A Triumph for Supply-side “Austrian” Economics and Say’s Law

The almost total inability of economists of the mainstream to make sense of the macroeconomy is because they look only at final demand. To them, the rest of the economy is a black box about which they know next to nothing. And emphasising how little they even understand about what they need to know, the most important statistic for the past seventy years has been the national accounts which measures how much final output is produced. It is why there are still economists who think that our economy is 60% consumption, when that part of the economy is around 5% at best. The rest is that vast hinterland of productive efforts that move resources from the ground and the forest through various stages of processing to the distributors and then, but only then, to retail outlets for final sale. The man who has done the work of Hercules in overturning this shallow and narrow approach is Mark Skousen. Do you wish to know more about this approach and how better to understand how an economy works, this is the go-to book, now released in its third edition. The title of this blog post is also the title on his own press release, so for a change it’s not just me.

Mark Skousen, The Structure of Production. New York University Press

Third revised edition, 2015, 402 pages. $26 paperback. Available on Kindle.

From the cover:

In 2014, the U. S. government adopted a new quarterly statistic called gross output (GO), the most significance advance in national income accounting since gross domestic product (GDP) was developed in the 1940s. The announcement comes as a triumph for Mark Skousen, who advocated GO twenty-five years ago as an essential macroeconomic tool and a better way to measure the economy and the business cycle. Now it has become an official statistic issued quarterly by the Bureau of Economic Analysis at the U. S. Department of Commerce.

To buy the book: NYU, Amazon
Quarterly data for Gross Output can be found at the BEA site here.
For Skousen’s latest quarterly report on GO, see this.

Since the announcement, Gross Output has been the subject of editorials in the Wall Street Journal, Barron’s, and other financial publications, and is now being adopted in leading economics textbooks, such as Roger Leroy Miller’s new 18th edition of Economics Today. Economists are now producing GO data for other countries, including the UK and Argentina.

In this third printing of Structure of Production, Skousen shows why GO is a more accurate and comprehensive measure of the economy because it includes business-to-business (B2B) transactions that move the supply chain along to final use. (GDP measures the value of finished goods and services only, and omits most B2B activity.) GO is an attempt to measure spending at all stages of production.

As Dale Jorgenson, Steve Landefeld, and William Nordhaus conclude in “A New Architecture for the U. S. National Accounts,” “Gross output [GO] is the natural measure of the production sector, while net output [GDP] is appropriate as a measure of welfare. Both are required in a complete system of accounts.”

Skousen concludes, “Gross Output fills in a big piece of the macroeconomic puzzle. It establishes the proper balance between production and consumption, between the ‘make’ and the ‘use’ economy, between aggregate supply and aggregate demand. And it is more consistent with growth and business cycle theory. Because GO attempts to measure all stages of production (known as Hayek’s triangle), it is a monumental triumph in supply-side ‘Austrian’ economics and Say’s law.”

Using GO, Skousen demonstrates that consumer spending does not account for two-thirds of the economy, as is often reported in the financial media, but is really only 30-40% of total economic activity. Business spending (B2B) is over 50% of the economy, and thus is far larger and more important than consumer spending, more consistent with economic growth theory, and a better measure of the business cycle. (See chart below.)

About the Author

MARK SKOUSEN is a Presidential Fellow at Chapman University in California. He has taught economics and finance at Columbia Business School, and is a former economic analyst for the Central Intelligence Agency. He received his Ph. D. in economics at George Washington University (1977). He is the editor-in-chief of the investment newsletter Forecasts & Strategies, and author of several books, including The Making of Modern Economics.

Reviews

“Now, it’s official. With Gross Output (GO), the U.S. government will provide official data on the supply side of the economy and its structure. How did this counter revolution come about? There have been many counter revolutionaries, but one stands out: Mark Skousen of Chapman University. Skousen’s book The Structure of Production, which was first published in 1990, backed his advocacy with heavy artillery. Indeed, it is Skousen who is, in part, responsible for the government’s move to provide a clearer, more comprehensive picture of the economy, with GO.” — Steve H. Hanke, Johns Hopkins University (2014)

“This is a great leap forward in national accounting. Gross Output, long advocated by Mark Skousen, will have a profound and manifestly positive impact on economic policy.” –Steve Forbes, Forbes magazine (2014)

“Skousen’s Structure of Production should be a required text at our leading universities.” (referring to second edition) –John O. Whitney, Emeritus Professor in Management Practice, Columbia University

“Monumental. I’ve read it twice!” (referring to first edition, published in 1990) — Peter F. Drucker, Clermont Graduate University

“I am enormously impressed with the care and integrity which Skousen has accomplished his work.” — Israel Kirzner, New York University

UPDATE: Mark thought that this might help to explain the concept of the GO:

GO

The problem with double counting is massive if you are trying to measure final output. If, however, you are trying to work out the level of activity across every part of the economy, it is not the central problem, and this is especially so if you are interested in proportions. If the data were divided into where jobs were, the division between the different parts of the economy that took in the stages of production would make perfect sense. If we were trying to measure jobs and counted only those who were in retail and personal services, we would immediately see what was wrong with the stat. GO tries to make up some of the deficiencies in knowing only final output and ignoring the economy’s interior.

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10 Responses to A Triumph for Supply-side “Austrian” Economics and Say’s Law

  1. Chris

    So would the sum of the value added each business writes on its GST return add up to GO?

    And is that figure reported from the ATO to ABS?

  2. Lem

    Excellent, Steve, return to what you are best at. Say’s Law. Let the war against politicians of all stripe (re)commence!

  3. Yohan

    Damm, I only purchased the 2nd edition a year ago. Will have to satisfy the OCD and get this new edition…

  4. Yohan

    According to Skousen’s B2B Index US has gone into recession for the first time since 2009.

  5. Lem

    Yohan, the whole world is in recession. The question is whether it will pan out into a deep and long-lasting depression, and what governments addicted to debt will do to finance their short term political promises.

    You can be sure it won’t amount to cutting in any meaningful way spending, which can only end up by exacerbating the problem.

    Bust follows boom, and we have had a big boom that has grossly misallocated capital as a consequence of government meddling.

    It’s going to be ugly, especially since government refuses to get out of the way. Australia, you’re doing the 80’s again.

  6. 2dogs

    So the new economic taxonomy becomes:

    GO = GI + C + I + G + (X -M) ?

  7. JohnA

    Chris #1810760, posted on September 27, 2015 at 5:54 pm

    So would the sum of the value added each business writes on its GST return add up to GO?

    And is that figure reported from the ATO to ABS?

    Wrong box, Chris.

    They need to add up the Gross sales excluding GST, and then for completeness also add up the GST.

    And I doubt if the report is going from ATO to ABS.

    If someone was to dare doing a CAT scan on government departments, it is a reasonable question whether any brain cells would be found – anywhere.

  8. JohnA

    It’s also unlikely they would find Schroedinger’s Cat…

  9. Terry O'Brien

    Thanks for this excellent heads-up, Steve. I’ll follow up with alacrity.

    But your report prompts me to ask: where is the Australian media on this development? Adam Creighton in The Australian is perhaps the only economic journalist I can imagine handling this story with any sensible context.

    To be a bit more pointed, when might we hear about it from ‘our ABC’? Who would handle it – Stephen Long?! This is an opportunity to note one of the lesser-remarked failings of the ABC: the complete lack of serious economic reporting.

  10. It’s also unlikely they would find Schroedinger’s Cat…

    I lolled. Thanks!

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