One potentially fruitful exercise has been to develop a new national income statistic that measures total spending in the economy, what (Murray) Rothbard called the Aggregate Production Structure. The purpose of this new national statistic, which I have dubbed Gross Domestic Expenditure (GDE), is to measure spending in all stages of production, not just the final stage. Gross Domestic Product (GDP) is a Keynesian-inspired statistic that measures final output only. The widespread use of GDP as the primary measure of the economy’s performance has led to much mischief, including the idea that an increase in government spending automatically increases economic growth, and the myth that consumer spending drives the economy, since personal consumption expenditures represent the largest part of GDP. By measuring total spending in the economy, including the intermediate as well as the final stages, we find that consumer spending actually represents less than 40% of the economy (GDE), while total business investment, which includes intermediate production, equals over 50% of total spending in the economy. Using GDE would do much to shift the emphasis away from the consumer-driven economy toward a more business-oriented growth model.
From Vienna and Chicago-Friends or Foes by Mark Skousen, a comparison and contrast between the two free market schools of economic thought.
The differences seem relatively minor to me for two reasons. While the GDP and the weight given to consumer spending is used to justify deficit stimulus spending, even then it will only work in very short time frames. By definition stimulus is only temporary. When the stimulus expires then the counter effect is likely to be experienced. The permanent income effect indicates that consumers are not easily duped by short term stimulus, and will be less likely to spend a short term oriented receipt. It also makes a different how a stimulus is spent and how large it is. The amount of stimulus may be subject to serious diminishing returns.
Secondly, there is an unmeasured asset that for lack of a better description, I will call entrepreneurial potential. George Gilder somewhat alluded to this in his Wealth and Poverty. Steve Jobs is a good example of this because he just created products that were cool and the market responded to his entrepreneurial creativity. Just as Henry Ford realized that paying higher wages helped create demand for his cars, Jobs realized that pushing his vision created an astonishing demand for products that were unheard of a decade earlier.
An effective industrial policy would remove friction costs to production, but more importantly, remove barriers to entrepreneurs who can turn their creative drive into consumer demand.