Best of the Week
Most Popular
1.Oil Wars 2016 - US vs Russia vs Saudi Arabia vs Iran - Nadeem_Walayat
2.Crude Oil Price Crash Triggering Global Instability, Trend Forecast 2016 - Nadeem_Walayat
3.Stock Market Crash - Last Week was The 2nd and Final Warning... - Clive_Maund
4.Stock Market Crash Apocalypse or Bull Market Severe Correction? - Nadeem_Walayat
5.TShipping Said to Have Ceased… Is the Worldwide Economy Grinding to a Halt? - Jeff_Berwick
6.Crude Oil Price Crash Catastrophe, Independant Scotland Literally Begging to Rejoin the UK - Nadeem_Walayat
7.Summers: Global Economy Can't Withstand Four 2016 Fed Hikes - Bloomberg
8.Gold And Silver: New World Order: Public Be Damned, Preferably Dead - Michael_Noonan
9.Rigged U.S. Ttreasury Bond Market Double Barreled Hidden Q.E. To Infinity - Jim_Willie_CB
10.Major Stocks Bear Market Awakening - Zeal_LLC
Last 5 days
Is This the Debt Bubbles Last Rattle? - 12th Feb 16
Gold Stocks Upside Targets - 12th Feb 16
Stock Market Observations - 12th Feb 16
Will Capital Controls Return? - 12th Feb 16
Gold, Gold Stocks, and the End Game - 12th Feb 16
Canadian Dollar Now Even Less of a Haven from US Dollar Collapse Than Before - 12th Feb 16
The Stock Market Dow Elevator; 18, 17, 16.... - 12th Feb 16
Will Harry Dent Eat Crow on His $700 Gold Price Prediction? - 12th Feb 16
Where to Hide Your Money From Reckless Governments - 12th Feb 16
The War on Cash is About to Go into Hyperdrive - 11th Feb 16
More Bankruptcy For Your Retirement Portfolio - 11th Feb 16
2016 - Gold & Silver Rising: A Gold And Silver Bottom May Be In - 11th Feb 16
Gain Trading Confidence by Improving Your Elliott Wave Analysis Skills - Video - 11th Feb 16
With A Gloomy Start To 2016, A Bust Seems Just Around The Corner - 11th Feb 16
UK Interest Rates, Economy Forecasts 2016 and 2017 - Video - 10th Feb 16
World Markets Are in Sync - 10th Feb 16
If You Miss Buying Gold – You Will Regret, it Later - 10th Feb 16
The Fed Doesn't have a Clue! - 10th Feb 16
How Far Can Gold Price Go? - 10th Feb 16
It's Stock Market Panic Time! - 9th Feb 16
Gold Stocks Picks for Patient Pickers - 9th Feb 16
Oil Price Collapse U.S. Recession Odds 2016 - 9th Feb 16
Preparing for Crisis - It's About Risk Mitigation and Capital Preservation - 9th Feb 16
Top Silver Mining CEO: Don't Laugh, We Could See Silver $100+ - 8th Feb 16
Gold, Investment Leadership Changes Permanent? - 8th Feb 16
Stock Market Panic Decline Begins... - 8th Feb 16
How to Save Money By Growing Your Own Homegrown Tomatoes Indoors From Seeds - 8th Feb 16
US Economy Slides One Step Further Towards A Recession - 8th Feb 16
Gold Bear Market Bottom : Mr. Bear has left the PM Sector for Greener Pastures - 8th Feb 16
Stock Market At Important Support - 8th Feb 16
David Cameron Humiliated in Poland Over Refusal to Stop Taking UK Benefits, BrExit or Super State? - 8th Feb 16
Why Crude Oil Prices Could Continue FALLING From Here - 7th Feb 16
Stock Market S&P, NAS Best, Most Reliable Answers Come From The Market And You - 7th Feb 16
Stocks Bear Market Continues - 7th Feb 16
Silver COT Paving Way for Sustained Upside Breakout Sharp Rally - 7th Feb 16
US Dollar Double Top, Gold Prospects Brightening Rapidly - 7th Feb 16
Gold And Silver - Is A Bottom In? Nothing Confirmed - 7th Feb 16
Gold Stocks Something has Changed - 6th Feb 16
UK Interest Rates, Economy GDP Forecasts 2016 and 2017 - 6th Feb 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Global Financial Crisis 2016

The Unseen Hand in Economic Progress

Economics / Economic Theory Jul 09, 2012 - 07:53 AM GMT

By: Alasdair_Macleod

Economics

The assessment of economic growth based on Gross Domestic Product is a fallacy, because GDP is merely a measure of the amount of money in an economy. The one thing it does not measure, which is central to economic progress (note progress, not growth), is the level of entrepreneurial activity. This has important implications for the efficacy of government interventions and solutions to the current economic crisis.


I have written about GDP before, but to refresh the reader’s memory, GDP is basically the sum total of recorded business activity at the consumption level plus government spending expressed in money terms. If the government spends more, GDP rises; give more money to consumers, GDP rises; give more bank credit to consumers or business, GDP rises. Cut government spending, GDP falls. This is not contentious and has nothing to do with economic progress. Importantly, it excludes future entrepreneurial activity, except to the extent that an entrepreneur has actually spent some money putting his future plans into action. The obsession with GDP means that entrepreneurial activity, which is Adam Smith’s unseen hand that guides our future, is invisible to economic planners.

If that was the only consequence of confusing a money quantity with economic progress the results would not be so serious. Instead, misleading statistics such as GDP are leading all governments into bad policy decisions, and their choice has narrowed down to either ever-greater reflationary attempts to pump up GDP, or alternatively facing a collapse in the GDP number as bank credit contracts. The situation facing the eurozone already precludes any compromise between these extremes, while other nations believe they can print their way out of this difficulty.

The twin errors of misunderstanding GDP are the failure to see that monetary inflation is concealing a deepening economic depression, and it encourages policies that destroy entrepreneurial activity, or economic progress itself. This is a deadly combination, the equivalent of being in a hole and continuing to dig.

We cannot expect politicians to stop digging deeper and faster when their economic advisors are calling for more shovels. All politicians are fully committed to the fallacies that result from confusing GDP with economic progress. They pursue economic policies that are the equivalent of eating their own children. The children being eaten are savers, increasingly raided to sustain the status quo: savers whose savings are a precondition for entrepreneurial activity, and without which increasing numbers of us become reliant on the state.

There can be little hope that this lunacy will be abandoned while statistical nonsense such as GDP growth persists. The underlying economic depression, evidenced by high levels of unemployment, is symptomatic of economies burdened by misallocated resources. The solution is to do exactly the opposite of actions currently being pursued. To quote Calvin Coolidge: “Perhaps one of the most important accomplishments of my administration has been minding my own business. Government shouldn't play a part in everyday life."

It is still possible to do this. What is required in our leaders is a sound understanding of economics instead of belief-based neoclassicism. Thus armed, a politician should be able to explain the proper course of action to the reasonable majority, and implement it with their support.

Alasdair Macleod runs FinanceAndEconomics.org, a website dedicated to sound money and demystifying finance and economics. Alasdair has a background as a stockbroker, banker and economist. He is also a contributor to GoldMoney - The best way to buy gold online.

© 2012 Copyright Alasdair Macleod - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Biggest Debt Bomb in History