A correspondent from Pakistan asked: "How can one tell whether a nation is experiencing economic growth?" Really, a nation experiences nothing; only individuals have experiences. So, if we would measure growth or progress, it must be with respect to the individual human being, not a nation.
I here lay myself open to an argument no less contentious than Galileo’s when he affirmed that the solar system does not revolve around the earth. He was up against the established faith; I find myself up against Hegel, Comte, and others who have held that only society is real and that the individual is the abstraction. Today these philosophers have followers by the millions — collectivists who have no inkling of the origin of their ideas — those who favor an intervening political apparatus, the planned economy, the welfare state.
Thus, the argument is between those on the one side who pose society, the nation, the over-all economy as the prime unit and, on the other side, the small minority who insist that all meaningful comparisons in progress must be made in terms of the individual.
First, let us ask, how would a bureaucracy, with its numerous interventions in the market place, go about measuring economic progress? The task is greatly hampered by the fact that economic calculation, which is founded on market data automatically supplied in a system of free competitive pricing, is denied in socialism; it is impossible.’ Leading communist "economists" concede the point.“ Yet, the interventionists are faced with decision-making. And in the absence of economic calculation, they have but one recourse: statistics! "Statistics are, in a crucial sense, critical to all interventionist and socialistic activities of government…. Only by statistics can the Federal government make even a fitful attempt to plan, regulate, control, or reform various industries — or impose central planning and socialization on the entire economic system." 3
When Prices Are Established by Bureaucratic Edict
When an economy is controlled by government, prices are not established by competitive forces but by bureaucratic edict. Edicts are written, modified, repealed in accord with bureaucratic judgments. Thus it is that they are compelled to form judgments from their readings of the statistical data they compile. While the ups and downs in employment, standard of living, and many other data are contrived for their use, the usual statistic for measuring economic growth or progress is gross national product (GNP).
The GNP idea is subject to several obvious flaws:
· If I divorce my wife and hire her as a cook at $50 a week, the GNP will increase by $2,600 annually. How, pray tell, is there any economic growth or progress in that maneuver?
· If the Defense Department spends $50 billion instead of $1 billion on war and its hardware, the GNP will rise by $49 billion. The larger expenditure may or may not increase our security but, assuredly, it represents no economic progress for you or me. We have a lower, not a higher, freedom of choice by reason of such outlays. To what economic use can a citizen put a battleship, or a nuclear warhead, or a dead "enemy"?4
· Were we to spend $40 billion to tear down New York City, the GNP would rise by that amount, the same as if we were to spend $40 billion to build a new city.5
· The dollars we pay farmers not to grow wheat, or peanuts or whatever, boost the GNP just as do the dollars paid farmers for things produced.
· GNP — expressed in the monetary unit — enlarges whenever the medium of exchange is diluted, that is, it gets bigger in an inflationary period.6
Contemplate what Germany’s GNP would have been in 1923 when 30 million marks wouldn’t buy a loaf of bread. What an inaccurate device is GNP, the so-called measuring rod of economic progress employed by intervening governments and so heartily endorsed by many economists!
No Better Guide Available
Why, then, is GNP used at all? Probably there is no better statistical guide available to an intervening bureaucracy; that is, none more consistent with their gross-economy — as distinguished from individualistic — assumptions. Further, they have come to believe that spending, rather than productive effort, is the key to growth or progress. Were this true, then Germany achieved its peak of growth immediately prior to complete economic collapse. Were this true, we could experience enormous progress by the simple expedient of repealing all laws against counterfeiting! The fact is, exploding expenditures no more measure economic growth than does exploding population!
I repeat, GNP is purely an invention and a device of an intervening government and/or its intellectual supporters. In an ideal free market society, with government limited to invoking a common justice and keeping the peace, GNP is inconceivable. Try to find a GNP figure in Hong Kong, the nearest approach to a free economy in today’s world. There simply is no use for a GNP figure by the voluntary participants in a free market. Market data as related to one’s goods or services, yes; but definitely not a generality like GNP related neither to specific markets nor to individual progress.
GNP is, of course, subject to manipulation, as explained above. Merely spend more, regardless of what for, and up it goes. Thus, the prevailing bureaucracy is enabled to "prove" that it is doing better each year, or better than the Establishment it succeeded.
Now, here is where the mischief enters: If the majority of the citizenry can be sold on the merit of government spending and made to believe that GNP is a reliable measuring rod, then we can easily be led by the nose into the total state — the free market wiped out completely.
Again, why is GNP used at all? Bureaucracies that intervene in the market will never use a valid definition of economic growth or progress for the simple reason that the real thing cannot be measured in mathematical or statistical terms and, thus, is utterly use-less for bureaucratic procedure.
No Objective Standards
The real thing — individual economic progress — cannot be measured by objective standards. This is to say that the individual’s economic progress cannot be reckoned by the number of chickens in the pot, by cars in the garage, by cash in the bank or statements of net worth, or by any or all other standard-of-living measurements.7
This is not to say that the individual can have no idea of his own economic growth; it is only to argue that growth cannot be judged by any set of objective standards.
For instance, I am aware of personal economic growth, which is to say, I can now obtain more of what I want in exchange for what I want to do than was the case thirty years ago. Further, the Pilgrim, or an 18th-century Englishman, or my father had nowhere near the choices of employment I have, or what could be received in exchange for the fruits thereof. My choices abound compared to theirs.
But please note that what I want to do is forever changing, and that what I want in exchange is in perpetual flux. Like a bird on the wing, I don’t "stay put," as we say. Even more to the point, I have no carbon copy on this earth; we are all in flux relative to each other.
Perhaps one man’s highest aspiration is to write and lecture on behalf of freedom. He prefers this to other employments, even though the other jobs available to him pay twice or ten times as much. And in exchange he desires above all else a working acquaintance with the best libertarian minds in the world, along with the economic means — food, transportation, and the like — for realization. To him this is the ultimate in economic progress. Who, pray tell, has any right to set a standard for him other than these unusual but, nonetheless, self-chosen goals?
But here’s another fellow who, above all else, prefers to strum a guitar. And in exchange his heart’s desire is "a Loaf of Bread… a Flask of Wine, a Book of Verse — and Thou." To him this is the ultimate in economic progress. Where is the superman who has any logical, moral, or ethical basis for decreeing otherwise? The above gets at the crux of the matter: gain or economic progress is individual and subjective; gain cannot be objectively measured, that is, neither I nor anyone else can devise a standard that can accurately assess what is or isn’t a gain to you.8 It’s difficult enough to know one’s own choice in such matters.
What economic progress is to one individual may very well be regress to another. Examples: There are persons who would prefer an audience with the President of the United States to $10,000, and vice versa; a hoola hoop to $5, and vice versa; a can of imported snails to $2, and vice versa; a Ph.D. or a mink coat to $5,000, and vice versa; a Sammy Davis performance to one by Roberta Peters, and vice versa; a Jeep to a Cadillac, and vice versa; and so on ad infinitum. Objective standards simply cannot be used to measure subjective judgments.
Measuring and determining the total value of these trillions of complex, ever-changing whims, fancies, desires — subjectively recorded only in the minds of individuals mostly unknown to one another — is not humanly possible.°
The individual can, if he so elects, generally assess his own economic progress, but he can no more express this growth statistically or mathematically than he can his intellectual, moral, or spiritual gain. Indeed, in these latter categories, no one makes any attempt at such measurement. Unlike the single dimensions of height, weight, girth, bushels of wheat, population, these other forms of growth, including economic, are multidimensional and — to top it off — in never-ending flux. And suppose one had an accurate measure of his own economic growth; what could he possibly do with the statistic that he could not do as well without it?
A Freeing of Choices
Far more important than fruitlessly trying to measure individual economic growth is understanding what it is that increases the possibilities for progress. Were we searching for a single phrase to express what has to be understood, we could well settle for a freeing of choices. This, however, is as big as "all outdoors." Reflect on the enormity of what’s involved:
· First, freeing the choices —increasing the alternatives and opportunities — for profitably (subjective) employing one’s abilities and properties.
· Second, freeing the choices —increasing the alternatives —of the desirable (subjective) goods and services that can be obtained in willing exchange for the fruits of said employment.
· Third, freeing the capacities of self in order to partake of the increasing alternatives. To what advantage is a proliferation of opportunities to an oyster, or to a human who can’t get off dead center?
All three of the above developments are founded on exchange —production as much as distribution. And this is true even of self-development, for man grows by exchanging ideas with his contemporaries or drawing on his heritage; he is incapable of going it alone. Thus, exchange is the key economic term.
There are two kinds of exchange, broadly speaking: forced exchange as in state interventionism (socialism) and willing exchange as in a free market economy. No society ever has had exclusively one or the other; every society has more or less one or the other.
To repeat what is already implied, economic progress may be judged only by the extent to which an individual becomes capable of taking advantage of an increase in opportunities for productive activity and an increase in what he can obtain for his goods or services in willing exchange.
Such progress, let it be emphasized, originates only in willing as distinguished from forced or coerced exchange. For example, when a robber takes $100 from you, there is no net gain; his gain is canceled out by your loss; this exchange is no more than a coercive swap. Precisely the same holds true when the government forcibly takes the fruits of your labors as a contribution toward any project which does not fall within the principled scope of government.¹º Parenthetically, an to Bastiat suggested the principled scope in simple terms: "See if the law takes from some persons what belongs to them, and gives it to other persons to whom it does not belong. See if the law benefits one citizen at the expense of another by doing what the citizen himself cannot do without committing a crime." See The Law by Frederic Bastiat (Foundation for Economic Education, Inc., Irvington-on-Hudson, N. Y.) intervening government, to be consistent, should tabulate robberies and include the total figure in GNP!
It is clear that there is no gain or progress in forced or coerced exchange. But observe the gain in willing exchange: you, on your own motion — voluntarily — purchase a suit for $100. Both you and the clothier gain in the only way that the term gain makes sense. You want the suit more than the cash; he wants the cash more than the suit. Each of you, on your own terms — nobody else’s — gains by the exchange. Were this not true in each case, you would not buy; he would not sell.
Individual Economic Progress
Let us now ask, why is individual economic progress so important? What, really, is its deep significance? For, surely, it transcends sensual pleasures and satisfactions.
Assume I am a Russian whose employment alternatives may be limited to working in the sputnik factory or on a collective farm and where the things that can be obtained in exchange approximate the contents of Mother Hubbard’s cupboard. Or a Chinese who, employment-wise, has no choice beyond sloshing around a rice paddy, in exchange for which he gets rice and little else.
Next, grant this: I — the Russian or the Chinese, it matters not — possess a potential talent, hidden, latent, untapped. Mine is distinctively unique, unlike that of any other living being. I don’t know what it is myself. I only know that it isn’t making sputniks or transplanting rice. If I understand life’s purpose, one aim must be to see how close I can come during my earthly days to realizing those creative potentialities uniquely mine. Under the conditions outlined above, I should go to my grave — in this respect unborn!
Now, let the alternatives for employment greatly proliferate. They pop into existence every day, one might say. Undeniably, the greater the proliferation the greater is the probability that some one alternative will coincide with that latent, undiscovered talent uniquely mine. In short, self-realization!
Maximizing the Alternatives
It is now appropriate to consider what type of political economy is most conducive to a maximum of alternatives for the employment of abilities and properties and of opportunities for profitable exchange. In what socioeconomic climate is there the greatest freeing of choices?
I believe the first requirement to be a societal agency — government — devoted to keeping the peace, that is, to inhibiting and minimizing all violence, fraud, misrepresentation, predation. Though fully aware of the tendency of governments to get out of hand — the policeman turned plunderer — I’m nonetheless convinced that society requires an organized agency of defensive force to keep the market free of coercion, to secure to each citizen his life and the fruits of his labor. Private property is the outcome of such security, this institution being a basic foundation for any growth in economic alternatives.
Only when life and property are respected is capital formation possible, labor and capital being the tools of production.
When the societal agency is limited to keeping the peace — assuming it does so — there remains no organized force standing against the freeing of creative human energy, a potential always seeking release to some extent in everyone.
When the societal agency keeps the peace, that is, when no one is permitted to lord it over others, there is free entry, free and willing exchange; in short, the free market.
It is under these conditions —never under authoritarian arrangements — that alternatives proliferate, both as to opportunities for the employment of one’s abilities and properties and as to what one can obtain in willing exchange.¹¹ The flower of freedom!
The flower of freedom, I say. But how, many will ask, can this proliferation of alternatives be taking place coincidentally with a rapidly advancing state intervention into the market? Isn’t there a contradiction here?
What Goes on Here?
While no societal agency has ever been strictly limited in practice to keeping the peace, invoking a common justice, and securing the rights to life and livelihood, and no market has ever been ideally free, the U.S.A. has afforded the nearest approximation to these ideals. This practice of freedom brought an unprecedented outburst of creative activity, and through the persons of self-reliant individuals. What’s going on today can partly be accounted for as a momentum, a mighty thrust from decades when sound principles were generally practiced. The traditions, the ways of dealing with each other, the will to improve, the incentives, and numerous other virtues born in that era combined into a fabric too tough for easy destruction.
But more than momentum: our impressions of what is happening are greatly colored and distorted because, to a marked extent, they derive from what we read in the press or hear over TV and radio. Public media — our eyes for seeing much of the world around us —highlight the news. And what’s news? Not the commonplace — never! But, rather, the exceptional events. A new intervention or control (restriction of the market) is always an exception; it is a break with tradition, with our ways of doing things and dealing with each other. So, it is the substitution of forced for willing exchange that is taken to be news nowadays.
Let’s reflect on the commonplace which mostly we overlook. For instance, the exchange of 30 cents for a can of beans. We take no more note of this than we do the important air we breathe. Yet these commonplace, unnoted actions occur daily in billions of unpublicized voluntary exchanges, with a constructive effect that tends to overcome many destructive, intervening forces.
I repeat, we are keenly conscious of the exceptional destructive forces and only dimly aware of the commonplace constructive forces. This, of course, is very dangerous, for we tend to accept these glaring interventions as causes of the proliferation of economic alternatives for the individual. This type of mistaken correlation leads labor union officials to believe that their coercive tactics raise the wage level,¹² or bureaucrats to believe that their price controls curb inflation. The fact is that coercion is an inhibiting force, never creative. It precludes creative activity by the person doing the coercing as well as by the one being coerced.
Free and willing exchange, on the other hand, can be likened to a world-wide electric grid into which flows the infinitesimal and varied creativities of several billion individuals, resulting in a magnificent total available to all.
As a bolt of lightning zigs and zags along the line of least resistance, so has free action found its way through the porosity of governmental restraints. It is the free action, not the restraints, that accounts for all that’s good in the economic situation. In short, free action is stronger than you think, and the interveners are weaker than they think.
However, it is the weakness of the interveners—and ever so many citizens — that can spell our undoing. For when a false economic growth (GNP) can be adopted as a proper goal and when the way to realization is believed to be exploding expenditures, inflation is inevitable.
Specialization of the free market kind is all to the good. But the more specialized we become, the more is each of us dependent on the free, uninhibited exchanges of our specializations. Exchange in specialized societies cannot be achieved by barter; a medium of exchange — money — is required. Inflation, like counterfeiting, destroys the integrity of the medium and, thus, threatens survival.
Of one thing we can be certain: when a high proportion of the time and energy of individuals is devoted to the measurement and expansion of the Gross National Product, their progress as individuals will be thwarted.
Progress is the flower of freedom!
1 Professor Ludwig von Mises is generally conceded to be the one who intellectually — though not politically —demolished socialism. He did this by proving that economic calculation is utterly impossible under socialism. Were this not an elusive fact and extremely difficult to grasp, others would have discovered it before him. See pp. 131-142 in Socialism by Ludwig von Mises (New Haven: Yale University Press).
2 Aleksy Wakar and Janusz Zielinski, leading professors of the Central Planning School of Poland, astonishingly for socialists, say, "The best methods of producing a given output cannot be chosen [by socialist methods of calculation] but are taken from outside the [socialist] system… i.e., methods of production used in the past, or so-called ‘advanced’ methods of production, usually taken from the practice of more advanced countries and used as data for plan-building by the [socialist] country under consideration." (Italics mine). See The Journal of the American Economic Association, March 1963.
For a clear, brief, simple, and excellent explanation of economic calculation, see "Play Store Economics" by Dean Russell. THE FREEMAN, January 1964.
3 See "Statistics: Achilles’ Heel of Government," by Murray N. Rothbard. THE FREEMAN, June 1961.
4 This is not to deny that expenditures by government to keep the peace are useful. Defense against destructive actions is to avoid losses; it is but a means to make progress possible; it is not in itself growth or progress or gain.
5 In Federal urban renewal, for instance, expenditures for razing the old structures are as much included in GNP as are expenditures for constructing the new.
6 True, The Department of Commerce does publish a figure with a "deflator" (adjustment to a constant dollar) in its monthly Survey of Current Business. But this figure, far from flawless, is noted almost exclusively by professional economists and statisticians. It is the inflated figure that is "fed to the public."
7 "... true economic growth is theoretically unmeasurable…. Concern about economic growth could… properly be shifted from pondering meaningless percentages to preserving and perfecting the mechanisms and incentives through which growth is achieved." United States Steel Corporation Annual Report, 1960.
8 This is clear to anyone who understands the marginal utility theory of value, one of the latest (1870) and assuredly one of the most important discoveries in economic science. See Value and Price by Eugen von Böhm-Bawerk (South Holland, Illinois: Libertarian Press).
9 This is not to say that the complete satisfaction of personal desires is necessarily to one’s advantage. It is only to argue that it is not my role to decide what someone else’s advantage is. Is it to another’s advantage that he be cast in my image, have my likes and dislikes imposed on him? Nonsense!
11 The alternatives (specializations) brought into existence by government, founded on forced rather than on free exchange
— space hardware, and the like must be excluded from the list that makes for individual economic progress. When we become dependent on the exchange of our numerous specializations as is now the case
— exchanges must be by common consent if we are to avoid the Russian type of authoritarian state. For more explanation of this point, see Chapter VI in my Anything That’s Peaceful (Foundation for Economic Education, Inc., Irvington-on-Hudson, N. Y.)