In the comments section of this post, a reader asks:
Quick question: In the second half, when the professor discusses the flaw in GDP that it captures only the final goods and does not count intermediary steps (production to or towards that final good), is not the price of the final good information about all the production that occurs leading to it? Stated differently: Does not a price of a final good contain all (or at least most) of the value of the production resulting in existence of the final good?
I understand the first part about government expenditure very clearly. The latter part regarding final goods is a little confusing.
As it happens, a member of Liberty Classroom asked this question in the site’s forums back in January; here is Professor Herbener’s answer:
If all one is interested in determining the the dollar value of all that has been produced in the economy, then, counting the steel, and other parts of the car along with the car would be double counting. But the dollar value of what has been produced in an economy is, perhaps, the least interesting thing we could know about it.
If we really want to understand an economy, we have to know how all the different resources people have get allocated into all the different production processes. The monetary value of all production tells us nothing about this. [Emphasis added.]
When we begin to investigate the working of the economy we see that consumer demands can only explain the production of consumer goods, since consumers do not demand producer goods directly. To explain the production of producers goods, we need to understand entrepreneurial demands for them. When we trace back the production of consumer goods to their sources, then, we see that the amount of demand entrepreneurs have for all the producer goods necessary to make some consumer good far outweigh the demand consumers have for it. In other words, the far greater portion of production in an economy is of producer goods, which is explained by entrepreneurial demands, which results in investment spending. Consumer demands and consumption spending are a far smaller portion of all demands and total spending and the production of consumer goods is a smaller portion of the production across the entire economy.
Murray Rothbard explained all of this and why it’s important in the production chapters in Man, Economy, and State.
And this is the point made at the end of the video: leaving out all these stages vastly inflates the portion of the economy represented by consumption. This makes people think all we need to do is stimulate consumption. But in fact, a huge slice of spending is actually gross savings in the form of all the intermediate goods producers buy over the course of seeing raw materials through to finished goods.