Wednesday, July 20, 2022

Mises Wire

Mises Wire

GDP Provides a False Reading of the State of the Economy

Posted: 19 Jul 2022 09:00 AM PDT

The GDP (gross domestic product) statistic portrays a view that the key driving factor of economic growth is not the production of wealth but rather its consumption. Instead, it is a calculation of the value of final goods and services produced during a particular time interval, usually a quarter or a year. Since consumer outlays are the largest part of the overall demand, it is held by many commentators that consumer spending is the key driver of economic growth.

All that matters in this view is the demand for goods and services, which in turn will give rise almost immediately to their supply. Because the supply of goods is taken for granted, this framework ignores the various stages of production that precede the emergence of the final good.

In the GDP framework goods emerge because of people's desire to purchase goods. However, it is not enough to have demand for goods—one must have the means to accommodate purchases. The means are various final consumer goods that are required to sustain individuals in the various stages of production.

The key source for the means of sustenance is individuals' savings. For instance, John the baker produces ten loaves of bread and consumes two loaves of bread. The unconsumed eight loaves of bread constitutes savings. John the baker could exchange the saved eight loaves of bread for the services of a technician in order to improve his oven—i.e., the improvement of his infrastructure. With the help of an improved infrastructure, John could increase the production of bread—increasing economic growth. Note that the eight saved loaves of bread sustain the life and well-being of the technician while he enhances the oven.

Savings determine future growth. If a strengthening in economic growth requires a particular infrastructure while there are not enough savings to make such an infrastructure, then economic growth is not going to emerge. The GDP framework cannot tell us whether final goods and services that were produced during a particular period are a reflection of wealth expansion, or because of capital consumption. 

GDP and the Real Economy: What Is the Relationship?

There are difficulties calculating real GDP. To calculate a total, several things must be added together, and they must have some unit in common. However, it is not possible to add refrigerators to cars and shirts to obtain the total of final goods. To overcome this difficulty, economists employ total monetary expenditure on goods, which they divide by an average price of those goods. It is however not possible to calculate the average price.

Suppose two transactions were conducted. In the first transaction, one TV set is exchanged for $1,000. In the second transaction, one shirt is exchanged for $40. The price or the rate of exchange in the first transaction is $1000/TV. The price in the second transaction is $40/shirt. In order to calculate the average price, we must add these two ratios and divide them by 2. However, $1000/TV cannot be added to $40/shirt, implying that it is not possible to establish an average price.

The employment of various sophisticated methods to calculate the average price level cannot bypass the essential issue that it is not possible to establish an average price of various goods and services. Accordingly, various price indices that government statisticians compute are simply arbitrary numbers. If price deflators are meaningless, then so is the real GDP statistic.

Since it is not possible to quantitatively establish the status of the total of real goods and services, one cannot take seriously the various data like real GDP that government statisticians generate. The concept of GDP gives the impression that there is such a thing as the national output. In a market economy, however, wealth is produced by individuals and belongs to them independently. According to Ludwig von Mises, the idea that one can establish the value of the national output or what is called the GDP is farfetched:

If a business calculation values a supply of potatoes at $100, the idea is that it will be possible to sell it or replace it against this sum. If a whole entrepreneurial unit is estimated at $1,000,000 it means that one expects to sell it for this amount, the businessman can convert his property into money, but a nation cannot.

So what are we to make out of the periodical pronouncements that the economy, as depicted by real GDP, grew by a particular percentage? All we can say is that this percentage has nothing to do with real economic growth and that it most likely mirrors the pace of monetary pumping. Since GDP is expressed in dollar terms, it is obvious that its fluctuations will be driven by the fluctuations in the amount of dollars pumped into the economy. From this, we can also infer that a strong real GDP growth rate likely depicts a weakening in the process of wealth formation.

Once one realizes that so-called real economic growth, as depicted by real GDP, mirrors fluctuations in the money supply growth rate, it becomes clear that an economic boom has nothing to do with real economic expansion. On the contrary, a boom leads to real economic contraction, since it undermines the pool of wealth, which is the heart of actual economic growth.

Since the GDP framework assumes the central bank can cause real economic growth, most commentators slavishly follow this narrative. Much of the so-called economic research produces "scientific support" for the viewpoint that monetary pumping can enable the economy to grow. What these studies overlook is that no other conclusion can be reached once it is realized that GDP is a close relative of the money stock. 

Why Do We Need Information on Economic Growth?

One is tempted to ask why it is necessary to know the growth of the so-called "economy." What purpose can this type of information serve? In a free economy, this type of information would be of little use to entrepreneurs. The only indicator that any entrepreneur would rely upon is profit and loss. How can information that the "economy" grew by 4 percent in a particular period help an entrepreneur generate profit? 

What an entrepreneur requires is not general but rather specific information regarding the demand for a specific product, or products. The entrepreneur himself has to establish his own network of information concerning a particular venture.

Things are different, however, when the government and the central bank tamper with businesses. Under these conditions, no businessperson can ignore the GDP statistic since the government and the central bank react to this statistic by means of fiscal and monetary policies.

By means of the GDP framework, government and central bank officials generate the impression that they can navigate the economy. According to this myth, the "economy" is expected to follow a growth path outlined by omniscient officials. Thus, whenever the growth rate slips to below the outlined growth path, officials are expected to give the "economy" a suitable push. Conversely, whenever the "economy" is growing too fast, the officials are expected to step in to cool off the "economy's" growth rate.

If the effect of these policies were confined only to the GDP statistic, then the whole exercise would be harmless. However, these policies tamper with activities of wealth producers and thereby undermine people's well-being. Likewise, by means of monetary pumping and interest rate manipulation, the Federal Reserve doesn't help generate more prosperity, but rather sets in motion "stronger GDP" and the consequent menace of the boom-bust cycle that results in economic impoverishment.

Conclusion

The GDP statistic provides an illusory frame of reference to assess the performance of government officials. Movements in GDP however, cannot provide us with any meaningful information about what is going on in the real economy. If anything, it can actually provide us with a false impression. A strong GDP growth rate in most cases is likely to be associated with the intensive squandering of the pool of wealth. Hence, despite "good GDP" data, many more individuals may find it much harder to make ends meet.

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Mark Packard: How Entrepreneurs Create Value

Posted: 19 Jul 2022 08:15 AM PDT

There is an excellent, deeply researched, Austrian economics-founded theory of customer value: the value learning cycle, which we explored thoroughly in Episode #178 (Mises.org/E4B_178). How do entrepreneurs and executives apply that theory to create customers, delight them, and grow strong brands and businesses? That's the subject of the second part of Mark Packard's business handbook for value creation, Entrepreneurial Valuation: An Entrepreneur's Guide To Getting Into The Minds Of Customers (Mises.org/E4B_179_Book).

Key Takeaways and Actionable Insights

Entrepreneurs can't directly access the customer's mental model, but they can apply empathy to run simulations.

Entrepreneurial empathy is the ability to see the world through the mental model of the customer. We all see the world through mental models rather than directly, and each of us has our own, unique mental model. But mental models can also be shared and aligned. A mental model is a way of thinking about real situations or about the real world. It's quite possible to describe someone else's mental model. We can first ask them questions ("How do you think about your current situation?" "What do you do when the car you drive gets to 50,000 miles on the odometer?") and then run hypotheses or ideas through the model that emerges ("How do you like this?", "How does this make you feel?", "Would you buy this product?")

Empathy is knowledge-based, and therefore can be practiced by any entrepreneur.

It's not the case that some people are more capable of empathy than others. Since empathy is knowledge-based, it can be learned, developed, and trained. It's a process of filling different buckets of knowledge about your customer. There's factual knowledge about them, as well as factual knowledge about their consumption or usage (e.g., location, frequency, any reports, or ratings they've provided). And then there's experiential knowledge — what an experience felt like to them.

Only the customer has this experiential knowledge, only they can feel it. But if the entrepreneur can understand the customer's mental model, it's possible to simulate what that experience might feel like — feel what they feel. It's possible to get closer and closer by experiencing it yourself: eating the food you're offering them or the beverage you've designed, using their mental model rather than your own. The customer's experiential knowledge is tacit — it can't be communicated directly — but entrepreneurs can get closer to it through simulation, and interpret it through empathic technique.

Be aware that there is always the risk of what Mark calls interpretive loss — we listen or observe but we don't interpret the data properly or fully. Our downloadable pdf provides direction on where interpretive loss occurs and how to safeguard against it.

There are some techniques to reinforce the accuracy of empathic investigation.

  • Lead users: In every category, there are users who feel needs and experience unsatisfaction / dissatisfaction more intensely. Give investigative priority to them.
  • Contextual in-depth interviews: Communication can be more productive using specific techniques from our E4B tools library. The contextual in-depth interview technique is one of our useful tools.
  • Ethnographic deduction: Ethnography is the technique of observing users in action. It's a better tool than a survey or questionnaire — what users do is more informative than what they say when answering surveys. Researchers deduce motivations from observation.
  • Behavioral data: Some data streams can be the equivalent of ethnography — observing users buying or searching as an indicator of their needs, preferences, and concerns.
  • Entrepreneurs can also learn from themselves: We are all both consumers and producers. In the categories that are most important to you, observe your own behavior as a user. Be aware of your concerns as a customer. Make your empathy channel customer-to-customer.

From value propositions to innovation.

Developing a value proposition is a problem-finding process. Designing an innovation is a problem-solution process.

Problem-finding is the development of knowledge of a problem to be solved from the customer's perspective, using the experiential learning from the mental modeling exercise. A problem is not the same as a need — it's a specific gap in the solution landscape of products and services from which the customer can choose, a gap that can be filled with a new solution yet to be identified but capable of identification.

Problem-solving is the application of resource knowledge and technical knowledge to identify a new solution. The entrepreneur must navigate multiple uncertainties to arrive at a solution — demand uncertainty (is there real demand?), technical uncertainty (will it work?), resource uncertainty (will I be able to gather the resources to get to a solution?), capability uncertainty (can I do this?), and competitive uncertainty (will someone else beat me to it?).

Mark's book includes a multi-step process for problem-solution creativity. One of the most interesting is knowledge combining.

What's a pancake boat? It's a combination of two very basic words and ideas that represents the potential for something new. Perhaps a very flat-profile boat for floating under low bridges. Or a breakfast barge touring the harbor. The point is the combination. When entrepreneurs can combine technological knowledge with problem knowledge, it's possible to invent a new solution without inventing a new technology.

Mark has two suggestions to help with knowledge combining. One is to become interested in technologies. If you are having a hard time devising a solution, it's probably because you are not familiar enough with technologies that are already available to do so. Find tech websites that can keep you up-to-date on the latest discoveries and applications. The more you understand about the properties and capabilities of resources and technologies, the better you can leverage those properties and what they do.

The second suggestion is a specific method. List as many different resources, technologies, and skills that you know about — software skills, hardware skills, people skills, technologies you've worked with, processes you've worked with, etc. Keep the list updated.

Then turn to the problem you are trying to solve. Mentally step through all the resources on your list and bring each of them into active memory. Try to think of a possible solution using each one. Keep going through the whole list. You're bringing technical knowledge schemas forward while holding your problem knowledge in active memory.

Do any of the solutions stand out? Are there any that are truly outside-the-box? Are any of them impossible with current technology? That's good. Do more research. You might find a breakthrough answer.

It takes time, commitment, and resources, but when you are passionate about the entrepreneurial process the effort will pay off big time.

Entrepreneurs get inside the mind of the customer to make the world a better place.

The goal of entrepreneurship is to enhance and improve the state of well-being experienced by customers. To achieve this goal, entrepreneurs aim to understand the customer's mental model, and run creative solutions — potential futures — through it to simulate the customer's new experience. It's a counter-factual exercise, but entrepreneurs can improve their capacity, and their odds of success, with practice, commitment, and the use of some of the cognitive techniques Mark Packard recommends.

Additional Resources

"Contextual In-depth Interview Technique" (PDF): Mises.org/E4B_179_PDF

"Interpretive Value Learning" (PPT): Mises.org/E4B_179_PPT

Entrepreneurial Valuation: An Entrepreneur's Guide To Getting Into The Minds Of Customers by Mark Packard: Mises.org/E4B_179_Book

Federalism, Not Centralization, Is the Way out of the Current Conflicts

Posted: 19 Jul 2022 06:15 AM PDT

Since the overturning of Roe v. Wade, pundits on the Left have demanded even more centralization of government. But federalism is the best way forward.

Original Article: "Federalism, Not Centralization, Is the Way out of the Current Conflicts"

This Audio Mises Wire is generously sponsored by Christopher Condon. 

Covid-19 and the Continuing Erosion of Private Property Rights

Posted: 19 Jul 2022 04:00 AM PDT

This article is the second in a two-part series. Check out part 1 here.

Even though the downhill trajectory we've seen over the last decades in terms of property rights is bad enough, nothing could have ever prepared us for what the covid-19 crisis would bring. Even those of us who have read enough history to know that there's really no line that the state will not cross in its fervent pursuit of absolute power were sincerely surprised. How could the ruling elite deny us our birth given right to own our own body and mind? How could we forget the principles of the Enlightenment and what it means to live in a society based on personal freedom? If we are not allowed to own our own body and mind, then the concept of private property does not exist any longer.

It's one thing to persuade millions of hardworking citizens to fork over a large part of their salaries to the state every single month, to pay exorbitant fees simply to take ownership of the home their parents left them after they passed away, or to pay a toll every time they wish to drive on a road that their money built and maintains. It's quite another thing to be able to convince them that closing their businesses and being forbidden from going to work to put bread on the table is "for their own good."

During the last two years, we witnessed an extraordinary shift the likes of which hasn't appeared in history books in times of peace. The state, in most of the Western world, abused all the power and the leverage that it had accumulated over the governed, and the results were truly shocking.

Much like that frog in the simmering pot, we found ourselves at the boiling point, seemingly overnight. And the most striking thing about this entire pandemic ordeal, is that governments, the world over, have come out of it looking like Robin Hood instead of the sheriff of Nottingham.

With substantial assistance from mainstream and social media, the vast majority of the population remembers all the "covid relief" payments and all the handouts, once again erroneously classifying them as "free." As for the revenue losses, the jobs that evaporated during the lockdowns, and the extreme distress and uncertainty countless households faced, all that was chalked up as the virus's fault, as though it were covid-19 itself that forced millions of business closures.

The lessons that we learned during the pandemic must never be forgotten. For one thing, with autumn just around the corner, we could very well have a repeat of all the restrictions and enter "season 3" of the covid saga. In Europe, I recently saw mainstream news stories about the threat posed by the "omicron 5" covid variant (and since I tend to avoid these news sources in general, I suppose I missed omicrons 2, 3, and 4, or perhaps they were not as civilization-ending as number 5).

Come September, once high tourist season is over, there is little doubt another variant will emerge. Maybe omicron 6—or perhaps this new variant will be menacing enough to merit its very own Greek letter. Either way, by this point, nobody should be surprised if we see another massive wave when it comes to the restriction of our individual liberties.

What Lies Ahead

Regardless of what happens next with the covid situation, however, the primary reason why we should all remember the trespasses and the overreach we saw during the last couple of years is that domino effect of which we spoke in part 1. The ride is nowhere near over. Given that the vast majority of the population happily and eagerly made that Faustian deal of trading freedom for the illusion of safety, there is no telling how far the state will go tomorrow, exploiting that very same weakness.

As the covid ordeal clearly demonstrated, property rights really do represent that first domino when it comes to defending all the rest of our liberties. And as too many of our fellow citizens demonstrated, the "wise majority" is all too willing to allow the expropriation of their neighbors, and even of themselves, if they believe this sacrifice will protect them from all the evils and the dangers of life. Of course, this is nothing more than wishful thinking, but it is so widespread, so strongly encouraged, and so normalized that all governments have come to rely on it to garner public support, and justifiably so.

And thus, we find ourselves today in the unenviable position of having to ask what threat, what "danger," what "crisis" the state might use next in its protection deal with the citizenry. And what will be the price for this protection? For the "war on terror" and the "war on drugs," we gave up our communications privacy, our banking secrecy, and a large part of our property rights—at least the freedom to transact. For the "war on covid," we gave up whatever remained, including the right to work, the right to assemble, the right to bodily integrity, and a good portion of our freedom of speech—what was left of it, anyway.

And now there is another engineered new "old" war on European soil: West against East, Europe against Asia. What belongs together must not come together, per North Atlantic Treaty Organization doctrine. And this war involves real armies with real guns, real casualties, and real devastation and destruction. The horrific images that are on a loop on most mainstream TV stations clearly point to a tangible threat, to actual, direct danger that one can see, unlike the invisible covid bug or some Mexican drug cartel far, far away. The kind of fear that the Russian army can inspire has the potential to affect far more citizens' judgment and short-circuit their critical thinking. After all, what else can protect you from the threat posed by another state besides your own state?

It remains to be seen to what lengths governments will go this time, but if there's one thing we know for sure, it's that property rights will be the first of our liberties to come under fire once again. As we already saw with the sanctions, it was bank accounts, assets, and gold holdings that were primarily targeted—and not just those of Russian government entities, but also of individuals that were perceived to have links with the Russian state.

What comes next is anyone's guess, but for all rational investors, savers, and ordinary citizens, planning ahead is most likely going to prove essential.

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