Waiting for Growth
Every policy discussion, in the media or the political arena, touches inevitably on the sensitive issue of economic growth. Over the past year, these discussions have revolved primarily around the sluggish growth experienced by European economies, Japan, the U.S., and even China. A recent VOX article tries to identify some of the possible reasons for this slow growth, i.e. present eight existing theories for what it calls “the big puzzle in economics today”. Although some of these theories contain a grain of truth, the discussion is marred by several erroneous premises and incorrectly identified causes. To quote Samuel Beckett’s characters, these theories are a fruitful exercise in “blaming on [our] boots the faults of [our] feet.”
First and foremost, analyses of economic growth, as we have seen before, are informed by aggregate measures, such as the GDP, that fail to capture the underlying relative evolution of the private economy—focusing instead on the bulk of government spending. In fact, a decrease in the GDP due to a decrease in government spending and taxation could mean an increase of the private economy, and of the welfare of producers and consumers alike. More importantly, however, the exclusive focus on figures usually diverts the conversation from the more important issue of economic institutions that are essential to material progress, such as private property, sound money, capital accumulation, and free markets. It is this neglect in the economic profession that currently leaves ‘experts’ baffled that “the economy isn’t delivering the kind of rising prosperity previous generations took for granted.”
For instance, one such theory of the slow economic growth argues that “we’re running out of innovations”: according to Robert Gordon’s book, 21st century entrepreneurs are finding it hard to come up with technologies worth investing in. However, as Rothbard explained, technological discoveries and the development of our knowledge require capital accumulation and subsequent investment in order to translate into economic progress and welfare: “The relative unimportance of technology in production as compared to the supply of saved capital becomes evident, as Mises points out, simply by looking at the “backward” or “underdeveloped” countries. […] The service of imparting knowledge, in person or in book form, can be paid for readily. What is lacking is the supply of saved capital needed to put the advanced methods into effect” (Rothbard 2009, 542). The downplaying of the importance of savings and investment in this context—and their further connection to sound monetary policy—, is responsible for both this theory, as well as for those well-known theories blaming slow growth on low levels of spending (see, for example, Summers’ recent article on the “Age of Secular Stagnation”).
But the neglect of sound money is found also at the root of recent discussions on how the narrow, short-term outlook of investors (which Clinton called ‘quarterly capitalism’) and the debt-ridden households are holding back our prosperity. Here we have otherwise correctly observed phenomena, whose cause is wrongly identified. Guido Hűlsmann, in discussing the cultural consequences of fiat money systems, explained that “…as price inflation diminishes the value of one’s monetary savings, we are encouraged to adopt a short-term perspective. That is, we need to hurry up to obtain credit as soon as possible and obtain revenue from that debt as soon as possible, because savings lose value if we just hold on to cash.” This tendency, Hűlsmann continues, has no natural stopping point—and thus, any policy attempts to control its symptoms rather than resolving the deep underlying cause of our flawed monetary system will not be successful.
Last but not least, all we are to expect from theories connecting government regulations with slow economic growth are half-truths, such as that excessive regulation, or regulation in one particular sector is harmful to growth, but not regulation per se. Even these ideas are often quickly ‘contradicted’ by national statistical figures that allegedly reveal a concomitant period of increased regulation and growth, but again fail to observe the relative evolution of private economic sectors, evolution well hidden within the aggregated magnitudes, which would show the actual impact of regulations on material progress. Here, economists are guilty of two loyalties in this type of discourse: first to the government that employs them, and second to the unsustainable idea of a third system, between the free market and government planning. Mises pointed out the internal conflict of the latter idea when, in relation to trade barriers, he wrote: “… either [regulations] are useful, then they cannot be high enough; or they are harmful, then they have to disappear completely (Mises 1943, 135).
In the end, it is truly disheartening that out of eight theories aiming to explain current economic phenomena, not one is correct. This situation shows not only the deficient, mediocre state to which modern economic theory has devolved, but the pressing need for a reformation of its foundations before any sound policy advice could come out of it.