What is Economic Activity?
By Arnold Kling
Maybe I should write something the length of a Kindle single on Patterns of Sustainable Specialization and Trade. Below might be a way to write the opening.What is economic activity? In standard macroeconomics, economic activity consists of spending. Certainly that is how we measure economic activity, using national income accounts. However, I propose looking at economic activity as patterns of sustainable specialization and trade (PSST). We can break down economic activity into three components:
Specialization and exchange are the familiar elements of the theory of trade. This is taught as “international trade,” using the important concepts of comparative advantage and division of labor. However, trade is trade, regardless of whether international borders are involved.
Economic activity means getting other people to voluntarily do things for you. If I order a pizza delivered to my house, then other people make the pizza and transport it to my door. Last night, when I made a pizza myself, there was less economic activity. However, I still used prepared foods that I bought from a store, including a pre-made crust, a jar of tomato sauce, and already-grated cheese. Somebody else made the oven that I used, as well as the kitchen utensils.
There would have been even less economic activity if I had made the crust myself using flour and yeast, made the sauce from tomatoes and spices, and grated fresh cheese. There would have been even less economic activity if I had used tomatoes and spices that I had grown in the back yard. etc.
I am not saying that doing more of the work myself would have been a bad idea. It might very well have produced a healthier, tastier pizza. But doing work yourself instead of having others do it for you reduces economic activity. From a PSST perspective, this is true by definition. It is also likely to be true from the perspective of the standard paradigm that treats economic activity as spending. That is, the national income accounts will usually show less GDP–less economic activity–when people choose to do things for themselves.
In standard economics, the dynamic properties are thought to reflect investment and capital accumulation. Long-term growth is described in terms of capital accumulation. And short-term fluctuations are often attributed to variations in the level of investment. That was the original idea of Keynes’ animal spirits.
With PSST, the dynamic properties reflect discovery. Long-term growth reflects discovery.. (I would not deny that capital accumulation also matters.) Discovery is not so much about “aha” moments or great inventions. I prefer the description in Kevin Kelly’s What Technology Wants. In that book, he depicts technology as evolving in a relatively natural fashion. I think that discovery reflects the cumulative application of knowledge.
Part of the process of discovery is figuring out new patterns of trade. Obviously, the transition from the horse to the automobile is going to require many new patterns. So does the transition to widespread use of the Internet.
It is possible for there to be “un-discovery.” After the voyages of Zheng He, the Chinese un-discovered ocean-going sailing. Some historians believe that in the Dark Ages, European un-discovered urban living and extensive trade. This may be a stretch, but you might say that financial markets periodically un-discover the rational basis for long-term valuation. I think that governments are quite capable of un-discovering good economic principles.
It is possible that some economic slumps can be traced to un-discovery. However, the more interesting possibility is that slumps can be caused by very rapid technological discovery, with the process of discovering new patterns of specialization and trade lagging behind.
In both standard and Austrian economics, the price system is supposed to take care of the process of adjusting to technological change. This is what we would expect if the instant that a technological change took place, the Walrasian auctioneer quickly tested thousands of different price vectors to find one that induces full employment. In the real world, adjustment is a lot messier.
I wish I could say more. In subsequent chapters I will say more, proposing some crude models. But doing away with the fiction of a Walrasian auctioneer puts me at a disadvantage. It is no longer appropriate to treat the economy as a system of equations with a definite solution. Instead of the Walrasian auctioneer, we have individual business ventures groping for sustainable patterns. Some new ventures will work. Most will fail, as will some existing ventures. There is a tendency for some industries to rise as others fall, but there is no automatic guarantee that the successes and the failures will exactly balance one another. Sometimes, the adjustment can be a difficult one, and the successful new ventures can lag behing the failing old ones.
To put it in terms of a single sentence, slumps can occur because discovery takes time.