One of the strangest things about this recession is surely the shameless neglect of unemployment figures by the politicos, anxious to tell us that the worst is over. (I am no Cameron fan but at last he has begun to talk about it, whatever his reasons may be). Although Mervyn King tells us that the recession “could be over”, the latest unemployment figures are at their highest level (almost 8%) for nearly 15 years. And if we take out the public sector (which has been expanding), it gets even worse. The same is happening in the USA, with the same order of magnitude. Yet the UK government, supposedly the party of “labour”, is up there with the best in “the recession could be over” crowd – on the strength of a tiny predicted uplift in one quarter’s GDP figures!

No wonder they all still love Keynes. Wherever would we be without the totally artificial and wonderfully flexible construct, Gross Domestic Product (GDP) to fall back on? GDP now seems to be part of the national psyche, which even most non-Keynesians would never dream of questioning. Suffice it to say here that (i) GDP is susceptible to huge margins of error (as much as 10% in any 12 months – think what that does for the accuracy of the difference, which is needed to calculate a growth rate); (ii) it is meaningless given the huge public sector where the value of a “product” cannot be determined (some say that the public sector should be subtracted!); and (iii) it is essentially a measure of consumption, not output.

So what are the alternatives? The short answer is nothing. According to Ludwig von Mises, any measure of national income “obliterates the real conditions of production in a market economy”.  A primary feature of such conditions is the extent and nature of business-to-business transactions, from raw materials to finished product (a process that typically takes many years). Hayek called this the structure of production, in which countries with high living standards feature “roundabout methods”, using capital created by high savings, whilst those with less capital have shorter production periods but far less output.

The structure of production has been pushed at both ends into an unsustainable mode – more investment and more consumption. Now that structure must unwind. Accordingly, I suggest that a good definition of recession is something along the lines of “the early stages of an inevitable re-adjustment to the original errors, namely a government-caused false boom – credit creation out of thin air via artificially low interest rates and massive increases in the money supply (both being the sole responsibility of the central bank).”

If this recession is indeed virtually over, then just as in the first few years of this century (in the US), there will be another one soon. It is impossible for the measures which caused the recession to be appropriate for shortening it.

IEA Pensions and Financial Regulation Fellow

Terry Arthur is a fellow of Pensions and Financial Regulation at the Institute of Economic Affairs and has written on this subject for a number of publications, working closely with Philip Booth, Editorial and Programme Director at the IEA.