How Economics Failed The Economy

Tyler Durden's picture

Authored by Umair Haque via Eudaimonia blog,

When, in the 1930s, the great economist Simon Kuznets created GDP, he deliberately left two industries out of this then novel, revolutionary idea of a “national income”: finance and advertising.

Don’t worry, this essay isn’t going to be a jeremiad against them, that would be too easy, and too shallow, but that is where the story of how modern economics failed the economy? - ?and how to understand how to undo it? - ?should begin.

Kuznets’ logic was simple, and it was not mere opinion, but analytical fact: finance and advertising don’t create new value, they only allocate, or distribute existing value? - ?in the same way that a loan to buy a television isn’t the television, or an ad for healthcare isn’t healthcare. They are only means to goods, not goods themselves.

Now we come to two tragedies of history.

What happened next is that Congress laughed, as Congresses do, ignored Kuznets, and included advertising and finance anyways for political reasons - after all, bigger, to the politicians’ mind, has always been better, and therefore, a bigger national income must have been better. Right? Let’s think about it.

Today, something very curious has taken place.

If we do what Kuznets originally suggested, and subtract finance and advertising from GDP, what does that picture - a picture of the economy as it actually is - reveal Well, since the lion’s share of growth, more than 50% every year, comes from finance and advertising - whether via Facebook or Google or Wall St and hedge funds and so on? - ?we would immediately see that the economic “growth” that the US has chased so desperately, so furiously, never actually existed at all.

Growth itself has only been an illusion, a trick of numbers, generated by including what should have been left out in the first place. If we subtracted allocative industries from GDP, we’d see that economic growth is in fact below population growth, and has been for a very long time now, probably since the 1980s -  and in that way, the US economy has been stagnant, which is (surprise) what everyday life feels like.

Feels like. Economic indicators do not anymore tell us a realistic, worthwhile, and accurate story about the truth of the economy, and they never did?—?only, for a while, the trick convinced us that reality wasn’t. Today, that trick is over, and economies “grow”, but people’s lives, their well-being, incomes, and wealth, do not, and that, of course, is why extremism is sweeping the globe. Perhaps now you begin to see why the two have grown divorced from one another: economics failed the economy.

Now let us go one step, then two steps, further. Finance and advertising are no longer merely allocative industries today. They are now extractive industries. That is, they internalize value from society, and shift costs onto society, all the while, creating no value themselves. The story is easiest to understand via Facebook’s example: it makes its users sadder, lonelier, and unhappier, and also corrodes democracy in spectacular and catastrophic ways. There is not a single upside of any kind that is discernible - and yet, all the above is counted as a benefit, not a cost, in national income, so the economy can thus grow, even while a society of miserable people are being manipulated by foreign actors into destroying their own democracy. Pretty neat, huh?

It was because finance and advertising were counted as creative, productive, when they were only allocative, distributive that they soon became extractive. After all, if we had said from the beginning that these industries do not count, perhaps they would not have needed to maximize profits (or for VCs to pour money into them, and so on) endlessly to count more. But we didn’t. And so soon, they had no choice but to become extractive: chasing more and more profits, to juice up the illusion of growth, and soon enough, these industries began to eat the economy whole, because of course, as Kuznets observed, they allocate everything else in the economy, and therefore, they control it. Thus, the truly creative, productive, life-giving parts of the economy shrank in relative, and even in absolute terms, as they were taken apart, strip-mined, and consumed in order to feed the predatory parts of the economy, which do not expand human potential. The economy did eat itself, just as Marx had supposed? - ?only the reason was not something inherent in it, but a choice, a mistake, a tragedy.

Again, that is just a story - so let us extract the key principle, which is the main mistake, the way in which economics failed the economy. Economics - let me be careful here, and say American economics? - ?made the grave mistake of supposing that whatever could be traded should be traded, and then counted as a benefit, always, to the economy. But that is patently foolish. You and I can buy guns, and while guns might help a few people hunt for food, mostly, they only help people kill. One only has to take a cursory glance at America’s off-the-charts murder rates and killing sprees. And so the net cost of guns is life itself. What can be traded isn’t always what should be traded, and even less so should what should be traded be counted only and always as a pure benefit to the economy.

I have said that the US is, ironically, the new Soviet Union, its precise mirror image. Here you see what I mean in the purest and truest way. In the Soviet Union, trade of any kind was strictly forbidden, because it was seen to always be a bad, a liability, and therefore, only the government should allocate goods. American economics made precisely the mirror image of the same mistake: trade was always assumed to always be a good, in nearly every possible circumstance and case (except those against which moral crusades were launched, like sex and drugs), and was and is always counted as a benefit, even when it shouldn’t be, just as in my tiny examples of finance and advertising (and therefore, only markets can allocate resources to society’s benefit).

Do you see how both are precise mirror images of one another? Here we have two forms of exactly the same kind of extremism: one assumes that trade is always bad, the other, that it is always good, but both assume, and assume similarly totalist positions. And in that way, economics went Soviet, and so now the West is trapped in an ideological bubble, just like the Soviet Union, caught fast like a helpless fly in a web of dead theories that fail utterly to explain its own decline and stagnation, and so mystified pundits and theorists prattle on, but nothing much seems to change, or even to be understood any better than it was last year, or the year before that, even though each year the toll of those very failures mounts and mounts.

Yet the truth is simply this. Reality, like life, is messier, subtler, more complicated than saying a thing is all good or all bad. To say that a thing is always good or bad is to commit the same error: to suppose that there is no room for negotiation, for investigation, for innovation, for this difficult project that we call society to need to be, to evolve, or to grow, at all. Society can only really exist when the boundaries of what is good and bad must constantly be renegotiated, rediscovered, reimagined, and understood anew. In precisely that way, the good in society grows, and the bad, perhaps, if not shrinks, then at least doesn’t grow along with the good. And that is how prosperity truly happens.

The good is only, to the limited extent that we can see it, for human are always blind, whether life is flourishing, growing, and developing, or not. Yet life expectancy is falling, people don’t expect the next generation to do better, there are regular mass killings, and so forth, in America. Life is not flourishing, growing, or developing in a single way that I or even you can readily identify or name. And yet, the economy appears to be growing, because purely allocative and distributive enterprises like Uber, Facebook, credit rating agencies, endless nameless hedge funds, shady personal info brokers, and so on, which fail to contribute positively to human life in any discernible way whatsoever, are all counted as beneficial. Do you see the absurdity of it?

And so. It’s not a coincidence that the good has failed to grow, nor is it an act of the gods. It was a choice. A simple cause-effect relationship, of a society tricking itself into desperately pretending it was growing, versus truly growing. Remember not subtracting finance and advertising from GDP, to create the illusion of growth? Had America not done that, then perhaps it might have had to work hard to find ways to genuinely, authentically, meaningfully grow, instead of taken the easy way out, only to end up stagnating today, and unable to really even figure out why yet.

And yet, perhaps, you and I can learn from that very mistake. In the societies, economics, corporations, cities, towns that we build tomorrow, we must learn to consider the good in more sophisticated, subtle, and most important of all, more authentic ways than we did yesterday. Economics failed the economy by telling us that everything that could be traded should be traded, since trade is always beneficial to humankind, even though even a child can see that people are fleeced and hoodwinked into buying every kind of foolish device, from guns to immortality potions, every day since time itself began. They are really buying the same thing: a salve for the desperation of lives that have gone nowhere.

If we really wish to help them, the answer is not simply assuming the problem away, as both the Soviet Union and then America, ironically, following in the footsteps of its mortal enemy, did, by saying any kind of human activity is all bad, or all good - for then we have done nothing more than pretended to solve a problem, which is the most foolish blindness of all. Problems that we have pretended to solve will only have the freest license of all to grow, just as advertising and finance, by being imagined to be productive when they were only allocative, soon turned extractive, being given free rein when they should have been if not reined in, then at least set to pasture. To genuinely stretch, become, develop, and grow is the same for economies as it is for lives as it is for societies, too: doing the difficult work of reckoning imperfectly with the good, and the bad, that dwell together, somehow, in each and every human heart.

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junction's picture

Economics is now more a failed religion than a science.

Manthong's picture

“1930s, the great economist Simon Kuznets created GDP,” 

Excuse me, when I was just a kid it was GNP,

Actually that was in my teens before the banks destroyed all concepts of capitalism in favor of predatory financial practice.

 

..but Voodoo Economics became the reality of the banks. 

 

and oh.... BTW

I have a speedometer for money velocity... I know that mine is zero nowadays and I am pretty sure that is the norm in money creation goes to zero zilch squat nada at an accelerating pace;.

 

J S Bach's picture

The "American Dream"'s demise began on December 23rd, 1913.  Once our money officially became our master and not simply a tool of barter, those dreams were kaput.  In fact, from that time on, it became inevitable that only a "nightmare" could possibly result.  The rotten fruits of debt-based currency became the established "system", which has been the root cause of all of our societal, cultural, moral and spiritual woes ever since.  The solution is simple, folks.  Do you have the will to execute it?

Manthong's picture

 

I grok this big time, but likely few others do………

Everything in this (not capitalist)  financial debt system ….. is…… debt

The controllers  in banks and government want us all to owe them  everything we produce….

The best place to go to see it in advanced practice is the UK….. you do not want to be a lower or middle class person there…. Because you are F’d.    or to rephrase that concept… Screwed, Blued and Tatuooed,

It is the precursor to what will happen here if we do not fix it.

 

SMG's picture

If you would subtract REAL inflation as well from GDP, you would see the economy has been shrinking for decades. 

Endgame Napoleon's picture

If you subtract all the government employees with undergraduate and advanced degrees from the income statistics, only counting the incomes of people who truly depend on the [free market] for all of their household income, you will find out the real market value of a college degree, which used to be a signifier of upward mobility. You will also need to subtract the many moms with safe government jobs, like secondary school teaching, which, according to multiple superintendents of schools, is “the perfect second income for a mom,” married to men who work in the private sector.

In a mostly unmarried society, if you focus on per capita income, rather than only reporting median FAMILY income, you will see how impossible it is to even rent a modest apartment on the earned-only income from a full-time job in an economy that is mostly churning out part-time, low-wage, temp and high-turnover jobs, especially in states like mine, KY, Texas, etc., where per capita income is right at $19,000 per year, meaning half of all people make even less than $19k. And you cannot live on $19k.

If taxpayers stopped paying single moms and immigrant households with sole, male breadwinners for having sex and reproducing, giving them free food, free housing, monthly cash assistance, electricity assistance and child-tax-credit welfare checks between $3,337 and $6,269 for working 20 hours per week and staying below the less-than-$1,000-per-month, earned-income limit for welfare, the outcry against this system would be much louder. And it is already loud. That is why politicians keep paying them, more and more, for sex and reproduction.

This article is so right; the economic numbers are distorted. They are distorted in many ways, including the one he mentioned.

The advertising sector is selling hardcore goods made by productive humans, though—goods made in China and other countries with low-cost labor. Advertising would support American production, making sure that the producers were rewarded for their efforts if economic elites in this country had any concern for their own country.

Now that robots and computer programs are replacing human workers, not just in manufacturing but in the financial services, it adds another layer of distortion. What production will the advertising sector support in this new era? It won’t be the low-cost global labor force and the massive profits of a few global elites at the expense of the US middle class.

It will be the non-consuming mega producers, the robots.

In the lower levels of financial services—the back offices and the sales-related offices that support the financial wing of this empty-vessel economy—the 99% mom staffs, making between $9 and $12 per hour, are already indulged in MASSIVE amounts of absenteeism.

Why?

Because, they have unearned income from spouses, child support checks or monthly welfare and child tax credits that enables them to work for low wages, but their absenteeism-friendly, back-watching, mom-gang jobs will soon be automated out of existence, making you wonder who these advertisers, supporting the robotic factory production, are going to sell their robot-made products to.

I guess they can market it all to the rich working families at the top of the economic food chain and the so-called working families being paid by government to create more humans to compete with robots for jobs at the bottom of the economic ladder. That is basically what they do now, with the upscale retailers & upscale financial-planning products and the poverty industry, serving the two groups at the top and the bottom, and the middle-class retailers going down. As the part-time, temporary, low-wage jobs are automated out of existence, the childbearing-age, female consumers at the bottom will need for all of their income to come as a pay-per-child-produced reward from government for creating more humans to compete with robots for jobs. Most of the rest of us will starve.

Justin Case's picture

We are all assets of the corporation USA Inc. and the Gov't borrows money on it's assets future labour output contribution to the economy.

Once you tell a lie, you have to keep creating lies to cover the previous one. I couldn't believe they added prostitution and narcotics to the GDP years back. Then they point the finger at China and say "look over there, they are corrupt" when merica is the leader in corruption that is worse than any third world country. drugs, money laundering, murder, torture, kidnapping, fraud. covert operations, interferance in elections of other countries, illegal sanctions, regime change, crimes against humanity, violation of international law and much moar, but you get the picture. They like to put their finger at the countries they can't conquer or demonize the leader to do a regime change.

BOPOH's picture

Murika is a global racketeer. Sucking blood from the whole world and this is still not enough?

Time to privatize the Sun, why it still shines for free and doesn't plugged in our GDP???

We need a new legislation and we have to act decisively...

Because of our Murika is the center of the universe, God damn, and God's choosen people have choosed us to be indispensible nation on this Earth...

Justin Case's picture

Then they ask people to stand when the national anthem is played? Why, are they proud of what thier Gov't has done to them and the rest of the world? It's all a facade to hide the criminal activities that are concocted in the epicenter of evil, DC.

adolphz's picture

Failed in the way most understand and use it. Give the Germans a chance to put the correct understanding 

XBroker1's picture

And considering the failure of 'scientism', that's a pretty low bar.

Blue Steel 309's picture

Economies is jewish quackery. There is nothing empirical about it. Nothing.

ebworthen's picture

Economists = our modern day Alchemists.

"Lead into Gold" didn't work back then either.

http://www.usdebtclock.org/

Assholes.

Winston Churchill's picture

Its a system backed by lead,not gold.

frank further's picture

I was unaware of that site, thanks for the link!

monk27's picture

Boy, those numbers seem to be spinning faster than ever... and, they all spin in the wrong direction !

Twee Surgeon's picture

Systemic fraud with a complicit Priesthood. Not hard to see.

HillaryOdor's picture

It sure is hard for a lot of people.  Look around you.  You don't have to look very hard.  They're all over the place, right here in the ZH comments section.

kermudgen's picture

It is hard for a lot of people and numbers grow each day.  

I can understand why young people are angry.  We have fucked up their future, financially and morally.  I just don't know if they realize why they're angry and to whom they should be directing that anger.  They're going to be really pissed when they finally figure out everybody has been lying to them and the got stuck with the check.  Too many people too few meaningful jobs.

 

 

Anonymous_Beneficiary's picture

God is dead and the politicians and economists are still quite busy trying to hide the body.

Giant Meteor's picture

"God is dead "- Friedrich Wilhelm Nietzsche

"Nietzsche is dead" - God

VWAndy's picture

Ever played monopoly?  Did the banker win?

falak pema's picture

How do you define value?

Is writing a book value?

Is art value?

To the professional, advertising is creating a message like a book and creating art like a painting or photo.

To a financier an algo creates a mathematical model for defining tradeoffs between assets in a dynamic market of supply and demand. Its creating value until it becomes a bubble. But the bubble is a misuse of the model. It kills the use, like a misused instrument.

 

Captain Nemo de Erehwon's picture

There is no such thing as absolute value in a physical sense for surplus or non-essential items. The same splotch of paint on a canvas can be worth millions as long as everyone thinks it dripped off of a famous artist's brush, and can go to zero if everyone learns it came from someone else. From a personal-preference viewpoint, if you like a painting it has value to you. If you hate it enough, it has value to you because you might be willing to buy it to burn it to prove your point. That is why marketing and advertising create value ...they make non-essential things desirable. It makes people want to pay more for something than they would, otherwise.Then they need to find better jobs to fund their habits; need cars to get there so the auto industry and oil become valuable; and then with too many cars roads have be improved so construction companies become valuable; and then with a captive audience sitting in a traffic-jam, billboards with more advertising on them become valuable; and then wars need to fought to get more oil so the MIC becomes valuable and then resources need to be allocated "efficiently" so finance becomes valuable and then technology becomes valuable because it can make things more efficient, and then higher-education becomes valuable, and then everyone has to work harder and harder to keep feeding their money habit and service their debt till they no longer have time to admire anything and realize that even getting essentials has become increasingly difficult.

 

Justin Case's picture

Values continuously change with time and situations. As situations change the values change accordingly. Different places on earth have different values as well due to situations. Family values are what has been destroyed in merica, so value perceptions of everything have been distorted.

Late onset ADHD's picture

"How Economics Failed The Economy"...

the title of the article is hilarious...  sounds very much like the Heisenberg uncertainty principle... observe it and you change it... well, the cat is fucking dead kidz, just ask Schroedinger - he'll tell you or he won't - or can't...

debtor of last resort's picture

The American dream is like a Somali pirat take. As soon as you get in the way, your dream is over.

Pennywise drags you into the sewer when your dream gets real.

24Richie's picture

The most important part of GDP is Real Final Sales.

itstippy's picture

Today's "Middle Class" American households have fabulous lifestyles compared to 50-60 years ago.  They live in 2,500 sq. ft. houses with central heat and central air.  They drive beautiful automobiles, one for each driving member of the household.  They have expensive recreational toys - boats, motorcycles, ATVs, snowmobiles, fishing gear, golf clubs, camping gear, etc.  They have comfortable, new, fashionable clothes.  Their houses are filled with modern appliances and furniture.  They have three or four color TVs, computers, laptops, and fancy phones.  They take wonderful vacations every other year.  They send their children to college.  Many have grown children living at home doing nothing at all but eating and shitting and finding ways to amuse themselves.  And on, and on, and on.  All of this on a "Middle Class"' income.

My Parents didn't live this way.  My Grandparents certainly didn't live this way.  Judging by what I see with my own eyes, I'd say U.S. economic growth has been phenomenal over the past 50-60 years.  It's been driven by several major factors, including cheap energy and rapid innovation.  It most likely won't continue, and a lot of people may have to live like Grandpa did, which they'll hate, having experienced the good life.  But to say the U.S. economy hasn't expanded over the past 50-60 years is ridiculous.

Giant Meteor's picture

"Today's "Middle Class" American households have fabulous lifestyles compared to 50-60 years ago."

At what cost?

 

csmith's picture

Exactly. The inflation indicators (contrary to popular perception) have OVERSTATED inflation for decades, as the hedonic adjustments are not great enough to comprehend quality and feature improvements in manufactured goods, health care, telecommunications, etc. This means real growth has been far GREATER than reported, resulting in the changes you see with your own eyes. Our greatest problems today are boredom. lassitude, obesity, lack of curiousity and general failure of initiative in 60% to 70% of the population. NECESSITY truly is the mother of healthy growth and change.

Justin Case's picture

OVERSTATED<--- understated.

There are many distortions by Gov't. This has also kept real wages down. In order for the people not to feel that they aren't getting less for their labour, they allowed people to pull future income forward with cheap money, ZIRP. This has added to the distortion of asset values and a host of other damage and distortions. Everything is in a bubble of some sort. The economy is a debt bubble and so are assets. This was all extend and pretend. The cadaver died long ago but they keep the tubes attached to it as if it will spring to life at any moment. It's not going to happen. There is no way out of this financial bubble. Corporations are the biggest buyer of stock now, they are buying their own stocks back with ZIRP. This is to keep the EPS high to meet bonus tsrgets. Sales are actually falling. This is like fraud.

Drop-Hammer's picture

Yes, and all of this is financed and mortgaged with jew debt.  

BOPOH's picture

Fabulous murikan lifestyle is the following:

- Houses made out of recycled cardboard just to keep the TV receiver dry.

- "american" automobiles are all joke compare with authentic japanese cars (nissan skyline; toyota cresta, chaser, crown, etc.)

- expensive recreational toys are cheap, designed and built for use one time only

- clothes/shoes made of the cotton dust and recycled paper

- modern appliancies and furniture designed and built just for decoration

- computers, laptops and fancy phones are all made for endless replacement in motion.

And all of this crap is sold to consumer with 100s percent profit for corps, sales tax and dozens of other taxes to feed insatiable american bureaucracy.

peippe's picture

The difference from 50 years ago is the price of lifestyle.

The autos ain't $2,900. The lots aren't $2,400. (lakefront)

The gasoline isnt 29 cents/gallon and cigarettes are not 75 cents a pack.

You have to hustle these days to afford to die young & with all your illusions about life intact.

 

 

Captain Nemo de Erehwon's picture

Yep, children are the future: grown children living at home doing nothing at all but eating and shitting and finding ways to amuse themselves. But then ones with initiative, the more active ones, buy 17 houses in Vegas on a waitress salary ... and we know how that ends.

Of course there have been major improvements due to technology but things do not go linearly indefinitely. You could get a dirt-cheap cool cell-phone that has more computing power than all of NASA put together in the 90's, with a free, unlimited, data plan, but if you cannot call the doctor for an appointment because health care is simply out of reach how would that help? And what is the use of all the bells and whistles if you will only use it to ...hmm...text others on five different social media platforms all at once.Wait for the petro-yuan, or if that does not happen soon enough, to be replaced by AI and then find out there was a bug (or feature) in the programming and now the weaponized drones are on their way!

Let it Go's picture

Recently while grabbing a handful of junk newspapers for recycling I could not help but notice the headline, "Indiana Needs Immigrants For Growth." It should be noted the publication in which the article appeared was one of those small pesky unprofitable government supported rags distributed to spread propaganda on the local level.

It is very important people understand that economic growth does not equal economic strength. Quantity simply does not make up for poor quality, we are talking about two totally different animals.

Misdirected spending based on low-interest rates and Ponzi style financing create an economy that is built on sand and prone to failure when put to the test. The article below delves deeper into this subject.

  http://Economic Growth Does Not Equal Economic Strength.html

hongdo's picture

This article is a mumbo jumbo made up strawman.  

Let it Go's picture

As healthcare soars it feeds the illusion of growth however, what we are really seeing is a transfer of wealth from one sector of the economy to another. This healthcare spending has slipped into the false narrative of a "growing economy" spoken by people with a poor understanding of what constitutes real growth.

Money spent on healthcare feeds the illusion of growth by driving the GDP ever higher but like any tax it is really government taking more and more. This is much like another tax that is simply being recycled back into the system. The piece below exposes why labeling this as growth is so misleading.

http://Soaring Healthcare Sector Wrongly Feeds GDP.html

Giant Meteor's picture

Questions, questions ... always questions ..

Rick Cerone's picture

No, the universities who teach Economics failed.

But who cares anymore?

dlfield's picture

How economics fails is as all human-observation-based "science" fails.  Human observation is the only means and standard, therefore our Achilles' heel.

ElTerco's picture

Finance and advertising are a way to redistribute wealth from the masses to the few. They are flourishing because their reach is carefully orchestrated in government by the wealthy parasite class who are smart enough to buy the representatives.

adolphz's picture

5the problem is most finance and all marketing  is corrupt. The lemmings are gullible. 

adolphz's picture

Statements and predictions in markets should only be shared by analysts who have at least a 20 year  track record available to their followers. Only Shepwave has accomplished this to my knowledge,    the recent calls by them do raise questions ofor insider information. Until they screw me I am not worrisome. 

roddy6667's picture

Keep your spam off this site. Anybody who makes positive remarks about Shepwave here is just another account they have. Spam spam spam. Fuck off.

menchivist's picture

They are right.  Shepwave has been dead on in thier market calls.