GNP AND CONSUMER CONFIDENCE IN AUSTRALIA:
A DISSENTING ARGUMENT

Part III

15 June 2001

...continued from Part II

What a country wants to make it richer is never consumption, but production. Where there is the latter, we may be sure that there is no want of the former.

John Stuart Mill, “The Consumer Theory of Prosperity”
Essays In Some Unsettled Questions of Political Economy (1830)

Table 2: ‘Gross National Outlays,’ Australia, 1994-95 ($m)

The foot of Table 2 shows that in 1994-95 Australia’s GNO was no less than 80% greater than its GNP and that consumption comprises less than one-third of GNO (versus one-half of GNP). Conversely, business expenditures, which include both intermediate inputs and fixed capital investment, comprise slightly more than one-half of GNO. Business expenditure is almost twice as large as consumer expenditure and roughly five times as great as government expenditure. By this alternate conception of economic activity, business expenditure at the various stages of production, together with non-governmental saving and investment – not spending by either consumers or governments – clearly drives economic activity, progress and prosperity in Australia. Analogous data for other years and other countries generate similar results.

... Denigrates Savings and Thereby Distorts Productive Impulses

The implications of this result are momentous. The conventions of national income accounting are a prominent example of the anti-savings, pro-consumption and statist mentality which pervades modern mainstream economics and public policy. This mentality, as discussed in Australia’s Post-Olympic Reality Cheque, has among other things encouraged individuals and businesses to eschew the discipline implicit in long-term savings and investment and to embrace the short-cut axiom that the way to wealth is debt. Indeed, in the minds of many economists there exists a ‘paradox of thrift.’ In the words of a Nobel Laureate and author of an influential text, “if people try to increase their saving and lower their consumption for a given level of business investment, sales will fall [by an amount that exceeds the amount of increase of savings]. Businesses will cut back on production. How far will production fall? GNP will fall until people stop trying to save more than businesses are investing.” According to mainstream economists, to save is to depress GNP and hence economic growth; savings, in other words, is evidence of vice rather than virtue.

Mainstream thinking focuses its attention upon the current demand for final consumer goods, and the higher this demand the better. Short shrift is therefore given to the demand for consumption which will occur in the future. Clearly, every individual and business must balance its desire to consume today versus its desire to consume tomorrow, the next day and in the indefinite future. In order to survive after one becomes too old to work, for example, an individual must either draw upon the stream of income generated by the savings invested (i.e., the consumption foregone) during one’s working life, subsist upon the consumption foregone and transferred voluntarily by family, friends and charities – or rely upon the resources extracted involuntarily and transferred coersively by governments. Similarly, in order to maintain a business as a going concern, provision must be made today for the plant, equipment, etc. which will have to be replaced in the future; and in order to finance any expansion of the business, it must either generate its own savings by foregoing consumption today or borrow others’ savings today and promise to repay them in the future.

The reality that every individual and business intuitively recognises, mainstream economists thus attenuate: in order to consume at a certain level in the future one must forego a certain amount of consumption in the present. Moreover, the more one wishes to consume in the future the more one must restrain one’s consumption in the present. No one can consume everything and save nothing: if he did then there would be no plant and equipment with which to produce consumer goods, and individuals would have no capital to sustain themselves in their dotage. Conversely, no one can save everything and consume nothing: starvation would quickly ensue. Accordingly, what individuals and businesses, left to their own devices, have recognised and practised for hundreds of years – that they must forego some current consumption, i.e., save and invest, in order to finance consumption in the future – has since the Second World War been downgraded and in many instances denigrated by governments and the orthodox economic ideas on which they rely. Governments have denigrated savings seemingly because current mainstream economic thinking blinds them from the notion that in the absence of government interference the decision to save and invest is an expression of time preference, i.e., the choice between spending and consuming today and doing so in the future. Today’s savings do not disappear or leak from tomorrow’s transactions. Money saved in a bank account, for example, does not lie idle; rather, the banks to which it is entrusted strive to direct savings (in the form of loans) into productive enterprises which earn a return over time. Savings, in other words, are spent today on capital goods (tools, machinery, etc.); these capital goods, in turn, create consumer goods tomorrow and into the more distant future. It is by this process of savings and investment – technological development is ancillary but subsidiary to it – that standards of living rise over time.

GNP’s Keynesian Pedigree

Economists do not always inform their students, bureaucrats may or may not inform politicians and politicians and media commentators virtually never inform the general public that, for better or worse, the premises which underlie GNP and contemporary national accounts and the bulk of Australian public policy are explicitly Keynesian. They derive, in other words, from the ideas set out in what is probably the most influential economics book of the twentieth century: The General Theory of Employment, Interest, and Money by John Meynard Keynes.

The Keynesian conception of final aggregate demand contrasts sharply to the view of Austrian and classical economists, i.e., that production, technological advancement and above all savings and investment are the keys to economic progress and prosperity. Classical economists believed that aggregate consumer demand was a relatively unimportant catalyst of growth and development; and Austrians advanced grounds to believe that a country’s standard of living stemmed from the competence of its entrepreneurs and the depth, breadth and productivity of its capital base. For both groups, the processes of saving, investment and production – and not the magnitude of consumption – is the most important aspect of economic activity. As Ludwig von Mises stated in Human Action, “every single performance in the ceaseless pursuit of wealth production is based upon saving and the preparatory work of earlier generations. We are the lucky heirs of our fathers and forefathers whose saving has accumulated the capital goods with the aid of which we are working today.”

Both classical and Austrian economists also applauded and justified private citizens’ and individual businesses’ resolve during times of economic adversity to increase savings, cut debt and reduce expenditure. Yet it is precisely this behaviour which today is regarded as folly by economists and is discouraged by politicians, bureaucrats, central bankers and commentators. Seen in this light, it is an irony and perhaps a tragedy that Lord Keynes, the author of the quote which begins Part I, has arguably become the chief “academic scribbler” and “defunct economist” whose ideas dominate both the “madmen in authority” and their court intellectuals. Hence a priority for Australia’s businessmen, investors, consumers and governments: the restoration of logical correspondence between traditional business practice, sensible household budgeting, sound economic theory and prudent public policy. This restoration will not be possible until policy makers and intellectuals have been weaned (or, to use a word coined by Keynes, “debamboozled”) from Keynesian ideas and policies. The damage wrought by the encouragement of consumption and accumulation of debt at a time of economic reckoning with past profligacy may facilitate such a restoration. But I’m not holding my breath.

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