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Yes, We Still Make Stuff, and It Wouldn’t Matter if We Didn’t – Article by Steven Horwitz

Yes, We Still Make Stuff, and It Wouldn’t Matter if We Didn’t – Article by Steven Horwitz

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The New Renaissance HatSteven Horwitz
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One of the perennial complaints about the US economy is that we don’t “make stuff” anymore. You hear this from candidates from both major parties, but especially from Donald Trump and Bernie Sanders. The argument seems to be that our manufacturing sector has collapsed and that all US workers do is to provide services, rather than manufacturing tangible goods.

It turns out that this perception is wrong, as the US manufacturing sector continues to grow and in 2014 manufacturing output was higher than at any point in US history. But even if the perception were correct, it does not matter. The measure of an economy’s health isn’t the quantity of physical stuff it produces, but rather the value that it produces. And value comes in a variety of forms.

Manufacturing is Up

The path to economic growth is not to freeze into place the US economy of the 1950s. Let’s deal with the myth of manufacturing decline first. The one piece of evidence in favor of that perception is that there are fewer manufacturing jobs today than in the past. Total manufacturing employment peaked at around 19 million jobs in the late 1970s. Today, there are about 12.5 million manufacturing jobs in the US.

However, manufacturing output has never been higher. The real value of US manufacturing output in 2014 was over $2 trillion. The real story of the US manufacturing sector is that we have become so much more efficient, that we can produce more and more manufactured goods with less and less labor. These efficiency gains are largely the result of computer technology and automation, especially in the last fifteen years.

The labor that we no longer need in order to produce an ever-increasing amount of stuff is now available to produce a whole variety of other things we value, from phone apps to entertainment to the expanded number and variety of grocery stores and restaurants, to the data analyses that makes all of this growth possible.

Just as the workers in those factories we are so nostalgic for were labor freed from growing food thanks to the growth in agricultural productivity, so are today’s web designers, chefs at the newest hipster café, and digital editors in Hollywood the labor that has been freed from producing “stuff” thanks to greater technological productivity.

Or, put differently: those agricultural, industrial, and computer revolutions collectively have enabled us to have more food, more stuff, and more entertainment, apps, services, and cage-free chicken salads served with kale. The list of human wants is endless, and the less labor we use to satisfy some of them, the more we have to start working on other ones.

But notice something: all of the things that we produce have something in common. Whether it’s food or footwear, or automobiles or apps, or manicures or massages, the point of production is to rearrange capital and labor in ways that better satisfy wants. In the language of economics, the point of production (and exchange) is to increase utility.

When we produce more cars that people wish to buy, it increases utility. When we open a new Asian fusion street food taco stand, it increases utility. When Uber more effectively uses the existing stock of cars, it increases utility. When we exchange dollars for manicures, it increases utility.

Adam Smith helped us to understand that the wealth of nations is not measured by how much gold a country possesses. Modern economics helps us understand that such wealth is not measured by how much physical stuff we manufacture. Increases in wealth happen because we arrange the physical world in ways that people value more.

Neither producing cars nor providing manicures changes the number of atoms in the universe. Both activities just rearrange existing matter in ways that people value more. That is what economic growth is about.

Misplaced Nostalgia

We’re richer because we have allowed markets to produce with fewer workers. When we are fooled into believing that “growth” is synonymous with “stuff,” we are likely to make two serious errors. First, we ignore the fact that the production of services is value-creating and therefore adds to wealth.

Second, we can easily believe that we need to “protect” manufacturing jobs. We don’t. And if we try to do so, we will not only stifle economic growth and thereby impoverish the citizenry, we will be engaging in precisely the sort of special-interest politics that those who buy the myth of manufacturing often rightly complain about in other sectors.

The path to economic growth is not to freeze into place the US economy of the 1950s. We are far richer today than we were back then, and that’s due to the remaining dynamism of an economy that can still shed jobs it no longer needs and create new ones to meet the ever-changing wants of the consumer.

The US still makes plenty of stuff, but we’re richer precisely because we have allowed markets to do so with fewer workers, freeing those people to provide us a whole cornucopia of new things to improve our lives in endless ways. We can only hope that the forces of misplaced nostalgia do not win out over the forces of progress.

Steven_Horwitz

Steven Horwitz

Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University and the author of Hayek’s Modern Family: Classical Liberalism and the Evolution of Social Institutions.

He is a member of the FEE Faculty Network.

This article was originally published on FEE.org. Read the original article.

Fooled by GDP: Economic Activity versus Economic Growth – Article by Steven Horwitz

Fooled by GDP: Economic Activity versus Economic Growth – Article by Steven Horwitz

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The New Renaissance Hat
Steven Horwitz
May 4, 2015
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Even the smartest of economists can make the simplest of mistakes. Two recent books, Violence and Social Orders by Douglass North, John Wallis, and Barry Weingast and Why Nations Fail by Daron Acemoglu and James Robinson both suffer from misunderstanding the concept of economic growth. Both books speak of the high growth rates in the Soviet economy in the mid-20th century. Even if the authors rightly note that such rates could not be sustained, they are still assuming that the aggregate measures they rely on as evidence of growth, such as GDP, really did reflect improvements in the lives of Soviet citizens. It is not clear that such aggregates are good indicators of genuine economic growth.

These misunderstandings of economic growth take two forms. One form is to assume that the traditional measurements we use to track economic activity also describe economic growth, and the other form is to mistake the production of material things for economic growth.

Often at the core of this confusion is the concept of gross domestic product (GDP). Although it is the most frequently used indicator of economic growth, what it really measures is economic activity. GDP is calculated by attempting to measure the market value of final goods and services produced in a particular geographic area over a specific period. By “final” goods and services, we mean the goods and services purchased by the end consumer, and that means excluding the various exchanges of inputs that went into making them. We count the loaf of bread you buy for sandwiches, but not the purchase of flour by the firm that produced the bread.

What GDP does not distinguish, however, is whether the exchanges that are taking place — even the total quantity of final goods — actually improve human lives.

That improvement is what we should be counting as economic growth. Two quick examples can illustrate this point.

First, nations that devote a great deal of resources to building enormous monuments to their leaders will see their GDP rise as a result. The purchase of the final goods and labor services to make such monuments will add to GDP, but whether they improve human lives and should genuinely constitute “economic growth” is much less obvious. GDP tells us nothing about whether the uses of the final goods and services that it measures are better than their alternative uses.

Second, consider how often people point to the supposed silver lining of natural disasters: all the jobs that will be created in the recovery process. I am writing this column at the airport in New Orleans, where, after Katrina, unemployment was very low and GDP measures were high. All of that cleanup activity counted as part of GDP, but I don’t think we want to say that rebuilding a devastated city is “economic growth” — or even that it’s any kind of silver lining. At best, such activity just returns us to where we were before the disaster, having used up in the process resources that could have been devoted to improving lives.

GDP measures economic activity, which may or may not constitute economic growth. In this way, it is like body weight. We can imagine two men who both weigh 250 pounds. One could be a muscular, fit professional athlete with very low body fat, and the other might be on the all-Cheetos diet. Knowing what someone weighs doesn’t tell us if it’s fat or muscle. GDP tells us that people are producing things but says nothing about whether those things are genuinely improving people’s lives.

The Soviet Union could indeed produce “stuff,” but when you look at the actual lives of the typical citizen, the stuff being produced did not translate into meaningful improvements in those lives.

Improving lives is what we really care about when we talk about economic growth.

The second confusion is a particular version of the first one. Too often, we think that economic growth is all about the production of material goods. We see this in discussions of the US economy, where the (supposed) decline of manufacturing is pointed to as a symptom of a poorly growing economy. But if economic growth is really about the accumulation of wealth — which is, in turn, about people acquiring things they value more — then material goods alone aren’t the issue. More physical stuff doesn’t mean that the stuff is improving lives.

More important, though, is that what really matters is subjective value. The purchase of a service is no less able to improve our lives, and thereby be a source of economic growth, than are the production and purchase of material goods. In fact, what we really care about when we purchase a material good is not the thing itself, but the stream of services it can provide us. The laptop I’m working on is valuable because it provides me with a whole bunch of services (word processing, games, Internet access, etc.) that I value highly. It is the subjective satisfaction of wants that we really care about, and whether that comes from a physical good or from human labor does not matter.

This point is particularly obvious in the digital and sharing economies, where so much value is created not through the production of stuff, but by using the things we have more efficiently and precisely. Uber doesn’t require the production of more cars, and Airbnb doesn’t require the production of more dwellings. But by using existing resources better, we create value — and that is what we mean by economic growth.

So what should we look at instead of GDP as we try to ascertain whether we are experiencing economic growth? Look at living standards: of average people, and especially of poor people. How easily can they obtain the basics of life? How many hours do they have to work to do so? Look at the division of labor. How fine is it? Are people able to specialize in narrow areas and still find demand for their products and services?

Economic growth is not the same as economic activity. It’s not about just making more exchanges or producing more stuff. It’s ultimately about getting people the things they want at progressively lower cost, and thereby improving their well-being. That’s what markets have done for the last two centuries. For those of us who understand this point, it’s important not to assume that higher rates of GDP growth or the increased production of physical stuff automatically means we are seeing growth.

Real economic growth is about improving people’s subjective well-being, and that is sometimes harder to see even as the evidence for it is all around us.

Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University and the author of Microfoundations and Macroeconomics: An Austrian Perspective, now in paperback.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.

Commonly Misunderstood Concepts: Wealth (2009) – Article by G. Stolyarov II

Commonly Misunderstood Concepts: Wealth (2009) – Article by G. Stolyarov II

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The New Renaissance Hat
G. Stolyarov II
Originally Published November 16, 2009
as Part of Issue CCXVIII of The Rational Argumentator
Republished July 24, 2014
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Note from the Author: This essay was originally published as part of Issue CCXVIII of The Rational Argumentator on November 16, 2009, using the Yahoo! Voices publishing platform. Because of the imminent closure of Yahoo! Voices, the essay is now being made directly available on The Rational Argumentator.
~ G. Stolyarov II, July 24, 2014
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Many of the economic and personal fallacies of our time arise from the mistaken belief that wealth and money are identical. In fact, while money is in many cases an important gateway to wealth, it does not even approach describing what wealth truly is.

In our time, money may be equated to wealth even less justifiably than it could have been in times past – when most money was identified with precious metals, such as gold and silver, which had uses other than as media of exchange. Currently, money in virtually all countries consists of pieces of paper which are decreed to be money by government fiat. Legal tender laws force individuals to accept these special pieces of paper as payment for products, services, or debts. The supply of these pieces of paper is controlled by the government’s printing press – typically located at either the central bank or the treasury department.

Why do people seek and hold this money? They do so because they expect to be able to purchase with it actual goods and services – either now or in the future. This means that the money is not seen as valuable in itself; it is seen as valuable because of the other things it can obtain. However, the supply of these other things is not dependent on the number of pieces of paper in circulation. Rather, it is dependent on real factors that affect individuals’ and businesses’ abilities to produce actual goods and services. Thus, having more pieces of paper does not automatically make one wealthier. If the government simply chooses to print more of them, while no external factors affect the production of goods and services, then there will simply be more pieces of paper for the same amount of real goods and services. We would therefore get inflation: prices in terms of the pieces of paper will increase in proportion to the volume of new pieces of paper introduced. Of course, inflation has disastrous impacts on individuals’ existing savings, incentives for frugality, and transaction costs. It also constitutes an unjustified redistribution of wealth from the producers who earn it to the politically connected elites who get priority access to the new pieces of paper. Creating more “money” can often destroy actual wealth and productivity.

But there is another respect in which money is not equivalent to wealth. Consider the fact that, even without inflation, the same amount of money will not purchase the same goods and services in every area. Indeed, a tiny, cramped apartment in the center of a major city may often cost more money than a spacious house in a small town. An individual earning the same amount of money in each area would be able to have a much higher standard of living in the small town. It is quite possible that the individual’s opportunities to earn more money in a big city will be greater, but the prices of goods will not increase in a one-to-one ratio with that individual’s relative salary increase. Rather, the prices are most likely to be higher in a ratio that is greater or smaller than the individual’s ratio of salaries – thereby making life in the city either less or more attractive to the individual. How much money one makes is not an indicator of the rate at which one accumulates wealth; a better indicator is what one can buy for one’s money.

These thoughts should give pause to both advocates of the government’s power of the printing press and to indiscriminate salary chasers. Both may be devoting their time and energy to the pursuit of numerical illusions rather than substantive benefits. A much more sophisticated and nuanced understanding of wealth is needed in order to truly thrive and lead a good life.

To achieve an understanding of wealth, we need to ask ourselves why we seek money in the first place. Ultimately, every unit of money – even one saved or invested for many years – goes to fund some human consumption. Money can pay for either goods – material objects – or services – human behaviors performed for the benefit of the payer. It is actual goods and services that constitute wealth, not the money. Moreover, the money price of these goods and services is irrelevant from the standpoint of the wealth of the person who owns them. If I have a table, I am no less wealthy if I cannot sell the table at all – nor am I any wealthier just because I have the potential to sell it for five million dollars. I still have the same table, and its physical qualities are unchanged. If I actually do sell it, I might become wealthier, but only insofar as my five million dollars would enable me to purchase more tables, better tables, or other goods and services I value. The important principle to recognize is that one either has potential wealth in the form of money or actual wealth in the form of the goods and services one has purchased. One does not have both at the same time in the same object. Fiat money is wealth only insofar as it can reasonably be expected to procure actual goods and services. Goods and services constitute wealth in themselves while they last. Capital goods that can produce other goods can also be described as potential wealth – but it is also true that they are not money while one owns them as goods.

A further distinction should be made. Not all material objects are goods, and not all human behaviors are services. Some material objects – such as clouds of poison gas in one’s living room – are active bads. Likewise, some human behaviors – such as people raping or murdering one another – are active disservices. The only way to comprehensively define wealth is with regard to a standard by which goods and services can be identified. The most fundamental standard from both a moral and a practical standpoint is the principle that the life of every innocent individual is the greatest and most basic good – where an innocent individual is one who has not violated this principle through actions such as murder or the attempt at murder. Thus, any object that promotes any individual’s life is a good; any behavior that promotes any individual’s life is a service. The more life-promoting objects one has – and the more life-promoting behaviors one either is able to elicit from others or is able to initiate oneself – the wealthier one is.

Everything else is a matter of means and context. How one gets wealth – whether it be through money, barter, gifts, or one’s own work and transformation of raw materials – has no bearing on the nature of that wealth; all of us who are not self-destructive pursue a wide variety of means that fundamentally aim at the goal of improving our lives. Ethically, the means ought to be non-coercive; we must not intrude on other people’s prerogatives to control their lives just like they must not intrude on ours. Wealth is still wealth, even if acquired through dishonest or evil means – but immoral means of wealth acquisition will destroy other wealth on net, through damage to property and human beings and their incentives to produce.

Moreover, it is possible for the same object to be beneficial in some circumstances and harmful in others. For instance, a piece of rope used to tie a knot may be extremely useful, while the same piece of rope strung across the floor of a room might be a tripping hazard. However, the same item or behavior in the exact same context should produce the same results; actual situations are never precisely repeatable, but we can at least estimate an object’s usefulness or lack thereof by analyzing situations where it has been applied in similar ways.

This view has practical implications beyond the scope of one’s views on economics or politics. Most items in our lives should be viewed not in terms of how we might be able to resell them to others, but rather in terms of what use they are to us personally. There is nothing wrong with resale as such, but it is not a behavior that can be imposed on all objects – and, indeed, economic bubbles are created when the expectation of resale for continually rising prices is applied by enough people to too many commodities. Those of us who acquire an item for our own use – which includes our purchases of art, furniture, automobiles, and yes, even houses – are not in the same position as businessmen who produce or acquire items for the specific purpose of reselling them at a profit. Businessmen see their inventories as potential money generators – an indirect route to greater wealth; consumers ought to see their property as useful in itself and any resale as incidental or fortuitous – a kind of loss mitigation once one is no longer able or willing to make good use of the property. We have adjusted quite well to the idea that the resale value of an automobile or a computer is virtually always much lower than its purchase price. In the role of consumers, we should adopt the same default expectation for houses – and for everything else. But the silly notion that one is entitled to resell any property at a higher price than one purchased it must be discarded, as it results in the foolish pursuit of higher-priced items in the vain hope of their further appreciation in price – without any expert knowledge of how markets in these items actually work. This turns many a layman into a speculator, while enticing him to take out loans with his fanciful expectations as collateral – as happened all too often during the housing bubble. Moreover, it engenders the disastrous attitude that price decreases – which make goods such as houses more affordable for people – are in some manner harmful. But one cannot destroy wealth by making goods easier to earn through honest work – nor can one create wealth by piggybacking off of others’ expectations of price increases.

Leave the house-flipping to the experts, and buy a house that you would want to live in, just as you buy clothes you want to wear and computers you want to use. That house would constitute real wealth for you, irrespective of its market price, and it will be there irrespective of financial market or currency value fluctuations – if you actually own the house or have a fixed-rate mortgage. To maximize your wealth, you should act in such a manner as to improve your access to actual goods and services that you value. Pieces of paper and expectations can only get you so far. And remember that your own ability to do useful work – including work that does not bring immediate monetary returns – is one of your most reliable gateways to wealth.

Read other articles in The Rational Argumentator’s Issue CCXVIII.

Review of Tyler Cowen’s “The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better” – Article by Kevin A. Carson

Review of Tyler Cowen’s “The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better” – Article by Kevin A. Carson

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The New Renaissance Hat
Kevin A. Carson
July 4, 2012
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Stagnation [for Carson]
Published by: Dutton Adult • Year: 2011 • Price: $12.95 • Pages: 128 •

Tyler Cowen’s thesis is that economic growth is leveling off and rates of return decreasing because we’ve already picked the “low-hanging fruit” (meaning innovations and investments that have high returns). The stagnation in GDP and median income in recent decades means “the pace of technological development has slowed down,” and the general population is benefiting less from new ideas.

I would argue, rather, that measured economic growth and income have slowed down precisely because of the increased pace of technological development.

The important trend behind the disappearance of “low-hanging fruit” is the decoupling of improved material quality of life from monetized measures of economic growth and income. Improvements in quality of life—although very real—don’t show up in conventional econometric terms.

Intensive development—increased efficiency in the use of inputs—isn’t necessarily reflected in increased money returns. Unless they’re turned into a source of rents by restrictions on competition, innovations that reduce production costs will benefit consumers in lower prices and better products.

Such rents are central to the business model of “cognitive capitalism”—the “progressive” model of capitalism pushed by Bill Gates and Warren Buffett. The most profitable industries in recent years have been those that depend on returns from “intellectual property.” But such artificial scarcities are fast becoming unenforceable, and technologies of abundance are growing so rapidly that they can’t be enclosed as a source of rents.

If anything, we can expect an implosion in metrics like GDP in the coming years, even as quality of life improves enormously.

Cowen almost gets it at one point. “[I]f our food supply chain harvests, retails and sells an apple for $1, that adds a dollar to measured national income.” Exactly: GDP measures value produced in terms of the total cost of inputs consumed—not the use-value we consume, but how much stuff was used up producing it. So anything that reduces the input costs of our standard of living seems to show up as negative growth.

Actually, Cowen contradicts his own thesis. He argues that official GDP figures exaggerate growth because so much of it is simply waste. But that undermines his treatment of reduced money incomes as a proxy for reduced growth in standard of living. If the additional portion of the GDP we spend on waste—and the hours we worked to pay for it—simply disappeared, we’d be better off by that much. He can’t argue both that economic growth is the best measure of technical progress and that the levels of growth that have occurred have too little to do with real productivity.

To be sure, Cowen does address the supposed diminishing returns of technological progress in terms of personal use-value. The blockbuster innovations with the biggest effect on our daily lives, he says, have already been adopted: antibiotics, automobiles, refrigerators, television, air conditioning. There’s been far less change in the character of daily life since 1960 than before. Aside from the Internet, recent innovations have been mostly incremental.

The Internet itself, Cowen argues, may be important in terms of personal happiness, but not of generating either revenue or employment. But to treat revenue generation and employment as ends in themselves—rather than a way to pay for stuff—is perverse. If the price of what we need falls because the amount of labor and capital needed to produce it falls, then we need less revenue—and less labor—for the same standard of living. The real significance of what Cowen mistakenly calls “stagnation” is that a growing share of our needs is being decoupled from revenue by technologies of abundance.

The reduced wage employment needed to produce our standard of living, as such, is a good thing. What’s bad is when artificial property rights enable rentier classes to appropriate the benefits of increased productivity for themselves. Our goal should not be to increase the number of “full-time jobs,” but to make sure that the productivity of the hours we do work is fully internalized.

Cowen focuses mainly on the Internet as part of the furniture of daily life—the fun of web surfing—to the neglect of a far more important benefit: the basic way society itself is organized, the relative power of the individual and networks versus large institutions, and the declining ability of hierarchies to enforce their will on us.

His focus on the objects of daily life ignores revolutionary changes in the way they’re made and on the structure of the economy. There’s not such a revolutionary change in going from picture tubes to gel panels, or from carburetors to fuel injectors. But there’s an enormous difference between John Kenneth Galbraith’s mass-production oligopoly economy and one of networked garage shops using cheap machine tools.

C4SS Senior Fellow Kevin Carson is a contemporary mutualist author and individualist anarchist whose written work includes Studies in Mutualist Political Economy, Organization Theory: An Individualist Anarchist Perspective, and The Homebrew Industrial Revolution: A Low-Overhead Manifesto, all of which are freely available online. Carson has also written for such print publications as The Freeman: Ideas on Liberty and a variety of internet-based journals and blogs, including Just Things, The Art of the Possible, the P2P Foundation and his own Mutualist Blog.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.