Consumption Does Not Drive the Macroeconomy

DCUSA.Gallery11.BB&BBlackFriday.WikipediaMark Skousen, through his Economic Logic and The Structure of Production, has been leading the fight for years for a measurement of economic activity that more closely aligns with a capital structure based macroeconomics. GDP is truly a Keynesian–based view of the economy; a data set that often hampers rather than helps advance Austrian macroeconomics. Misguided use of the data set encourages counterproductive active management of aggregate demand.

Both Hayek and Rothbard highlighted the inadequacies of national product measures of the  economy. From a Hayekian perspective, investment as measured by product and income accounts, greatly understates the role of capital or future-oriented expenditures in the economy. Hayek raised the point in his criticism of Foster and Catchings’s misguided underconsumption approach to fluctuations.  Expenditures on “raw materials, semi-finished products and other means of production” greatly exceed the value of consumption goods that are simultaneously offered in the markets for consumption goods. According to Rothbard, “It is certainly legitimate and often useful to consider net incomes and net savings, but not always illuminating, and its use has been extremely misleading in present-day economics.” Consumption spending is overemphasized and investment and saving is dwarfed relative to their overall importance in maintaining and expanding the structure of production.

Fortunately Mark Skousen stayed diligent in pressing for a better data set. Now what started as windmill jousting has ended in a minor victory for those who desire a better understanding of how an economy works. Mark explains more in today’s Wall Street Journal in his commentary, “At Last a Better Measure of Economic Activity.”


In many ways, gross output is a supply-side statistic, a measure of the production side of the economy. GDP, on the other hand, measures the “use” economy, the value of all “final” or finished goods and services used by consumers, business and government.

GDP is a useful measure of a country’s standard of living and economic growth. But its focus on final output omits intermediate production and as a result creates much mischief in our understanding of how the economy works.

In particular, it has led to the misguided Keynesian notion that consumer and government spending drive the economy rather than saving, business investment, technology and entrepreneurship.

The critical importance of business activity is clear when you look at employment statistics and leading economic indicators. Employees in the consumer side of the economy (retail outlets and leisure businesses) account for about 20% of the labor force, and another 15% work for various levels of government. Yet the vast majority of employees, 65%, work in mining, manufacturing and the service industries.

Finally, as a broader measure of economic activity, gross output is more consistent with economic-growth theory. Studies by Robert Solow at MIT and Robert Barro at Harvard have shown that economic growth comes largely from the supply side—increased technology, entrepreneurship, capital formation and productive savings and investment. Higher consumption is the effect, not the cause, of prosperity [emphasis added].

The new measure: Gross Output, while not perfect, is a marked improvement that should enable more and better historical analysis of the economy from an Austrian perspective. What an opportunity for the growing ranks of Austrian influenced scholars.


  1. GDP is a useful measure of a country’s standard of living and economic growth. But its focus on final output omits intermediate production and as a result creates much mischief in our understanding of how the economy works.

    Isn’t the value of intermediate production already reflected in the price of the final good?

    • The problem is, the way GDP is constructed and calculated it becomes very easy to say “70% of the economy is consumer spending”. This gives the impression that we can borrow and consume our way to higher GDP and healthy economic growth. But the final value/price (of that output that has been spent upon) does not show all the economic activity that takes place at intermediate stages of production… it is omitted to prevent double-counting. In reality, consumer spending is perhaps only 30% of all economic activity. Look up Skousen, as he has written much on this.

    • It’s an important but overlooked timing issue.
      Overlooked factor in GDP is the amount of current resource use – the make it part of the economy- which is really value added in future not current final product. Peter Klein highlights another such common fallacy where GDP hinders good analysis of a capital using economy:

      He writes, “Robert Solow, in a glowing review of Piketty’s book, states: ‘The key thing about wealth in a capitalist economy is that it reproduces itself [emphasis added] and usually earns a positive net return.’” As Peter out, “But this is nonsense from the point of view of microeconomics, entrepreneurship, uncertainty, innovation, strategy, etc.”
      Hayek in Pure Theory of Capital in a defense of his earlier more simple framework (triangles) is that it highlighted important aspects of capital that too many too easily ignored – new and renewed investment..
      Every time revenue comes in the decision to save and reinvest or save more (net savings) and add to investment must be made again. GDP overlooks to enormous amount of gross saving required to maintain a capital structure. Another often overlooked point by Hayek – maintaining a given income stream requires that capital must be replaced, not necessarily by the same capital goods but by something.

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