The GDP Fixation

Every Friday I receive a free investment letter from John Mauldin, an investment advisor who has enough credibility to get on CNBC, hold conferences with top speakers and produce an investment letter read by millions. Recently, he has been harping on GDP (as in GDP = C + I + G + (X-M), where C is consumption, I is investment, G is government spending, X is exports and M is imports). Now, if we accept that increased GDP is good, then any decrease in G is bad. However, some economists disagree and suggest that G should, in fact, be subtracted from the equation, as government spending is spending that people would otherwise forgo or channel into activities other than invading Iraq, bailing out banks or purchasing car companies that have failed to be competitive. Such an economist is Murray N. Rothbard who, in America's Great Depression, describes a measure he calls the Gross Private Product, or GPP. To quote him (pg 224),

In the pleasant but illusory world of "national product statistics," government expenditures on goods and services constitute an addition to the nation's product. Actually, since government's revenue, in contrast to all other institutions, is coerced from the taxpayers rather than paid voluntarily, it is far more realistic to regard all government expenditures as a depredation upon, rather than an addition to the national product. (emphasis in original)

So, Rothbard's equation is

GPP = C + I - G + (X-M)

where G now represents the maximum of government revenues and government spending - the value it extracts from the economy. Rothbard elaborates more on GPP and the reader may want to follow up on his ideas. In fact, I think that Rothbard may be too harsh on government spending, as there is some value produced in some spending - it's just impossible to know what it is as it is not subject to consumer sovereignty or profit and loss.

Now, if Mauldin were like Paul Krugman - that is completely ignorant of the Austrian School of economics and a shill for Democrats - I wouldn't blame him. However, Mauldin does know about the Austrian School and was apparently present when Gary North and Mark Skousen interviewed F. A. Hayek. Mauldin does disagree with the Austrian Business Cycle Theory (ABCT) and has said in his newsletter that he is more inclined to Irving Fisher's views; but how can a thinking person suggest that G - government spending - must not be reduced too quickly as it will lead to a reduction in GDP and further economic pain? Yes, a reduction of government spending will injure some parts of the population, but that capital is then freed up for productive uses. The longer we delay that reduction the greater - and wider - will be the pain.

Competition as a Discovery Procedure for Ethics

Friedrich Hayek wrote essays concerned with competition in a theoretical sense, e.g. "Competition as a Discovery Procedure," and in a pragmatic sense, e.g. "Denationalisation of Money." The first essay argues (among other things) that competition leads to discoveries of new knowledge that could not have been aimed at. The latter essay was written as a challenge to the monopolization of the monetary system and the resulting failure to create sound money by proposing the introduction of competitive currencies. It is time to challenge another monopoly of the state – that of the ethical or legal system – and suggest that competing ethical systems are the method by which we may approach an ever more sound system.

Ethical systems are generally presented as being handed down from God or derived in some way from human nature. Ayn Rand and Murray Rothbard developed systems explicitly in the latter class. Andrew
J. Galambos claimed to derive an ethical system from science, a claim that may also be lumped in with theirs, being derived from the nature of volitional beings. These claims are not intended by the claimants to be subject to test, but are presented as systems to which people must adhere, even though the systems may be based upon free market, stateless societies (Rothbard's and Galambos's systems are members of this class while Ayn Rand retains the existence of the state).

Ethical systems, where they intersect with the state, produce legal systems that are imposed upon the inhabitants within the borders of a political entity. In the time of monarchy the legal system reflected the religion of the monarch and whatever concepts of justice the monarch held. In modern democracies the legal system is a reflection of the struggle between various groups and may reflect most fundamentally the views of the religious majority. The one system that attempts to reflect evolutionary market forces is English Common Law, but even in that case the discovery process is hampered by the fact that competition between courts is limited and petitioners may not choose the legal system by which a case will be tried. A free market in judicial services would harness the engine of competition in the quest for ethical systems that are more sound and responsive to the consumers' needs.

If individuals may enter into contracts with different companies providing judicial services reflecting different ethical systems (e.g. Christian, Rothbardian, Galambosian, Islamic, etc.) to resolve their disputes, defend or recover their property, etc., one can imagine that there would be a number of problems. But would these problems be greater than the problems that exist between countries
or, in the United States, between local state jurisdictions? Certainly the execution of a judgment or transfer of an alleged criminal between jurisdictions involves some process that would evolve between justice companies. If companies do not have reciprocal agreements, due to remoteness, neglect or aversion, it is possible that disputes that cross their boundaries will not be resolved, and a loss that might be covered by insurance will be incurred.

Each company may codify its ethical system and reference it in its advertising, along with endorsements from its satisfied customers. If a company has an attractive ethical system it can be expected to attract repeat customers and grow. Superior systems will be reproduced and inferior ones will die out. Better ways of handling cases will be sought, successes added and failures dropped, advancing the system using the same method as science.

In Karl Popper's parlance, each ethical system is a theory and is subject to falsification. The falsification method is its profitability. However, it must be remembered that a falsification of an ethical system, as it is a volitional creation, is subject to its circumstances. Certainly, an ethical system that many might find reasonable today would have found few customers in the depths of the Dark Ages. People's beliefs are essential in the discussion of human action, and change over time. So, it is clear that an ethical system introduced into the market "before its time" may fail, only to be rediscovered and retried successfully later.

If the state were to end its monopolization of the justice market, various ethical systems could flourish, some succeeding (generating profits) and some failing (generating losses). Through this system of competition, inferior systems could be weeded out and superior systems discovered.

Sources

F.A. Hayek, Competition as a Discovery Procedure in The Essence of Hayek (Stanford, California: Hoover Institution Press, 1984) 254-265.

F.A. Hayek, Denationalisation of Money: The Argument Refined (London: The Institute of Economic Affairs, 1978).

Bryan Magee, Philosophy and the Real World: An Introduction to Karl Popper (La Salle, Illinois: Open Court, 1985).