“Though not one in a thousand recognizes it, it is business, not consumers, that is the heart of the economy. When businesses produce profitably, they create income-paying jobs and then consumers spend.” — Larry Kudlow, host, Fox Business
Special Announcement: Next Wednesday, Oct. 9, is the 50th anniversary of Friedrich Hayek winning the Nobel prize in economics (1974). I am organizing a special one-hour gathering on Zoom to discuss the importance of Hayek’s works. In some surveys, Hayek is ranked the #2 most influential economist in the world, between John Maynard Keynes (#1) and Milton Friedman (#3).
He is famous for his bestseller, “The Road to Serfdom.” I should also mention that my gross output (GO) statistic that the federal government now measures quarterly along with GDP, is a measure of Hayek’s macro model of the economy (known as “Hayek’s triangles”). I consider GO the greatest advance in macroeconomics since Hayek won the Nobel prize 50 years ago.
Our panelists are all Hayekian experts: Prof. Lanny Ebenstein (UC Santa Barbara), author of two biographies of Hayek; Barbara Kolm, president of the Austrian Center in Vienna and a new member of the Austrian parliament (see “You Nailed it” below) and Prof. Tawni Hunt Ferrarini, co-author of “Common Sense Economics.”
Here is the link to watch live next Wednesday, Oct. 9, at 2-3 p.m. ET: Riverside.FM Studio | FreedomFest.
This Hayek event is streaming for FREE exclusively on CiVL!
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Last week, I had the opportunity of addressing top government economists and their staff at India’s prestigious National Institute of Public Finance and Policy in New Delhi.
The topic was the #1 myth: “Consumer spending is the key to economic growth.” You hear it all the time in the media. For example:
“Consumer spending is the lifeblood of the U.S. economy…” — Barron’s
“Household spending generates more than two-thirds of total economic output, so sturdy [consumer] spending gains should translate into economic growth.” — Wall Street Journal
“Consumer spending makes up more than 70% of the economy, and it usually drives growth during economic recoveries.” — New York Times
The myth is based on a misunderstanding of national income accounting. Since consumption is 70% of GDP, the media concludes that consumer spending is the big elephant in the room.
But GDP measures final output only — it leaves out all business spending in the supply chain.
If you use gross output (GO), the relatively new measure of spending at all stages of production (including the all-important supply chain), you come to a very different conclusion.
Using GO as a measure of total spending, you quickly discover that consumption is only about one-third of economic activity. Over 60% is business spending!
The United States (Bureau of Economic Analysis at the Commerce Department) has been publishing GO for 10 years now, but it is a new concept in India.
The response to my presentation was positive. My host Prof. Lekha Chakraborty commented on X (Twitter): “Grateful for Prof. @MarkSkousen1’s insightful presentation on ‘GO Beyond GDP’ at @nipfp_org_in today! Thank you Prof. Vito Tanzi, fr IMF Director Fiscal Affairs, for connecting me to Mark & bringing him to NIPFP. @IIPF_org @IMFNews here’s thelink to GO: https://t.co/sktdtX59Mp. https://t.co/eFbxFgcdyS” / X.
Afterwards, on my way home, I found a fascinating new book in the airport bookstore: “India@100” by Indian economist Krishnamurthy Subramanian.
It’s available on Amazon here: India @100 : Envisioning Tomorrow’s Economic Powerhouse: Krishnamurthy Subramanian: 9789390260836: Amazon.com: Books.
Subramanian is currently the executive director of the International Monetary Fund (IMF) and professor at the Indian School of Business.
He is convinced that the most populous country in the world (1.5 billion people) will continue to be the fastest growing country in the world (8% growth this year).
How? By following what he calls the four pillars for a successful India, which is amazingly pro-free market given India’s history of socialism, heavy bureaucracy and central planning.
The four pillars are:
Why Investment Is More Important than Consumer Spending
In his chapter on the “Virtuous Cycle for Economic Development,” Professor Subramanian rejected the modern Keynesian view that consumer spending drives the economy, based on the fact that consumption is two-thirds of GDP.
This is popular myth — in reality, business investment is far more important. Using GO as the more accurate measure of total spending in the economy, we see that consumption is only about one-third of economic activity. Business-to-business spending (B2B) is in fact twice the size of consumer spending (see chart below).
Thus, consumption is the effect, not the cause, of prosperity (known as Say’s law).
I was glad to see Professor Subramanian confirm my thesis that business investment is the key factor in advancing economic growth — not consumption.
He states:
“The virtuous cycle originating from private investment is crucial for sustained economic growth in India. Investment leads to productivity gains and creation of jobs, both of which increase disposable income in the economy and thereby foster consumption.
“Thus, in the first-round effects embedded in the virtuous cycle, private investment is most crucial for enhancing consumption.
“In the second-round effects embedded in the virtuous cycle, anticipated increases in consumption spur further investment by the private sector.” (p. 37)
Later, in chapter 23, “Private Investment: Primary Driver of Consumption, Jobs and Growth,” he adds, “China has relied primarily on savings and investment, with consumption decreasing significantly as a share of GDP” (p. 374).
He concludes, “investment, especially private investment, is the ‘key driver’ that drives demand, creates capacity, increases labour productivity, introduces new technology, allows creative destruction and generates jobs… The resulting growth in income accelerates consumption and increases savings” (pp. 369-370).
‘The Best Brief in Economics I’ve Ever Read’
How does GO fit into the economy? The best way to find out is to obtain a copy of my special report, “The Economics of Life Made Simple.”
Last year, Michael Shermer, publisher of Skeptic magazine, commissioned me to write a cover story, “Economics of Life Made Simple,” in honor of Adam Smith’s 300th birthday. It’s been a hit ever since, with hundreds of people buying multiple copies — accountants, lawyers, investors, ministers and housewives.
What Others Are Saying
David Berkovitz, who teaches business law and accounting at Chapman University, recently wrote me, “I always wanted to understand economics, so I read ‘Economics for Dummies,’ and still couldn’t understand it… until I read your essay, ‘Economics of Life Made Simple.’”
He added: “Concise and clear, this essay is THE source for anyone seeking to understand this important topic. It should be required reading for everyone in college.”
Most importantly, this 15-page essay introduces GO and why business investment, not consumption or government spending, drives economic growth.
The essay explains the principles of economics in one sitting; it includes a simple glossary. It seeks to answer fundamental questions about money and the economy, such as:
I’ve had so many requests for this essay that I printed up thousands of copies to handle the demand. A professor at the University of the Bahamas bought 50 copies to hand out to his students. A coin dealer asked for 25 copies to hand out to his clients. I just got another order for 50 copies last week. I’ve had to go back to press several times.
A highly successful lawyer from North Dakota attended FreedomFest and picked up a copy. He told a colleague, “This is the best brief in economics that I’ve ever read,” and made copies to send out to all his clients.
One Christian minister, Dallin H. Oaks, wrote me, “I have just finished reading your ‘Economics of Life Made Simple.’ Marvelous! I have never read a better expression by a sophisticated professional who has written to the clear understanding of laymen. Congratulations! I hope this will be widely circulated. It is very important.”
A top official at the U.S. Commerce Department was so impressed that he sent it to all his college-aged children, one of whom is pursuing a degree in business analytics at the University of Tennessee.
A mother wrote from Colorado, “I’m making copies for my boys to send to them in college.”
And it’s now being translated into Spanish.
How to Order Your Own Copy
You can read my essay online here at The Economics of Life Made Simple.
If you like it, why not buy a printed copy and pass it along to your friends and colleagues? They are more likely to read it as a printed copy. The price is only $3 each at www.skousenbooks.com. The minimum order is three copies.
You Nailed It!
Barbara Kolm Elected to Austrian Parliament!
I was delighted to see that my long-time friend Barbara Kolm, president of the Austrian Center and Hayek Institute in Vienna, Austria, was just elected to the Austrian Parliament. Congratulations!
She is a member of the Freedom Party, which has been smeared by the press as “far right.”
Steve Moore, publisher and editor of Unleash Prosperity Hotline, states, “In reality, Austria’s economy has been in stagnation and the failure to deal with rising numbers of migrants and asylum seekers is why voters have given the Freedom Party its largest percentage ever. The policy agenda of the Freedom Party is the opposite of fascism. The platform is the most free market ever, and was co-written by Barbara Kolm of the Hayek Institute and a former deputy director of Austria’s central bank. She is in favor of a flat tax, against measures to curb tax competition between nations, ending taxes on capital gains and imposing tuition fees for Austrian universities. Hardly radical stuff! We hope the Freedom Party will have the chance to prove its critics wrong by actually implementing some of its reforms as part of the new government and seeing them succeed.”
Barbara Kolm with Steve Forbes at FreedomFest in Las Vegas
Barbara runs here own annual series called “The Free Market Road Show” and is a regular at FreedomFest. She will be joining us next June 11-14, 2025, in Palm Springs, California. I look forward to her insights.
Good investing, AEIOU,
Mark Skousen
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