How many times have you heard the
unthinking comment that we need to keep consumption burning brightly because
"consumption is two-thirds of GDP"?
There it is, after all, in black
and white. If you look up the GDP release, you see that, in 2001, nominal GDP
was $10 trillion dollars and change, while personal consumption expenditures
were a touch under $7 trillion. QED.
Fair enough, but be aware that this
is very much a circular argument which presupposes that this GDP measure can
provide an accurate reflection of the process of wealth generation in the
first place (when in fact it is rooted in J.M. Keynes's facile identity that Income
= Consumption plus Investment, +/- Net External Trade and Government).
So, let us assume that what makes
us rich is not consumption. Consumption is merely that fraction of our income
and assets that we decide to exhaust today in pursuits other than those which
will either add to the possibilities of greater output in future, or act as a
prudential fund against unforeseen needs.
Clearly, it is production that
matters, for this is what ultimately lifts us out of savagery. That this
should be controversial shows how far we have fallen from the good common
sense of our forefathers.
For we can play Oliver Twist all we
like, importunately holding up our plates for more, but unless we offer
something in return, we are unlikely to be able to rely on our portion being
replenished at will.
This simple insight was
encapsulated by the classical economist Jean-Baptiste
Say, who expressed this to the effect that Supply creates its own Demand. Or,
to put it in colloquial English, "You want some of these here beans?
What you got in yer wagon to trade fer 'em?"
For the best part of the century
that witnessed the flowering of Manchester liberalism, Say's aphorism came to
be taken for granted, as a truism. Namely, it was accepted that if you worked
to produce a saleable good (or to offer a saleable service), you were then
entitled to exchange it for the fruits of someone else's efforts at a price
to be freely negotiated between the two of you.
Should the wants of vendor and
purchaser not coincide exactly, or should the two be separated by even the
width of an ocean, this was no problem, so long as men felt they could rely
upon tokens of exchange that equitably reflected the work which went into
their generation--that is, upon an honest money to use as a medium of this
Sadly, the idea of resorting to
work and entrepreneurialism, as a means to material well-being, has
historically become a poor second to the idea of acquiring resources through
theft. This robbery is always most effectively perpetrated when disguised and
when legally underwritten by the threat of political violence--i.e., when it
is committed by the State.
This comes about because theft is a
much less arduous task than the capitalist process of striving best to serve
the capricious tastes and fluctuating relative valuations of consumers in
open competition with one's fellow entrepreneurs. It is also a much more
glamorous occupation and is more likely to grant one a fabled posterity: few
children are read tales of successful grocers and haberdashers at bedtime, preferring
to hear of the heroic thefts of conquerors, warriors, and presidents instead.
Thus, what John Berger aptly
defined in his book, The Sinews of Power, as the "fiscal-military
state," or what the Austrians less charitably decry as the
"warfare-welfare state," invariably sees those at the pinnacle of
political-military power, disrupting this benign process by siphoning off a
tribute every time goods pass over the shop counter. In this they are usually
abetted--if not actually manipulated--by those who control the purse strings.
They used to exact this levy by
sheer brigandage and the overt threat of physical force; now, the means are
more subtle and tend to involve the hidden redistribution of resources
through the Unholy Trinity of Debt, Taxes, and Paper Money.
Now, one of the sad facts of such
impositions is that they always lead to undue hardship. The entrepreneurial
bourgeois and the diligent artisan alike have to carry to market not just
goods for their own utility, but also goods sufficient to support a posse of
bureaucrats, court lackeys, armoured hooligans, tax
gatherers, assessors, monopolists, subsidy-mongers, and welfare dispensers,
as well as the power elite and their financiers themselves.
If this parasitism is sufficiently
subtly interwoven in the social fabric--as nearly a century of fiat money and
creeping collectivism has largely accomplished today--the impoverished and
bewildered creators of wealth cry out for help in their anguish and foolishly
come to mistake the shaggy pelts of the state wolfpack
for the robes of a gentle shepherd whom they trust will tenderly deliver them
from their miseries.
Thus, government frustration of the
market process inexorably leads to the call for the government to Do
Something once again to counteract its own malfeasance. As an astute
18th-century Briton succinctly put it, "Armies beget taxes, taxes beget
unrest, unrest begets armies."
In this way, the fourth decade of
this century--after a long period of false and frenzied prosperity that was
fueled like today, largely by debt--witnessed a crisis, caused not by the
breakdown of free market capitalism, as the state's apologists have
maintained ever since. Rather, the Great Depression was caused by the febrile
convulsions made inevitable by the suppression of the market's workings
throughout a decade of monetary deceit and a consequently unsupportable
credit expansion. This was worsened by the willful frustration of the
international division of labor through high tariffs, and by the
unwillingness to settle the entwined issues of inflationary war debt and
punitive reparations in a timely and realistic manner.
In the midst of this turmoil of the
depression, the ever-opportunistic and dangerously meretricious Keynes
stepped forward, seeking to persuade people that Say had it all back to
front: that, in fact, it was Demand that created its own Supply
("Please, sir, may I have some more?") and that all we needed was
to give people extra monetary tokens, unbacked by
anything tangible, for the prodigals to restore us to prosperity simply
through spending them.
But if we reckon that being bribed
to set fire to an overplanted forest is likely to add less value than would
setting a new clearing price for any surfeit of lumber, or exploring to what
other exciting new productive uses we can put the wood, let us go back to
this question of production, to see why Keynes and all his Myrmidons are
We need to visualize the critical
concept of the structure of production, the idea that what we are dealing
with is not a crude hydrological exercise in plumbing, as actually physically
embodied by Keynes's acolyte, Phillips, of "curve" fame. Instead,
we must return to F.A. Hayek's useful motif of the economy as a right-angle
triangle, with elapsed time along the bottom, and some measure of output, or
revenues, going up the page.
Raw materials and capital goods are
way up there at the apex, far distant in time from their final realization as
consumers' goods. Consumption itself represents a slice along the nearby
vertex, and "fixed investment," as arbitrarily defined in the GDP
numbers, is merely a sliver along the hypotenuse.
There are multiple steps and
innumerable interconnections in this structure, a structure which is, in
fact, not so much a simple triangle as it is a multi-dimensional manifold,
knotted with loops, feedbacks, and bifurcations.
Meshed in all this complexity, we
must never lose sight of the fact that the passage of time is an immutable
constraint, and also that since most activities take place at times remote
from their fruition in consumption, savings are an essential element for the
support of such deferred consummation.
As an aside, to know how much time
one has to complete a process, one must know what savings are available for
the sustenance of its factors. The means by which both are signaled is the
natural rate of interest. That is why any interference with this regulatory
influence by the action of the central bank is so prejudicial to prosperity.
Returning to our theme, we should
begin to see that GDP can only give us a very partial (in both senses!)
insight into the mechanisms at work.
Keynes effectively wants us to
believe we can truly appreciate the artistic achievements, the engineering
prowess, and the religious sensibilities of the Egyptian builders by taking
the Great Pyramid of Cheops and weighing the first course of blocks at the
base, then adding in some reckoning of the amount of whitewash limning the
rest of the masonry.
So, for a fairer picture--though
still only a crude sketch of the whole intricate mechanism at work--consider
the BEA's Input-Output data instead. For 1998, when these were last compiled,
nominal GDP stood at $8.8 trillion, and personal consumption was $5.9
trillion. Manufacturing seemed to be fairly inconsequential at $1.5 trillion
in the GDP numbers ("Nobody cares about manufacturing anymore!")
and made a smaller contribution than either finance
($1.7 trillion) or services ($2.1 trillion).
But now look at what was actually
being made and sweated over within the economy, providing jobs, on the one
hand, and the opportunity of profits on the other. Let us sneak a glimpse at
the division of labor in all its glory.
The total gross output of the
economy now comes to $15.4 trillion in turnover, and manufacturing--at $3.9
trillion--suddenly swells to being the largest constituent of them all, 55
percent greater than finance, and 10 percent larger even than the
much-vaunted service sector.
Manufacturing emphatically does
matter, for it now becomes responsible for fully a quarter of all productive
activity and--here is the crucial point--60 percent of that provides an input
for other intermediate industries, and 60 percent of that fraction, in turn,
goes back into the other stages of manufacturing itself, with only 25 percent
destined straight for consumption and a lowly 15 percent to the GDP-defined
Armed with this fresh perspective,
now ask yourself whether you are ready to continue to accept blindly that we
are living in a "service economy," or that all will be well
"as long as the consumer keeps spending" (rather than if the
worker--and the manufacturing worker, at that--keeps usefully producing), or
that businesses merely have an "inventory problem" (not a
fixed-capital problem) to overcome.
But, under the Keynes
version--espoused uncritically by central banks, Wall Street
"analysts," and politicians everywhere--if business falters, do not
be alarmed! We can simply send people to the shops waving their new Federal
Reserve purchasing coupons, and urge them to be profligate.
Manufacturing, for so long misled
by the total distortion of the prices of capital, inputs, and final sales,
will then automatically reorient itself to satisfy
these demands--despite the fact that it was patently unable to do this
sustainably, much less profitably, before the masses were given their extra
We are told, by the Inflationists, that currently there is overproduction and
that prices are falling. If we do not take care, consumption will falter
unless we induce the Fed to prop up demand by expanding the supply of money.
Granted, there is specific
overproduction perhaps--the distortions of the credit expansion have ensured
that, thank you, Sir Alan--so there may be a surfeit of automobiles and disk
drives and broadband capacity, among many others. But do we really have
everything else we want for the asking?
Do we have the best shoes, the
finest clothes, limitless energy with no harmful waste products, instant
medical treatment, the highest standards of
education for our children, delay-free means of transport--in fact, all the
delights of an earthly Paradise?
Of course not.
You must therefore be able to
appreciate that consumption is highly unlikely to fail through any sudden fulfilment of the consumers' endless shopping
list--barring a miraculous outbreak of religious hysteria, a global
conversion to asceticism.
What instead may fail--indeed, has
been failing--is these would-be consumers' ability to comply with Say's Law.
They are unable to find an outlet
for their particular skills and talents because the matrix of relative (never
absolute, much less average) prices has been made replete with harmful
rigidities--thanks to the Fed and the rest of the government --and so cannot
adjust to offer them a niche.
Moreover, such niches as do exist
are harder to exploit to their maximum because so much scarce capital has
been wasted or misallocated, giving people fewer tools with which to work.
This, in turn, means these
unfortunates cannot buy all they want, except by taking up yet more debt, and
this only perpetuates those faulty entries in that all-important matrix of
relative prices. It also progressively alienates their future incomes, and
thus comes to jeopardize the soundness of their increasingly foolhardy,
morally hazardous lenders.
Put differently, supply creates its
own demand, except where unsaved credit intrudes, and that can only prolong
the agony, not cure the misalignment
But this is all very well in
theory. Surely, there must be too much production. For why else do we
constantly hear the lament on everyone's lips that "Businesses have no
Pricing Power!"--a wail which usually precedes
a call for more Fed funny money to combat this malaise?
It is a pivotal fact that this
misses the larger truth: businesses NEVER have control over prices--not on a
free market. Rather, what has been removed from them today is some measure of
influence over their costs.
This has come about because the
vast effusion of unsaved credit is propping up demand from those who supply
nothing in return, except their credit cards and their home equity cash-outs.
If all these nonsuppliers
were instead left to price themselves back into productive work before they
bought things, and if the goods they could no longer
honestly afford in the interim were allowed to fall in price to reflect this
fact, more businesses might then be able to take up what would now be both
cheaper labor and cheaper resources. They would be induced to do this because
this relative repricing would help furnish them
with a greater faith that their hopes of making a genuine return on capital
were not in vain.
This they could also do, since they
would have more assurance of successfully supplying a mix of goods and
services that was more nearly in tune with the expression of only those wants
which had justifiably earned their gratification in the demander's own
concurrent contribution to output. That way, the economic organism would be
likely to rediscover its holistic, dynamic balance between the yin and yang
of production and consumption, and investment and saving.
That way, only those who Supply
could Demand in their turn.
Extra fiat money can do little to
substitute for this necessary immune response, or to speed this
time-consuming recuperative process. It cannot give the outfoxed chessmaster two moves to his opponent's one to avoid a
mate, nor can it teach infantrymen instantly to ride cavalry chargers to
repel the foe.
It cannot create wealth, for wealth
is only minimally coincident with today's mockery of money.
It can, however, arbitrarily
transfer ownership of what wealth still exists. It can lock sub-par
businesses in place and suck their creditors deeper into the mire alongside them.
It can thus foster an unwelcome competition for resources which elevates
their costs beyond the reach of truly productive businesses. It can choke the
Garden with the weeds of those undertakings which are only able to flourish
under these highly artificial conditions--the housing boom springs to mind
Unfortunately for the legions of Inflationists (Californian Money Managers, or
otherwise!), there are no shortcuts to betterment, but there are all too many
diversions, distractions, and dead ends, and the most misleading road map in
the world is the one printed at 20th Street and Constitution Avenue in
Washington, deep inside the Marriner S. Eccles