Keynesians Are Wrong: Spending Does Not Equal Growth

Using spending as a measure of economic growth is patently insane. Let’s take a look at a recent AP article on “slow economic growth” to see what I mean. The AP reports, "The U.S. economy grew at an annual rate of just 1.5 percent from April through June, as Americans cut back sharply on spending. The slowdown in growth adds to worries that the economy could be stalling three years after the recession ended."

The clear inference here is that growth = spending. The article uses the two words interchangeably.  To the authors of this article, there is no difference between the words growth and spending – spending is growth, and growth is spending. The economists claim that measuring spending is measuring growth. Does this make any sense to anyone other than a Keynesian economist?

In your own life, do you consider yourself wealthier if you go out and spend all the money you have saved? Of course not! You are no more or less wealthy than you were before you spent your money.  The act of spending money is simply transferring the value you have already earned into some physical product or the consumption of some service. If you spend $100 on some new shoes, your total net worth is exactly the same as before you spent the money; rather than holding $100 in cash, you are now holding $100 in shoes. Of course, the value of products and services generally depreciate faster than cash does, but at the moment that spending occurs, there is no loss of value.

When people spend money, there is no immediate gain or loss of wealth. The act of spending is simply transferring wealth already earned into some other form of wealth. From this we can take away that wealth is things. The more things of value you have, the more wealthy you are. The more cash, houses, cars, gold, etc. that a person has, the more society would consider that person to be wealthy. Thus, to become more wealthy than they already are, a person must earn more money (or things) than they previously had.

A proper measure of “growth” would be counting up the total value of things a society produces, rather than purchases. This is quite different than the total amount of spending that occurs within an economy.  Consider that I can purchase a new house on credit, yet I didn't need to produce anything of value before I bought the house! The act of buying the house on credit means I must produce something in the future in order to pay back the house I have purchased today. Society is not any wealthier because I purchased a house on credit. If I put myself a quarter of a million dollars in debt by purchasing a house, does that mean I am a quarter of a million dollars wealthier than I previously was? Obviously not! I must now sacrifice my future earnings to pay back the house I purchased today. If I fail to earn enough money in the future to make my house payments, the debt holder will take back the house! I don’t fully own that house until I finish paying off the mortgage.

Consider that by using the terms “growth” and spending synonymously, Keynesian economists can claim that “growth” increases when debt increases. As I just pointed out, going into debt does not make a person more wealthy in and of itself. So let us further examine the consequences of this fallacy.  If, for example, people were unable to take out larger lines of credit because they were either insolvent or maxed out on the amount of debt they could make payments on, what would happen to the economists’ measure of “growth?” How about if the government balanced its budgets and stopped issuing new debt? What would happen to “growth” then? Under the Keynesian definition of growth, a slowdown in debt based spending would clearly equate to a slow down in growth! Does this make any sense?

If we imagine a world where the total money supply remains constant at all times, where there is no debt based money creation, wouldn't “growth” under these conditions always be flat as a pancake? While the productive capacity of the economy may increase dramatically under these conditions, total spending would always be the same. Sure, people might save more money or spend more savings at any given point in time, but on a long term horizon, there would never be any “growth” under this definition because the total amount of money available to spend within the economy would never change. As more things are produced, prices would fall, and the total amount of dollars spent would not change; even though society is obviously wealthier than it previously was.

We can clearly see that real growth is an increase in the production of goods and services within an economy.  It has absolutely nothing to do with how much spending is taking place. In fact, under our present debt based system of money creation, one could argue that more “growth” is actually a measure of more poverty! For in order for spending to increase over time, more money must necessarily be conjured into existence! And in order for more money to be conjured into existence, people must be put further and further into debt!

Yet there is even more to this story. If we consider that the real growth is the production of new things that have value to the market, then what happens when things are produced that have no market value?  GDP (the measure of spending economists use to calculate "growth") includes government spending!  Should a society be considered richer because the state built a new prison or aircraft carrier? Of course not! The human condition is not improved! To see the deleterious effects of state spending on "growth," see my previous article on this subject.

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Michael Suede

Michael Suede is an Austrian economist and author who holds a business degree from the University of Wisconsin. Michael's articles have appeared in numerous economics publications. Michael is also one of the few economists who is well versed in the economics of voluntary crypto-currencies such as Bitcoin. Michael is a veteran of the US Navy and an advocate of voluntarism. Michael authorizes the use of all his content under Public Domain copyright. Any organization or individual may freely republish, edit, modify and distribute Michael's works without restrictions.

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