Wednesday, December 17, 2008

Production and The Primacy of Existence

After my recent post Two-Thirds of Economists Don't Understand Economics, I received several good comments. One was from Beth at Wealth is Not the Problem who correctly identified the underlying issue as being the theory of productionism vs. consumptionism and provided a link to Dr. Reisman's excellent essay Production vs. Consumption published in 1964. Beth also wrote a lucid explanation of the problem on her blog titled Consumption vs. Production, or...The Anatomy of a Stimulus which I highly recommend.

Also, Per-Olof Samuelsson commented:

Another place where Reisman covers this is in Chapter 15 of "Capitalism". There he shows that the contemporary way of counting GNP makes it appear as if most of what goes on in economic life is consumption, whereas, in actual fact, most of what goes on is saving and investing.

He is referring to Dr. Reisman's treatise which you can link to here. Dr. Reisman explains how modern economists calculate national income and shows fundamentally how their method violates the law of identity by not counting productive expenditures as expenditures. As Per-Olof said, this leads to economists overemphasizing consumer expenditure as it relates to economic "growth" or GDP. I have read about this elsewhere, e.g., Jesus Huerta De Soto's book Money, Bank Credit, and Economic Cycles but nowhere is this explained as clearly and as in depth as in Reisman's book.

Thanks again to both Beth and Per-Olof. Their comments helped to further my understanding of the topic greatly.

I'd like to make a further fundamental point on the ideology of productionism vs. consumptionism. It would seem that this dichotomy is an instance of the more fundamental philosophic dichotomy of the primacy of existence vs. the primacy of consciousness. From ARI's website, I quote Ayn Rand:

The basic metaphysical issue that lies at the root of any system of philosophy [is] the primacy of existence or the primacy of consciousness.

The primacy of existence (of reality) is the axiom that existence exists, i.e., that the universe exists independent of consciousness (of any consciousness), that things are what they are, that they possess a specific nature, an identity. The epistemological corollary is the axiom that consciousness is the faculty of perceiving that which exists—and that man gains knowledge of reality by looking outward. The rejection of these axioms represents a reversal: the primacy of consciousness—the notion that the universe has no independent existence, that it is the product of a consciousness (either human or divine or both). The epistemological corollary is the notion that man gains knowledge of reality by looking inward (either at his own consciousness or at the revelations it receives from another, superior consciousness).

The source of this reversal is the inability or unwillingness fully to grasp the difference between one’s inner state and the outer world, i.e., between the perceiver and the perceived (thus blending consciousness and existence into one indeterminate package-deal). This crucial distinction is not given to man automatically; it has to be learned. It is implicit in any awareness, but it has to be grasped conceptually and held as an absolute.

The idea that the purpose of economics is to study the problem of production or "productionism" rests on the observation that man must produce in order to survive. It recognizes that man's desire for wealth is unlimited but that he must produce that wealth. Fundamentally, this represents a recognition of reality. The idea of consumptionism is a total reversal. It starts with the idea that the "goods are here" and we must figure out how to "allocate" or "consume" them. Of course, the problem of producing the goods is not considered. I quote Ayn Rand again:

Observe that the philosophical system based on the axiom of the primacy of existence (i.e., on recognizing the absolutism of reality) led to the recognition of man’s identity and rights. But the philosophical systems based on the primacy of consciousness (i.e., on the seemingly megalomaniacal notion that nature is whatever man wants it to be) lead to the view that man possesses no identity, that he is infinitely flexible, malleable, usable and disposable. Ask yourself why.

See, for example, this recent article on the resurgence of Keynesian economics. Quoting the article:

More than 70 years after the ideas of a British economist were used to justify a huge expansion in the government’s role in the economy, John Maynard Keynes is back.

Almost everyone today agrees that a big fiscal stimulus is just what the doctor ordered to lift the U.S. economy out of what is fast becoming the worst slump since the Great Depression. (The few remaining limited-government types are hunkered down at Washington’s Cato Institute.) The only questions for the Obama administration are the size of the package (anywhere from $500 billion to $1 trillion) and its composition (infrastructure, tax cuts, transfers to the states, “green” jobs).

That the idea of government spending substituting for private demand is still kicking around after all this time makes you wonder just what kind of a science economics is. Why don’t we know with some degree of certainty whether old-fashioned pump- priming works? Do we care? Or is this about government appearing to “do something” -- anything -- in a crisis?

The author of the article then cites the difficulty of conducting economics experiments as an inherent dilemma in ascertaining the validity of such policies. Do you need to do an experiment to know that cheating reality can not work. Doesn't all of our experience in reality tell us that? Quoting one of the "hunkered down", "limited government types":

There’s only one problem with the theory: a “glaring logical fallacy,” says Dan Mitchell, senior fellow at the Cato Institute, a libertarian think tank. “In the real world, government can’t inject money into the economy without first taking money out of the economy,” he says. “The theory only looks at one-half of the equation.”

So it is believed by virtually all that the government can create "fiscal stimulus" by spending money on public works thus increasing demand. Where does the government get this money and isn't this a zero sum game? Who knows - we do not have enough data from our experiments. The Fed is encouraged to create money or "inject liquidity" into the system. Where does this money come from and what effect will the creation of paper dollars have on prices in the long run? We don't know because we can not figure out how to do a "double blind" experiment. Of course, cheating reality can not work. So how can the whole world be taken in by this kind of thinking? Quoting Ayn Rand:

They want to cheat the axiom of existence and consciousness, they want their consciousness to be an instrument not of perceiving but of creating existence, and existence to be not the object but the subject of their consciousness—they want to be that God they created in their image and likeness, who creates a universe out of a void by means of an arbitrary whim. But reality is not to be cheated. What they achieve is the opposite of their desire. They want an omnipotent power over existence; instead, they lose the power of their consciousness. By refusing to know, they condemn themselves to the horror of a perpetual unknown.

Oh well, maybe this time they will make it "work".


Burgess Laughlin said...

If statists are resorting to a debunked economist and his tried and failed policies, then this fact may be another indication that statism is at the end of the road, at least ideologically. They have nothing new to offer.

That doesn't mean they won't be destructive, but it might mean there is an opportunity for economists who use objective methods to step in. Even better, it may offer an opportunity for philosophers of objectivity to step in as supporters.

Doug Reich said...


Thanks for your comment as always.

I agree that there is an opportunity right now. Unfortunately, it is the same kind of "opportunity" that Galileo had when he opposed the Inquisition. In other words, just as Galileo could scientifically demonstrate that his ideas were right by reference to reality, the mindset of today's economics profession in essence rejects science! They do not reject "science" in the same way as the Inquisitors (belief in God or scripture unless you take Keynes as scripture...) but reject proper scientific epistemology as a consequence of the modern philosophers assault on reason.

Most economists are "empiricists" in the sense that they reject any generalization and rely only on statistical measurements of actual data. The non-empiricists and hence the default position of the profession appears to be Keynesian and his ideas are rampant as can be seen in articles and statements by modern economists, financial forecasters and pundits.

I recently read a paper by John Taylor of Stanford who did an empirical analysis to show that the government was responsible for the housing bubble and hence blamed the government for causing the crisis. That's a good start but then he doesn't make the logical conclusion that we should remove government from the economy but instead offers some wishy washy, middle of the road recommendations. So even when an empiricist comes to the right empirical conclusion he can not make proper generalizations because he can not generalize. That's not the job of the empiricist.

The current crisis is an excellent opportunity but we need to do more than just offer good economics or even just rational policy ideas. We need to reset the entire mind set of the economics and social sciences. That is a daunting task but it must be done if we are going to survive.

Beth said...


Nice job taking the production/consumption debate to its fundamental philosophical base: primacy of existence vs. primacy of consciousness.

One manifestation of this is how people think of money. On a primacy of consciousness basis, money can be anything we chose it to be, what ever stuff we decide to arbitrarily assign value. Most economists (Keynesian, Monatarist, and even some Austrians) fail to see the need to tie an abstraction back to its referents in reality. In a market based on barter, the need to produce in order to “demand” was concretely obvious. The existence of money requires a proper understanding of concepts in order to avoid having it become a floating abstraction, cut off from the fact that money is simply a commonly accepted commodity (i.e. somebody’s production) used in a way which simplifies exchange.

So, one part of untangling the production/consumption confusion is to wrestle with the misunderstandings of the fundamental nature of money. In a recent post, ( I started on this task. There are several key aspects still to flush out…such as given a commodity money, what are the proper definitions of inflation and deflation, and why and how a limited amount of money can serve a growing number of product…and how it all pertains to Say’s Law. I see it as adding the flesh to your philosophical skeleton. Both aspects are needed in order to stay standing: the philosophical axioms and principles, and an explanation of how they manifest themselves in our daily lives.

Thanks for the kind words!! They are greatly appreciated.

Per-Olof Samuelsson said...

I'm happy to see that my comment was helpful!