving in discrete steps. We will assume 100% backing and assume also that any saved money is immediately automatically spent by a borrower WITHIN BUSINESS. So we don’t have this Keynesian sleight-of-hand where savings are considered leakage.

Now going with this analysis we imagine you get some revenue. Lets say it is ten ounces of silver. Your small business spends the money, not on consumption, but on something for the business. Pays some wages and does some maintenance. Gets the place painted. Fixes up the leaky roof. Leases a small hand fork. Puts in some racking. Gets a new cash register. Pays for some advertising. 

The next small businessman gets some of that revenue. He has a fundamental choice. He can spend the money on consumption or he can spend that money on something for his business. We might say he can spend internally or externally. He can consume the resources or his business can. And then when that money goes to the next small business. same basic choice. Does he spend on himself or on his business? Or rather WHAT PROPORTION gets consumed by his business, or by himself, in each discrete step that we are talking about.

(There is some more that can be said about that proportion going to wages. But I won’t further complicate things at this point and to follow the money going to wages doesn’t change in principle what we are saying here.)

The thing is that wages are paid out of the money that you spend WITHIN your business. Not on the money that you spend on yourself. Wages are paid out of the money spent WITHIN and not WITHOUT of your business.

We made an assumption about savings above so we would not lose track of it. We see that WAGES ARE PAID OUT OF SAVINGS as well. Wages are NOT paid out of consumer spending. Wages are paid out of retained earnings and savings. We can see this because we have made some specific assumptions above that allow us to view the effect of savings consistently.We said that savings lead to spending by borrowers within business. Whereas spending on consumer goods does not contain spending on wages going with this discrete step methodology.

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Now we see that from an accounting point of view, if we have people spending money on themselves (ie consumer spending), then that spending becomes someone elses revenue in the next discrete step. But in that first instance, this consumer spending becomes revenue, without spending of the sort that one day will become cost of goods sold. Hence consumer spending is the sort of spending that lifts profit rates. Since profit is revenue less cost of goods sold. But we see that the sort of spending WITHIN the business is spending that doesn’t lift profit rates. Since it is revenue, but it is also the sort of spending that will be one day be classified under cost of goods sold. So the policy that our government and Paulson and the others are pushing…… well all this extra spending on consumer goods and government spending, that our dumb-economists are trying to bring about, will indeed lift pre-tax profit rates. There is no doubt about that. There will be a cosmetic effect as government spending and extra-consumer-spending will lift the profit share. This may make people imagine that the recession is less bad then it is.

But this sort of change to spending cannot make the businesses themselves more productive in real terms. And it cannot lead to a recovery of employment and real wages in total. Only the spending WITHIN the business can do that. The new machinery, the new stock, the extra maintenance, the hiring of new staff, the new computer system, the new basement, and so forth.

*I may add to this further explanations over time down the bottom. The example is likely hard to visualize whereas the misleading examples associated with the Keynesian multiplier are easy to visualise and therein lies the problem.

We see for example that the ten ounces of silver do not go to the next Joe and him put aside some for saving and then 9 ounces go forward. Thats not realistic at all when most of the spending that goes on, is spending WITHIN business. What happens is that this money immediately gets split up and goes outwards in different directions. So to do the next freeze-frame we have to go to another bloke with a reconstituted ten ounces of silver. 

In the case of the typical Keynesian narrative, as George Reisman points out, if that was how spending worked and each fellow consumed all the money he received, then the entirety of national income almost, would be profit. Of course the economy would crash, and there would be famine and galloping consumer-goods price rises, and all that. But when you looked at the national accounts it would be the case that most of national income would be profit. Since people would be spending on what little consumer goods were still available, and almost nothing would be being spent on items that would one day wind up as cost of goods sold. The Keynesian multiplier examples are inherently idiotic. But since you can follow them easily in your minds eye they become like an infection. And the cure of reading Hayek and Reisman on the train everyday for a couple of years, isn’t a cure that all that many people put themselves through.

POST III
I majored in economics. Yes the good reasons the Austrians are marginalized is that they are field slaves and not house slaves. The others are court-economists and are pretty useless although they have some sound predecessors like Friedman and Buchanan.  

Gross domestic product scrupulously misses out all the spending that you need to know in order to be able to get out of the recession. Its perverse. Thats why people perceive the recession prior to the official one being announced. Business-to-business spending tanks first. But government and consumer spending only starts falling away when their is awesome amount of damage done and real distress is felt. Hence your recession really started probably around August 2007. But it wasn’t official until now. 

If you could cut taxes on retained earnings and make up for the loss with massive government spending cuts, the private economy would recover almost immediately. We would see that since the resources would be directed to business-to-business spending. But funnily enough the recovery would not necessarily show up in the figures. In fact if you did things right the figures would be saying that things were going wrong.

You see with GDP they have it like this:

GDP = C+ net I + G + X – M

What is left out of these figures? What is left out is the one thing that you need to know. That is to say business to business spending. And supposing you cut government spending, business to business spending recovers and the recession is ended. But when you went to look at the figures you might add them up and see that GDP had reduced!!!!!!!!!!!!!

This is the crap state that mainstream economics is in at the moment.

There are other matters involved though. There are matters to do with debt levels, cash balances, the money supply and exports that have to be dealt with to begin business expansion from a healthy point of view.

POST IV
“On another note, what is the exact mechanism by which an increase in G leads to a decrease in “inter-business spending.?”  

Well you are going to have to pay for that government spending right? So if it comes from taxes thats less business spending. If it comes from borrowing thats less business spending too. And if it comes from money creation then thats more business spending but with less resources to those businesses so that inflationary and various bubbles will develop.

POST V
“I’m also confused why gross investment is such an improvement over net investment in measuring business spending. Doesn’t net investment = capital spending – depreciation? Can you give me a concrete example of something produced that’s not measured by GDP, but captured by GDR?”

Well take the company I work in. We spend millions of dollars every month and that means a lot of activity. Heaps of subcontracters. Heaps of materials coming in and going out. Machines working round the clock. And maintenance people fixing things up the whole time.

Almost none of it recognized in GDP. Since we buy all our stuff from other businesses and we sell all our stuff to other businesses. So all our revenues could suddenly dry up and our overtime cut. Our spending to other businesses tanks. But because consumers are still spending and government is still spending GDP holds up and the authorities might still be tightening monetary policy.

So they aren’t looking at all the spending thats going on. They are looking at the economy through a single squinted eye. 

Business to business spending can soar and tank and the monetary authorities never notice until the consumer is finally hurting and his credit card finally tanked out and he finally has to start changing his habits. But thats what causes the recovery. Whereas the real pain is where the business to business spending dies in the ass.

You’re simply asserting that business expenses are not measured in GDP.”  

Right. Very little of business to business expenditures will be picked up in GDP. Net profit reinvested will be picked up in Net I. Or something close to that. 

“Every bit of stuff a firm buys is counted in I or C, isn’t it?”

Maybe at retail. But no not really. Modern economics tries to have this value added business going on throughout the supply chain. So at each stage you are minusing a bunch of costs that they reckon are double counting. 

“If Xerox sells 20 businesses copy machines, that’s investment.”

Well its revenue for Xerox. Its investment for these companies that buy the machines and there will be depreciation expense. All in all you might wind up with net I but it won’t be specific to these photocopiers. Rather it will wind up being the net result of your entire balance sheet. 

“Maintenance costs are counted because they cancel out the depreciation that would occur without them.”

Well you will wind up with both maintenance expense and depreciation expense in this case. And the expense of the paper and the ink and all that. So in the final analysis the fiction that is NET INVESTMENT won’t tend to be too much to do with the Xerox machines. But more to do with retained profits. See we’ve spilled over to accounting so there is a chance I could lead you astray. Interestingly Reismans system is fully integrated with normal accounting. Its pretty astonishing what he’s done.

POST VI
Well obviously some countries have higher savings rates than others right? Do they suddenly fall into recession when that occurs? No of course not. And it doesn’t tell us anything about whether a country is following too tight or too loose a monetary policy. For example the Chinese economy was overheating a lot of the time and it had a high savings rate. And the Chinese economy can be tanking and it can still have a high savings rate.  

Its not that the finished goods will keep moving backwards and forwards between business. Its rather that in the next time period the finished goods would, with the same GDR, start being produced more cheaply. Hence although wages would need to fall in order to maintain employment, the situation would be that REAL WAGES were increasing. 

The way to think about it is to see what would happen if Gross domestic revenue stayed the same. If you don’t work it through that way you are likely to stooge yourself. 

Generally speaking, the more sophisticated an economy, the greater is the ratio of business to business spending over everything else. This is because increases in productive capacity lead to a “lengthening of the production structure.”

So for example in Malawi, or some dirt poor place like that, production is very direct. And so gross domestic revenue would not be all that much greater then gross domestic product. But in a sophisticated economy, and particularly one that is progressing, business-to-business spending is far larger than anything else.

 
POST VII
“Incorrect. Productive expenditure, AKA net investment is not left out. It is the unproductive part (“gross business-to-business spending”) that is left out, for the reason that it is not productive.  

Reismanesque gross domestic revenue has effectively zero recognition for a reason.”

So what is your reasoning here? If a company only buys and sells to other businesses is everything they then do unproductive? This would make all manufacturing unproductive!!!!!!!!

This is a serious failure of mainstream economists. The only cure for it is mass-sackings. In that mass-sackings would reduce government spending to help end the recession. And at the same time it would force the remaining economists to get their act together.

Its a serious question. The implication of what you say is that all manufacturing and warehousing is unproductive. Which is of course ridiculous. Your claim would imply that only retailing is productive which is of course ludicrous. Though it might seem like the right thing for a shopaholic.

See a Keynesian is like these little kids we used to take out to the farm to show them that milk didn’t come from a bottle.

POST VIII
No no. Lets go over it again. You need to save to get out of a recession. You need to save and pay down debt. Some monetization of debt is helpful its true. But thats monetary policy. From a government policy perspective the idea is to practice financial triage. Cut cut cut cut cut and more government spending cutting.  

So Keynes is totally wrong.

POST IX
Yes GDP would fall without expansionary monetary policy. Which just shows what a stupid metric GDP is. But with GDR static business to business spending would increase and so you would have dynamic economic conditions. The fault is with the metric that is being used to show when a recession starts and finishes.  

With some monetary expansion you would have GDR increasing a lot, GDP perhaps increasing a little bit. But the recession ending and real wages powering ahead. 

You see the bind you are in. Using the wrong metric locks you into the wrong policy. But a progressing economy, a developing economy can only come from business development. From spending within the business. The new machinery, the new basement, the racking, the new software, staff hired, installing a new lift, new cars for your fleet, not for the consumer, that sort of thing is what modernizes business.

POST X
World War II Did Not End The Depression. The End Of World War II Did.

Originally Posted by a_unique_person View Post
It was the spending of WWII that ended the great depression.
No thats entirely wrong. But thats how the matter was judged by completely bogus Keynesian economics. The unemployment of the depression was ended by the following: 

1. The abandonment of policies which attempted to keep wages high and New Deal policies more generally.

2. The creation of a labour shortage by the expedient of shipping millions of men overseas. 

3. Wage controls to artificially keep wages low.

4. Massive monetary expansion.

So it wasn’t the fiscal policy that ended unemployment. And in fact World War II was the cause of further impoverishment despite the fact that everyone was now employed.

Fiscal policy didn’t end the depression via high spending. Rather fiscal policy ended the depression in 1946 when most of the lads came home and government spending was drastically cut.

But ludicrously by Keynesian methodology this would have registered as a fall in “national income”.

POST XI
We Are Just Going To Have To Go Over It Again.

Originally Posted by Francesca R View Post
Well if you redefine “getting out of recession” to mean “a sharp fall in national income” then your crazy nonsense would be correct.

Right you are not getting it so we are just going to have to go over it again. Gross Domestic Product ignores the vast majority of economic activity. Its true that it measures the flipside of NOMINAL national income.

I’ve already proved that GDP ignores the vast totality of economic activity. So its a bad metric for the purpose involved. 

Keynesian economics and the use of GDP as the measure of economic activity therefore is the ultimate in spoon-bending voodoo. Since it is claimed that fiscal policy can stimulate spending. This is a claim made in error. What it can do rather is shift spending from a category that the irrational macromancers refuse to acknowledge.

Fiscal policy does not increase the money supply. Nor does it reduce the demand for money for holding, Hence it is irrational, mindlessly dogmatic and anal retentive to suggest that it can increase spending. But what it can do is move spending AWAY FROM GROSS INVESTMENT SO THAT IT MAY BE RECOGNIZED BY IRRATIONAL MACROMANCERS.

Hence it is a third-rate magicians trick. It shifts spending to a category that the third-rate-magician will allow the people to see. It creates no new spending rabbit. But it merely pulls the spending rabbit out of the GDP hat.
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Lets go through it again.

Gross Domestic Product= Consumer Spending + Government Spending + NET INVESTMENT + Exports – Imports.

This can never be a measure of spending or economic activity. Rather it is closer to a measure of consumption by individuals and government. Therefore it can never be a measure of what is needed to re-establish powerful business performance in real terms. Since consumption is the point at which wealth is used up or destroyed. Not the point at which it is produced or productive power is enhanced.

Now contrast this with the superior (for these purposes) measure of economic activity which is Gross Domestic Revenue.

Gross Domestic Revenue= Government Spending + Consumer Spending + GROSS INVESTMENT + Exports – Imports.

Now it turns out that as a total figure gross investment dwarfes all other spending categories by a very large margin in a developed economy. It is also the best indicator of economic activity and will be correlated far better than other categories with REAL wages paid. Not nominal wages paid but REAL wages paid. This is important since it shows that a progressing economy, with fixed GDR will have wages dropping but consumer goods prices dropping faster. And this must be the case if GDR is fixed for everyone to be employed. It is true that GDP corresponds to NOMINAL national income. It tells us nothing about REAL wages. 

Now the macromancy that tricks people into thinking that fiscal policy can increase spending is simply the trick of:

1. Using the foolish measure of GDP as the measure of spending and economic activity. Only a complete idiot would do this.

2. Diverting spending from where GDP doesn’t take it into account, to diverting spending to where GDP DOES take it into account. Hence it is pulling a rabbit out of a hat and creating no new rabbit. Its appallingly dishonest to suggest that fiscal policy affects spending, and to use this prescription is atrociously damaging to the economy. Its vandalism in the extreme. It does un-imagineable damage. But what it does do is it pumps up nominal profits BEFORE TAX a little bit. It adds to the proportion of national income being earned as profits. Its pretty good for the bigshots if that is what is being sort. 

So this must be understood. Fiscal policy creates NO NEW SPENDING. It takes spending out of GROSS INVESTMENT and sends it to government spending and consumer spending. Its the worst vandalism that can be imagined. Its an appalling causer of hardship and diminished economic performance.

 
POST XII
Yes I have and stop lying about it. You cannot be that stupid so its dishonesty. 

Now I, just for example, work in a business that never deals in consumer goods. We buy from manufacturers for the most part. We sell to other manufacturers. We spend real money just the same as a retailer. We have to have enourmous amounts of capital goods just to be in business, moreso than a retailer. And those capital goods must be maintained and updated. We pay heaps of wages.

Now sometimes we are busier than other times. Those times that we are busier our economic activity is greater. The money we both spend and earn is correlated with just how busy we are. So that therefore that spending has to be included in any fair barometer of the extent of economic activity capiche?????

Now just keep on going over it and over it and over it again until such time as some glimmer of understanding finally penetrates through Fort Knox here.

POST XIII
Business-to-business spending the only core measure of economic activity

Originally Posted by Francesca R View Post
You are in error.]

Alright. You are wrong again and I can see that we are dealing with mindless bigotry and flat learning curves. But I’m endlessly patient and kind, having once taught downs syndrome kids how to swim, so we will have to go over it again. And this time with an analogy.
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Supposing you work 12 hours a day, Monday to Friday. You work the shift from 2.30am to 2.30 pm. And you get paid on Friday at 3.00 am immediately for the work performed that week.

Now on Fridays there are still business hours left and so you pull out all your money, pay all your bills, take a brief nap and live it up all weekend.

What is your best measure of the level of WORK that you do? Is it your spending on the weekend? Is that a measure of your worklife? Is it when you pull that money out of the cash-card machine? Is it how much you consume and how hard you party? If you partied harder would that be a measure of how much work activity you perform?

Supposing you got a credit card, cut your work hours by two-thirds, and spent more and partied harder? Would that mean that you were working more and working harder?

Well actually no it wouldn’t. Certainly what you did on the weekend would be a measure of activity. It would be a measure of consumption. It would be a measure of this and of that. But its not a measure of work activity.
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Likewise how much money we spend at the shops and how much our government spends isn’t a powerful indicator of the totality of economic activity. An example might be at the last few days of Christmas. Where many people are on holidays but there is more consumer spending going on than usual. The GDP is higher for that week than usual. But is it a powerful indicator of the level of economic activity? No of course not, though the retailers and some wholesalers may be working around the clock, its one of the least economically active times of the year.

The level of economic activity is therefore best understood by Gross Domestic Revenue, or alternatively the component within GDR, that comprises the totality of business to business spending. 

Now surely THAT is not outside your range of comprehension.

 
POST XIV
Right well thats good. So the scales have fallen from your eyes, and now you feel dreadfully foolish for ever being taken in by Keynesian macromancy. 

However its a strong cult you have been involved in. This particular bunch of golden calf worshipers are a hard lot of spoon-benders to be quits with. 

So here is some follow through. Mark Skousen takes a similar view. He uses a related concept called total gross national output. He too is showing why this is a better measure to guide monetary policy then GDP is. His “gross output” corresponds roughly to George Reismans Gross Domestic Revenue, but sort of on the flipside. His Intermediate Input corresponds somewhat to George Reismans “Productive Expenditure.” which elsewhere I’ve seen renamed as Gross Investment and I’ve renamed it myself “Business-To-Business Spending” just to help people get a rough picture of what one is talking about. 

Now note Mark Skousen makes the exact same criticisms of GDP as what I have been doing.

“For a decade I thought my criticisms of GDP had fallen on deaf ears and no one was interested in using a new national income statistic like GDO that accurately included total spending in the economy, not just final output. However, I am happy to report that the Commerce Department’s Bureau of Economic Analysis has just begun to publish a new series called “Gross Output,” an annual measure of total spending at all stages. GO is defined as Intermediate Input (II) plus GDP (final output).3″

Right. So the idea of it ought to sound a little bit familiar by now one hopes.

“First, the data support the Austrian theory that the structure of production lengthens as an economy grows. Indeed, from 1987 until 1998 real GDP rose from $6.1 trillion to $8.8 trillion, or 39 percent (using 1996 as a base year). But real Intermediate Input (II) increased from $4.3 trillion to $6.5 trillion, or 53 percent, much faster than GDP. In other words, the producer/capital goods market grew more rapidly than the consumer/retail good market. This suggests that the number of stages of production increased.”

“Third, GO data support the Austrian argument that business investment—not consumer spending—is the driving force behind economic growth. The Keynesian argument that consumer spending is the largest sector of the economy is specious and is based on a misunderstanding of GDP statistics. It is true that personal consumption expenditures typically represent 67 percent of GDP, but GDP is not total spending in the economy.”

AND FINALLY THE REVELATION THAT A MACROMANCING KEYNESIAN WAS TO BLAME:

“Most students of economics are unaware of the fact that GDP was created by Simon Kuznets during World War II to quantify final aggregate demand according to the new economics of Keynes. As such, GDP ignores all intermediate spending in the economy, based on the tenuous argument that earlier stages of production constitute double counting.”

http://www.mskousen.com/Books/Articles/0104go.html

 
POST XV
“I think mine and other’s main objection is that any “back end” activity either results in an increase in C/I or adds no value to society.” 

ITS THE CONSUMPTION THAT ADDS NO VALUE TO ONGOING PRODUCTIVE POWER. THE CONSUMPTION IS THE PURPOSE OF PRODUCTIVE POWER BUT DOES NOT ADD TO IT. THAT OUGHT TO BE OBVIOUS.

“I think mine and other’s main objection is that any “back end” activity either results in an increase in C/I or adds no value to society.”

Also this is not true in nominal terms if spending is held constant. It is true in real terms however. Since more production leads to cheaper goods. But more back end activity leads to less spending elsewhere if spending overall is held constant. 

“If you make raw material, the value added to society by the raw material is shown by the purchase of the final product.”

THE PURCHASE OF THE FINAL PRODUCT IS NOT POSSIBLE WITHOUT THE RAW MATERIAL. HOWEVER THE RAW MATERIAL DOESN’T REQUIRE CONSUMPTION. SO OBVIOUSLY ITS THE PRODUCTION OF THE RAW MATERIAL THAT IS WHERE THE ECONOMIC ACTIVITY IS. NOT THE CONSUMPTION. BUT FOR THE PARASITICAL CLASS TO JUSTIFY THEMSELVES THEY NEED TO HAVE A PHILOSOPHY THAT CONFUSES PARASITISM WITH WEALTH PRODUCTION. HENCE KEYNESIANISM IS THE ECONOMICS OF GOVERNMENT. THIEF-ECONOMICS.

“So, in the above example, the work you do is measured by the value it adds to the end product that goes into C/I. The theory of value based on labor seems almost Marxist.”

The Labour Theory Of Value is a specific fallacy. A fallacy that Adam Smith participated in and that Marx took an extremist take on. But this in no way denies that a lot of work goes into wealth and productive power. That would be simply foolish to deny. To say that millions of man hours and millions of dollars in capital invested goes into something that represents wealth is merely stating the obvious. I’ve heard that accusation before and it really sounds like Keynesian leftist projection. 

Consumption STEERS production. It does not constitute production. We can see that in this sense. Imagine if you have 30% welfare bludgers but very few public service bludgers. How would spending patterns differ? Well you see welfare bludgers are cheaper than government bludgers. The government bludgers cost us two or three times as much per capita. So we would not likely be worse off overall. So lets say that instead of wine they are drinking beer. So they steer the production into the production of beer, but they in no way contribute to that production. They take resources away from capital goods and other consumer goods, make those consumer goods more expensive and are a total burden and slow down economic progress. But they do manage to steer production towards beer and away from other things.

And supposing they demand roll-your-own tobacco and papers. Well they will steer production in favour of those products. But they in no way contribute to production hence the production is taken away from spending on capital goods and other consumer goods.

So to be clear about this. Consumption DOES STEER production. It does do that. No doubt about that at all. It steers production but thats all it does. It in no way IS production and it in no way CONTRIBUTES to production. It is not the ship as the Keynesians ignorantly think. It is not the ship nor two thirds of the ship or anything like that. 

CONSUMPTION IS ONLY THE STEERING WHEEL AND THE RUDDER. 

And it is a very small part of economic activity as measured by spending. And in some sense it is not economic activity at all.

 
 
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Responses

  1. If a household is in recession (through declining asset prices, falling income, etc), does the family “spend” it’s way out of hardship? No, of course not! In fact increasing spending at that point in time is a sure-fire means to tear the family asunder and destroy lives. There is no reason why national finances are in principle any different to individual finances.

    By the way, Bird, if you want to see a classic example of Keynesian idiocy, look no further than the following clip. Pay particular attention to the “economist” who gets on there from about 1min10. It’s depressing.

    • Yeah I checked out the clip. And its just depressing. But you go over to Catallaxy and try and talk about Gross Domestic Revenue to these guys. Jason will reject it. Call it Stalinism for some strange reason known only to himself. Start talking about the labour theory of value for reasons known only to Keynesians. And of course Sinclair will never come out on it one way or another. Or if he’s pushed really hard he’ll come out on the wrong side of the issue.

      Thats what these dummies believe. But once you have Reismans clarification of the system its very clear what happens. Most of those spending cuts, if spending cuts were all that the New Zealanders were doing, would simply disappear from Government Spending and wind up in business to business spending. So it would mean a recovery in business activity regardless of how it affected GDP figures.

      Now its not only outright Keynesians that screw this up. For example bloody Greg bloody Mankiw had an article out there which showed he didn’t understand this either. It was posted on Catallaxy. And someone said oh no Homer or something when they posted it. Might have been Nanu. But it showed that Mankiw was about as oblivious as anyone else. There really has been a re-merging of the Keynesian and Neoclassical wings of thief-economics. These blokes cannot be counted along with Friedman and Hayek who they claim to revere. Thats all just a crock. The pull of predation affects them all. If not as individuals then as a group. You just go and try and set them straight on this matter. You will make no progress whatsoever.

      So I say its sackings. Only mass-sackings can change our intellectuals and get them to take their jobs seriously or get them in other jobs. Taxpaying jobs. All plans, defense and otherwise, should centre around mass-sackings.

  2. Given your point about households, Steve, this article by Andrew B. Wilson in today’s WSJ might be of interest:

    Thatcher Wouldn’t Have Gone Wobbly on Detroit: Keynsianism is proof you shouldn’t ‘leave economics to economists’.

    Historical thesis:

    The incoming [US] administration is talking about spending hundreds of billions on public works with the hope of creating some jobs, but remember: 93.3% of Americans, though shaken, already have jobs.

    So what to do?

    The government must do something, and something fairly big, to jump-start the economy, an economist friend told me. His point was that the private sector is too shell-shocked to climb out of the hole it is now in, and government needs to take the lead. He also quoted the old shibboleth among economists — the “fallacy of composition” — which argues that what might be a good course of action for an individual can lead to disaster if widely adopted by members of the larger group. In this case, disaster could be the result if there was too strong a preference for savings over consumption.

    I disagree with this whole line of thought. It reminds me of the open letter that 364 economists addressed to British Prime Minister Margaret Thatcher in 1981, condemning her for daring to cut public borrowing in the midst of a recession, which was contrary to the Keynesian orthodoxy at the time. They did not accept Mrs. Thatcher’s reasoning that too much public-sector borrowing and government-directed investment could only crowd out private-sector borrowing and risk-taking.

    They also implicitly rejected Mrs. Thatcher’s strongly held belief that both governments and individuals must be guided by fundamental rules of common sense and frugality, in good times and bad. The economists described her thinking on this score as naive.

    Mrs. Thatcher spurned the collective wisdom of the 364 economists, seeing their advice as just more of the same failed interventionist policy prescriptions which the country had followed for over three decades.

    When she came to power in May 1979, the British economy, by every measure, was in worse shape than the U.S. economy is today. Inflation was out of control. Unemployment was high and rising rapidly. Job creation had been at a total standstill for almost a decade and a half.

    No one has captured the Keystone Cop-like futility of government intervention to fix this or that problem any better than Mrs. Thatcher’s long-time sparring partner and rival, Denis Healey, the Chancellor of the Exchequer in the Labour government that preceded her administration. Speaking of Britain’s periodic bouts of wage-and-price controls to counteract inflation, he wrote: “Adopting a pay policy (i.e. limiting wage increases to a set percent) is rather like jumping out a second-story window: no one in his senses would do it unless the stairs were on fire. But in postwar Britain the stairs have always been on fire.”

    Clearly, some things have changed since Mrs. Thatcher’s time. Inflation is more easily controlled today, due to intense global competition. But Thatcherite principles remain as valid as ever. The freedom of the marketplace is still the only effective mechanism for eliminating poor business practices, identifying productive investment, and providing long-term growth.

    Read the whole thing.

    • Jason seems to think its a great joke when lunatics like Andrew Leigh and Nick Gruen get jobs in Canberra. He seems to think thats just fine. And in his view, and that of JC and others, its just fine for Humphreys to be running years-long campaigns in support of CO2-bedwetting from his devastating vantage-point of being founder of the LDP. But look at the consequences of this sort of behaviour? How many economists stand up to this stuff. The incredibly feeble and tepid opposition amounts to an endorsement. Henry Ergas went so far as to commend these 8 lunatic economists talking about a stimulus package that would put put red ink to the tune of 10% of GDP. Sinclair has never come out in favour of GDR rather than GDP and Jason actively opposes this for completely garbled and mindless reasons. And look at the results. We get to a recession, and just when we need people to be acting rationally in accordance with economic science they are out there on the splurge. Doing about as much damage as they possibly can. Australian economists must be about the most irresponsible people there are. A bunch of Harold Shipmans. Humphreys is STILL promoting a carbon tax. He even went so far as to show up on Jennifer Marohasy’s blog promoting a carbon tax. JC too. JC promotes a carbon tax and in his next post he’ll compare me to Lambert. This was the Humphreys idea that he’s picked up on. I wish I was over at Catallaxy beating up on this stupidity. I don’t see why I would be abusing Quiggin. Quiggin is being overmatched by the generalized stupidity now. And he doesn’t lay out the DDT-bureaucratization holocaust denial as often as he once did.

      This is one reason why I cannot really support the LDP for the time being. They haven’t come out strongly against this CO2-bedwetting. Humphreys still promotes it as he tries to triangulate between rationality and alarmism. As if science were about such sloppy-minded human compromise. You’ve got an whole contingent of nutballs in the LDP supporting carbon taxes. Jarrah Job is a particularly obnoxious and evidence free nutter in this regard. But there’s an whole contingent of them. I call them the gay wing of the party. There has to be some lessons learned here about libertarian parties and how they can go astray. I was listening to the same situation as it pertained in America. And the parallels there were pretty strong.

      [audio src="http://www.lewrockwell.com/podcast/?p=episode&name=2008-12-16_085_david_nolan_what_happened_to_the_libertarian_party.mp3" /]

      If I was in America I’d probably be supporting the constitutionalist party and not the libertarian party. One ought to have few laws on the books but if a law is passed it ought to mean something. So that we ought to be living within the rule of law. This is an idea that has lost currency as a usurper is headed to be sworn in. And it will further lose standing. The problem is that neoclassical types typically are too stupid to see any link between causes and consequences. So red ink no problem. Rule of law under attack thats sweet. Constitution being made up as we go along. Well thats OK too.

      • How is this for stupidity from fats:

        “If only that was the solution. I attended a talk by a Mental Health Council fellow a while back, and he had plenty to say about homelessness. Specifically, that accommodation is just the start, and what is really needed is “joined-up thinking” on the matter – better coordination of physical health services, mental health services, drug and alcohol programs, training and employment programs, domestic violence programs, the legal system, the police, and so on.

        The government has all this information, but will it ignore the experts again? Who knows, maybe Rudd (as bureaucrat extraordinaire) will actually be able to deliver on the gargantuan task. But I won’t hold my breath. The fact that he’s put a price tag on it already does not bode well.”

        Fats wistfully thinking that we ought to be listening to the experts. Thats what is doing us in right now. And look at fats thinking that miracles might be achievable, not on the basis of the free market, but on the basis that the guy at the top has never had a proper job.

        This could be helpful:

        https://graemebird.wordpress.com/2008/06/20/raiding-the-sick-blind-lame-old-and-aboriginal-for-manhours/

        But notice that the first thing this socialist fatty did was join the LDP. That would be enough for Jason to call him a libertarian no doubt.

  3. Could you please configure wordpress to provide the entire post in the feed? I’m only getting the first few lines.

  4. I don’t know whats happening there. Tommorrow I’ll find the link to the Amazing Randi site where these posts originally appear.

  5. It is in point of fact a nice and helpful piece of information.
    I’m happy that you shared this useful info with us. Please
    stay us informed like this. Thank you for sharing.

  6. […] You feel free to provide a functional alternative…..which we can use to measure over time…… Gross Domestic Revenue = Government spending plus Gross Investment (Business To Business Spending) plus Consumer Spending […]


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