On the nature of GDP growth

Economics Economics Questions
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1

I was having a conversation with a friend of mine about how, well, the fed has done more harm than good. I had cited a few examples, but he countered with GDP growth and how it has grown so much. I’m not too well read in Austrian economics just yet (Just ordered Human Action a week ago, and other than that, I merely read the three daily articles here everyday), and I was hoping for some clarification on the nature of GDP growth, and why it has grown so dramatically.

I told him it must be artificial as it fell right back down after 1930, but then I saw how it went right back up. If the real GDP numbers are corrected for inflation (to be trusted, not trusted?), then how do you explain this?

2

Frank Shostak demolishes GDP here. GDP is hocus-pocus. Most amusing to me are the charts of the supposedly exponential growth of the Dow-Jones index which financial service pushers use to push the notion that all you need to do is put your money in the market and it will inevitably grow, and not just grow, but grow exponentially. The reality is that the DJIA and the money supply are in almost perfect 1:1 correlation… the price of an average share of a business has grown exponentially over time for the same reason that the prices of every other good have grown exponentially over time… inflation.

Clayton -

3

Besides GDP being bunk, it’s practically impossible to “correct numbers for inflation.” It’s impossible to consider the prices of every single good and their fluctuations, so a “basket” of goods is arbitrarily chosen that may or may not accurately reflect the situation. And even besides that, prices can change for many more reasons than just inflation.

4

I see this is your first post, welcome! I would say the Fed has done harm, period. No good has been done, can be done, or will be done by the Fed or any central bank. I see you are new to Austrian economics and just ordered Human Action. May I suggest reading some of the introductory works first? Like:

Economics in One Lesson - Start with this one, this is where sound economic thinking begins. Avail. in bookstores or from the Mises store.

Mystery of Banking

What Has Government Done to Our Money

Clayton hit a home run when he referred the Shostak article to you. It was Shostak’s explanation of the “pool of real savings” that led me to study capital formation and the structure of production, two profound insights provided by the Austrian school. An understanding of capital formation and the structure of production will help you realize why GDP is a fiction. Here’s Shostak’s archive. Reading the Mises Daily articles is excellent, you will pick up on many concepts quickly. And keep asking questions.

5

Thanks a lot guys. I’ll get to picking up those books chloe732 and thank you for the warm welcome. Like so many others.. I became active in the scene in 2008 supporting Ron Paul, read the daily articles on campaign for liberty, read the mises.org daily articles and loved how academic, rational, and professional they were.

Here’s to hoping for a bright future!

6

Hurrah to that. Note that Hazlitt’s treasure is available for free online, as well. Economics in One Lesson.

I also strongly recommend that all budding libertarians* read Bastiat’s timeless The Law.

Along more anti-state lines, I recommend Etienne de la Boetie’s The Politics of Obedience: The Discourse of Voluntary Servitude, Rothbard’s Anatomy of the State and Hoppe’s On the Origin and Stability of the State.

The most important thing to keep in mind is that the struggle for liberty is a moral struggle, a struggle in which liberty is the high ground and slavery is the low ground. Rothbard discusses the moral dimension of the liberty-vs-state debate in Egalitarianism as a Revolt Against Nature.

Clayton -

  • I actually started the same time as you during the '08 election though, unusually, not as a result of Ron Paul
7

¡Hi everyone! This is also mi first post so I will briefly introduce me. (Also, forgive my “engrish”)

My real name is Alfonso, Michi is just some stupid nickname got on hs that I use as login everywhere, I´m a 33 years old Spaniard.

So, ¡Hi everyone!

Ok, I was just thinking today while listening to one of Rothbards mp3s while at work, and part of my brain was thinking about this inflation thing being really and increase in the quantity of available money that surfaces as an increase in prices, while the real natural tendency -except in scarcity- is for the prices to deflect, when, somewhere, in other part of my brain, two neurons where having a conversation about GPD and prices, and then all this stupid neurons heard each other and got into a disccussion, that now I need to ask, disccus, or just get out of my head!

Did a search and found this topic, and here I am. Red Frank Shostak’s article (thanks ClaytonB), but not too deep into it, and I have a couple more questions about it, appart from the fact that inflation indexes are just statistic magic.

First will be, ok, if a good’s price lowers, e.g Bananas, due to the market forces, lets say overproduction and the producers selling market, but his price, at the same time due to inflation effect raises… how does one really know what the REAL inflation factor was on this good?

I mean, as I said, If it is common for prices to lower as productivity increases (as long as costs don’t increase also) and it also has been common for inflation to happen in the last five-eight decades. Could you just imagine… What would be the REAL inflation index?

Over all those years if one could calculate the deflactory factor due to productivity and competivity that must have happend during all those years also, and add it (actually I think multiplying by its factor would be more correct) to the NOMINAL inflation. (Gosh, now i write like my stupid textbooks)

Could one image? I guess there is no way to calculate that. Or, Could it be?

Am I just being incredibly moronic?

I just can’t stop wondering…

8

I would also love to see the DJIA and money supply charts if someone would be so kind to tell me where to find them.

'The reality is that the DJIA and the money supply are in almost perfect 1:1 correlation…"

9

http://i833.photobucket.com/albums/zz252/claytonkb/DJIA_TMS.jpg

The True Money Supply* (TMS) is the lighter blue line, the DJIA is the smoother, thicker, darker blue line (taken from Yahoo! Finance). This graph is just to give you the idea, the scales have not been rigorously adjusted. The TMS data begins at 1959 so I have aligned the DJIA at 1960 forward. You will notice that the money supply slightly leads the DJIA. It would probably be instructive to view an overly of TMS and DJIA on a log-linear graph.

Clayton -

*TMS is a money supply metric maintained by the LvMI which is derived from the available money supply data but reflects the Austrian definition of money as closely as possible.

10

Thanks a lot,

Seems very interesting. I do not dare to draw any conclusions on the correlation of DJ and Money supply, but I think -intuition, mainly- that all four GDP, CPI, money suply, and Dj all go hand in hand, as it happens in with any especulative market, like housing or stocks.

There will be of course also an increase in products and services to “substract” but in this same 50 year span a 2800% increase in production and productivity of goods and services?.. ¡I think no way that high!

http://research.stlouisfed.org/fred2/graph/?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23B3CDE7&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&ts=8&preserve_ratio=true&fo=ve&id=GDP,CPIAUCSL&transformation=nbd,nbd&scale=Left,Left&range=Custom,Custom&cosd=1959-01-01,1959-01-01&coed=2009-10-01,2010-03-01&line_color=%230000FF,%23006600&link_values=,&mark_type=NONE,NONE&mw=4,4&line_style=Solid,Solid&lw=1,1&vintage_date=2010-04-29,2010-04-29&revision_date=2010-04-29,2010-04-29&mma=0,0&nd=1959-01-01,1959-01-01&ost=,&oet=,&fml=a,a

11

missed a 0, a 2800% porcent, if I am correct?

12

You can’t. That’s the central tenet of Austrian business-cycle theory. Monetarists try to apply the efficient market hypothesis to inflation and say that, if inflation is high then entrepreneurs will figure it out and arbitrage it correctly, so inflation is not a problem for the market, it’s automatically factored in. But this is baloney. Businesses calculate from profit & loss. They cannot divine how much of their increased profits is due to inflation and how much is due to a genuine increase in consumer demand. Since this is the case, businesses begins over-investing.

Hope I’ve helped.

Clayton -

13

Neither the DJIA, CPI nor GDP are a measure of real productivity. Also, general increase in productivity cannot be a percentage since it is not quantitative. We don’t just produce more things per capita than were produced 50 years ago, we produce different things, and more of them, things which, in turn, help us to become yet more productive.

Clayton -

14

Very helpful! Thanks.

I agree, there can not be a correct agreggate of productivity overall.

But GDPs increases and decreases are suppoused to come by increases in productivity and/or demand.

For what my personal understanding tells me, is that an increase in productivity and therefore an increase in the number of goods and services offered using the same number of resources than before is the real measure of a countries “richness”.

After all, this Keynes GDP index is what goverments rely on to say his national economy goes well or not