F.A. Hayek would have been 114 years old today. To celebrate, here’s a set of videos in which Hayek is interviewed by, among others, Axel Leijonhufvud (!), Armen Alchian (!!), and James Buchanan (!!!). Or, if you prefer the written word, you can download Individualism and Economic Order for the low price of $0.
On Saturday, I teased a forthcoming post about whether “Eat your pizza or aggregate demand collapses” is a good argument to have with less-than-completely-hungry children at Chuck E. Cheese’s. The rest of the conversation will appear later this week, after my Principles of Macro and Intermediate Macro students have debated the merits and demerits of expansionary policy. Nonetheless, our trip raised an interesting question in light of last Tuesday’s visit from West Virginia University’s Andrew Young. Andy made a point that I remember Pete Boettke making in other contexts: Keynesian theory leads to Keynesian data; as he argues, the development of national income accounting proceeded on the basis of Keynesian assumptions about what should go where.* This complicates the job of one who might wish to run an empirical horse race between Keynesian, Austrian, and other business cycle theories to see which factors–malinvestment, collapsing aggregate demand, real shocks, regime uncertainty, financial fragility a la Hyman Minsky, I’m sure you can think of a dozen or so others, and here are some LearnLiberty videos in which Tyler Cowen explains competing theories–are most important for explaining business cycles. Andy’s visit and what he said about business cycles and measurement made me move “re-read NBER conference volumes 24 and 30 very carefully” closer to the top of my to-do list.
Measurement is obviously problematic. The BEA counts “education” as “consumption spending” (see Cowen & Tabarrok’s macro principles book, p. 103), for example, and this is definitely true for some students and some degrees. If people are in school to acquire human capital, then schooling should probably be counted as investment.
Here’s a question I put to my intermediate macro students yesterday: when I take my kids to Chuck E. Cheese’s, am I consuming or am I investing? It seems like “consuming” is the obvious answer. However, just as schooling can be used to build human capital, the time and energy we spend with our kids builds social capital. Presumably, this will pay off in higher future non-market consumption (a better relationship with my kids as such) and perhaps higher future market consumption (my kids are also potential future business partners). Measurements in which investment is classified as consumption and vice versa run the risk of being misleading.
Simplification is always and everywhere inevitable, differences in classification may not matter that much in a $14 trillion economy, and the national income accounts are good enough for government work. Things are definitely not always what they seem, though, and just as economics in the Austrian tradition takes an expansive view of human action, it should also take an expansive view of categories like “consumption” and “investment.” Indeed, there are probably several great dissertations waiting to be written on the theory and history of economic measurement. There’s also probably a grad student who is reading this right now and wondering what he or she should write about. If that’s you, then here’s a topic for your next paper. Get to work and change the world.
*-A qualification: this is not necessarily a bad thing. Indeed, I hesitate to write “Keynesian” because I’ve heard it used in a pejorative sense far too often.
READER COMMENTS
Jeff
May 8 2013 at 1:58pm
I, personally, use it as an epithet. As in “Keynes it! Where the hell have my car keys gone?”
Roger Sweeny
May 8 2013 at 2:53pm
Why does something have to be “consumption” OR “investment”?
I am reminded of the famous commercial. Two twins are arguing:
Twin 1: Certs is a candy mint.
Twin 2:Certs is a breath mint.
Announcer: Stop. You’re both right. New Certs is two mints in one. … two, two, two mints in one.
http://www.youtube.com/watch?v=E8zwnXjIjPM
Depending on the person, college could be mostly consumption, mostly investment, a lot of both (rare, but common among those who become college professors), or not much of either.
Art Carden
May 8 2013 at 3:40pm
@Roger: Great point. I usually reference the SNL “Shimmer: Floor Wax or Dessert Topping?” routine in this case, but fewer and fewer people get it. In fact, I think it’s actually older than I am.
John Thacker
May 8 2013 at 5:05pm
A lot of things are a little bit of both. Even people who believe strongly that universities are investment also generally concede (in my experience) that some of the gleaming luxurious student exercise facilities and so forth built in many universities are about consumption.
Our tax code recognizes this with some things; business meals, for example, are treated as 50% consumption, 50% investment in most cases, though at times they can be treated as 100% compensation (and thus not as investment.)
Ilya
May 8 2013 at 5:27pm
Art,
Do you know of a good source on wages and productivity between say 1870 and 1930? The Gilded Age. I’ve always been curious if they moved in tandem.
Jacob A. Geller
May 9 2013 at 5:51am
The universities issue alone is confounding. Think about all the stylized facts you hear about tuition inflation. Now ask whether it’s that the cost of an investment in human capital rising, or increased use of investment-consumption bundling. Now conclude that it’s both, really, but ask yourself what is the split? 50-50? 70-30? How has it changed over time?
Now think of all the econometric studies on education that rely on it being all investment…
Roger Sweeny
May 9 2013 at 12:28pm
The SNL Shimmer ad is, of course, a parody of the Certs commercials. Alas, unlike the Certs commercials, it cannot be found on YouTube (I suspect NBS/Universal makes sure of that).
Politics Debunked
May 9 2013 at 5:51pm
re: “and the national income accounts are good enough for government work.”
They may not be in some ways, e.g. as BEA documents explain, they lump some government spending into the “business” category if user fees are charged. That is also done in the international standard SNA standards used to calculate economic figures around the world for comparisons. So if a government nationalized every industry most of the data would still go into the “business” category , even if they acted in a very non-businesslike fashion under political control and jacked up prices for unpopular groups and drove away business, or lowered prices below costs (though the subsidies to compensate might be chalked up to government).
There are problems with other BEA data as well, such as their claimed “total government expenditures”. In some cases (as they explain) instead of adding up all government spending in “expenditures” and receipts into a revenue category, they “offset” some expenditures by receipts to make spending look smaller. Federal budgets play the same game, almost every figure you see for total outlays of the federal government is “net oulays” which are 15-20% smaller than the real “gross outlays” which are given in 1 place in the yearly budget proposal and not collected in other data tables.
This page provides links to sources for that info, and to the federal GAO complaining in the past about the games government uses to try to hide spending, with the GAO explaining “These factors can have significant economic importance” yet nothing has changed in the decades the GAO has complained about it.
http://www.politicsdebunked.com/article-list/goverment-hides-spending
Vadim
May 9 2013 at 9:16pm
Maybe our entire way of thinking about “investment” is misguided. The whole point of all economic activity is consumption, so that is where the measurement focus should. When I save/invest – what is really happening is that I’m trading my current consumption for (hopefully more) future consumption.
Peter
May 10 2013 at 4:26am
Does it count as investment if it’s a zero sum game (like the signaling model for education)?
Consuming food is an investment since your future productivity would go down if you didn’t.
Roger McKinney
May 10 2013 at 9:23am
Ilya, you might start with Higgs’ “The Transformation of the American Economy, 1865-1914”.
Roger McKinney
May 10 2013 at 9:38am
I don’t think it’s helpful to create more confusion over investment and consumption. Socialists have taken us a long way down that road to where everything the government does is investment.
We need to focus on what kinds of spending increase per capita gdp or GO if you don’t like gdp. Most public education, kindergarten through college, doesn’t do that. A lot of studies confirm that public education is a result of economic development, not a cause. In other words, as people grow richer they want to consume more education. The only education that results in greater productivity is on-the-job training.
For example, one would think that education in engineering would increase the productivity of the engineering grad, but that thinking belies an ignorance of the real world. Talk to businesses that hire new grads in engineering and ask them how long it takes for the new grad to become productive. Often the answer is two years. Companies often spend two years training new grad hires to become productive, meaning for two years they have negative marginal productivity for that company.
Investment needs to be defined as narrowly as possible in order for it to mean anything or be useful in economic analysis. That’s why even mainstream text books define investment as money spent on plants, equipment, or OJT to produce other goods/services.
W. Lewis
May 10 2013 at 6:53pm
So, how many years does it take for an engineer to become “productive” without the education in engineering?
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