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Mark Skousen: Production Drives Economies, Not Consumption

By: Belén Marty - @belenmarty - Nov 25, 2014, 10:27 am

EspañolUS economist Mark Skousen has worked for the CIA, headed up nonprofits, and taken leading corporate positions. But as a former professor at New York’s Columbia University, and a current presidential fellow at California’s Chapman University, he’s equally at home in academia.

Skousen seems at ease as he takes a seat in a conference room at the Catholic University in Rosario, Argentina, fresh from speaking at November’s International Conference on Austrian economics. It doesn’t take long for him to extend the PanAm Post an invitation to participate in the next FreedomFest, an annual gathering of “free minds” in Las Vegas, which he produces.

During his conference speech, he proudly told the audience of a lunch he had with Milton Friedman, and an anecdote which was met with laughter and applause. Skousen offered to pay the bill, telling Friedman that his famous axiom — “there’s no such thing as a free lunch” — was thereby disproved. Friedman replied,”Well, it wasn’t free at all. I had to listen to you for two hours.”

The PanAm Post was here to discuss an innovative new proposal in Skousen’s conference speech. Essentially, the economist argued that governments, in their reliance on the traditional GDP metric, are failing to accurately measure national economies. Instead, a new measurement — already being published by the Bureau of Economic Analysis in the United States — might well prove to be the future.

Why should we measure the economy with Gross Output (GO) rather than with GDP?

Normally, GDP is what everybody uses to represent the economy. The problem is that GDP measures only the value of the finished product. It’s like the end product, but how did you get to the end product? What production process, what invention, what entrepreneurship, what investment went into create this product? That requires money, time, creativity, all of the great thinkers like Steve Jobs, that every country has, who put in a lot of work and effort. How do we measure that?

Right now we have a wonderful measure, GDP, to measure the finished products, good and services that we use, but we need something to describe the “make” economy — the production side of the economy. That is where GO comes in play. I’ve been advocating it since I wrote The Structure of Production in 1990, and now it’s become a reality.

In the United States we have quarterly data [on GO] that is coming out, and I think most countries will eventually move towards this measure of the total economy.

What makes this way of measuring the economy revolutionary?

I think is revolutionary because when GDP came out in the 1940s it was incomplete; there are a lot of problems with just using GDP. It implies that consumption drives the economy, because consumer spending is the biggest sector of the GDP. That’s a mistake, because all studies show that economic growth is a result of technology, productivity, and all of these entrepreneurs that drive the economy.

The consumer responds and chose between what products are available and so forth. But they are not very creative. That’s where an entrepreneurial, and inventive class of people, come in.

There’s nothing wrong with GDP per se. It’s just incomplete, so we need a balanced approach of showing the “make” economy and the “use” economy and having the entire process of production and consumption being measured.

This is creating a full view of the economy, before we just had an incomplete view of the economy. In that sense is very revolutionary because it took 50, 60 years for people to figure out that we needed to measure the production side.

Do you believe this will have an impact on economic policy?

It will, because you realize now that the business sector is now more important than the consumer side of the economy. They are both essential, because you need to have a consumer to buy the product, but who comes up with the product?

Steve Jobs often quoted Henry Ford, who said, “If I’d asked the consumer what they wanted, they’d have said ‘a faster horse.'” Steve Jobs and others would say, “Listen, we need to invent new products,” but how do you create new products? It comes from the inventive minds, the production side of the economy.

So, in your opinion, what drives the economy?

What drives the economy is not so much the consumer but the business entrepreneur, the capitalists who provide the money to this entrepreneur versus that entrepreneur. There is limited supply of capital available, and the entrepreneur and the venture capitalists have to decide whether they will give the money to this person or that money.

It has become a little bit easier to raise money but the business side needs to develop more. We need to encourage entrepreneurship, we need to increase the profitability of firms, because if companies become more profitable they pay their workers more, produce more products and a greater variety of quality and quantity. That’s what we want.

We’re holding back if we don’t encourage businesspeople. We need lower taxes, less regulation or better regulation, rather than heavy and excessive regulation. We need more free trade.

What would you say to Walmart employees that are asking for a minimum wage salary of US$15 per hour?

There are many voluntary ways that companies can pay their workers more. I think it’s a big mistake to move towards mandatory, government-imposed minimum wages because that’s interfering with an extremely important relationship: labor and capital. I think it should be the last resort and not the first resort.

So, as I tell my students, there are lots of ways to get a raise: one is to provide a benefit to the company, if you have a way to save money or if you have a way to make more money. If you are more valuable, you can get a raise.

The second one is training and education. All studies show that people that get advanced degrees by going to college and university or special training … become more skilled, so you’ll get paid more because you’re more valuable to your company.

The third one is that if companies become more profitable they have more money to give to the workers. So if Walmart becomes more profitable, it increases its earnings and they can pay their workers more.

It is true that Costco has increased [its profits], they have a billion dollars in cash and they increased their payments to their workers. However, the profit margins are lower than Walmart, so they’re paying a price for doing it. Somehow Walmart and Costco need to earn more money and become more profitable.

One thing that many supply-siders have advocated is a lower corporate tax rate in the United States, since our corporate tax rate is quite high. Canada right now has a 15 percent corporate tax rate versus our 35 percent, so that’s why many companies are considering moving to Canada.

Belén Marty Belén Marty

Belén Marty is the Libertarian Latina, a journalist based in Buenos Aires, Argentina. She has lived in Guatemala, Jordan, the United Arab Emirates, and the United States and is a former candidate for local office with Argentina's Libertarian Party. Follow @BelenMarty.