What (and who) drives the economic system?

 

Who drives the economic system? What creates economic growth?

Is it consumer spending?

Is it government spending and stimulus?

Is it the investment of capitalists and business-to-business spending of entrepreneurs?

Or maybe it’s all just rainbows and unicorns.

Politicians seem to think it’s the latter, who can be seduced by fine words and solecisms. Too many economists think it’s the first two – and they have a measurement, GDP, that seems to prove it – that’s constantly misunderstood as a thing that measures “growth,’ that “shows,” or seems to, that consumer spending represents two-thirds of the economy.

But that’s bullshit out of both holes.

GDP doesn’t measure all economic acitivity in the econoic system; only measures so-called final output and by so doing assumes it captures it all. Yet business-to-business spending is almost double the total amount of consumer spending – and is most volatile across the business cycle -- it’s just that too few economists bother to notice any of this.

Mark Skousen explains the gross error, and explains the new measure, Gross Output (aka Gross Domestic Expenditure), that corrects it.

 

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[Pic by and hat tip to Richard Ebeling]

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