Trouble is, all these macroeconomic metrics that can be precisely defined have only a vague and tenuous link to the actual level of prosperity and quality of life, which is impossible to quantify precisely in a satisfactory manner. Moreover, predicting the future consequences of economic events reliably is impossible, despite all the endless reams of macroeconomic literature presenting various models that attempt to do so.
Thus, if you want to ask how your choice will affect the nominal GDP for the current year or some such measure, that’s a well-defined question (though not necessarily easy to answer). However, if you want to interpret the result as “helping” or “hurting” the economy, it requires a much more difficult, controversial, and often inevitably subjective judgment.
That’s only one of the main problems with GDP. Here’s a fairly decent critique of the concept written from a libertarian perspective (but the main points hold regardless of whether you agree with the author’s ideological assumptions): http://www.econlib.org/library/Columns/y2010/HendersonGDP.html
In addition to these criticisms, I would point out the impossibility of defining meaningful price indexes that would be necessary for sensible comparisons of GDP across countries, and even across different time periods in the same country. The way these numbers are determined now is a mixture of arbitrariness and politicized number-cooking masquerading as science.
It is certainly true that some people make too much of GDP, but those numbers can be pretty helpful for answering certain research questions. Let’s not throw the baby out with the bath water.
To continue on your metaphor, it’s not clear to me if there is a baby worth saving there at all. Even if there is, the baby is submerged in an enormous cesspool of filthy and toxic bathwater that’s been poisoning us in very nasty ways for a long time.
To be clear, you are suggesting we might not lose anything by giving up measuring and using GDP figures? I’ll side with the majority of the economics profession… they aren’t perfect but they mostly use GDP data in a reasonable way.
Just so we’re on the same page, could you explain what it would look like if economists’ collective wisdom were actually so bad that you would agree they use GDP data in an unreasonable way?
Because you can’t just look at the fact the top economists all agree—they’d do that even if the field were collectively garbage. There has to be some real-world entanglement which would reveal the failure of their ideas, and I want to know what you expect such a failure to look like.
I’m a sociologist*, and there is nothing sociologists like to do more than point out where economists go wrong. So if GDP was a worthless figure, I expect the real world entanglement that one of my fellow sociologists would have convinced me of that already.
I’m not saying economists never overinterpret GDP figures, and I’m not saying the consensus of macroeconomists is always correct.
Though I think we might both be better served by quitting conversation and reading actual experts (I don’t claim to be one) I would like to make sure we’re on the same page about the implications of your criticism. Are you not saying that it is essentially worthless to attempt to study economic growth or business cycles empirically because the data is so poor?
*if you can be one without having completed your dissertation yet.
I’m a sociologist, and there is nothing sociologists like to do more than point out where economists go wrong. So if GDP was a worthless figure, I expect the real world entanglement that one of my fellow sociologists would have convinced me of that already.
This sounds to me like a case of mistakenly thinking “someone would have noticed!”. What exactly would sociologists have noticed and hasn’t happened? Remember, “my echo chamber in academia agrees with me” doesn’t count as evidence!
And, FWIW, sociologists (and a lot of the left in general) do complain about GDP—they’re the ones spearheading the push to use alternate metrics like “Gross National Happiness” and other things. I think a lot of them are nutty, but at least they’re identifying values that need to be looked at.
Though I think we might both be better served by quitting conversation and reading actual experts (I don’t claim to be one) I would like to make sure we’re on the same page about the implications of your criticism.
But I have read the experts! Top economists like Greg Mankiw, Paul Krugman, and Scott Sumner blog and lay out their arguments in detail, and their (economic basis for making their) arguments are exactly as I have portrayed them! Sumner in particular believes (mistakenly imo) that nominal GDP is a crucial measure.
Krugman certainly relies heavily on measuring real GDP growth and equates it with progress. And James_K, who claims to be an economist, just came out of the woodwork and endorsed exactly what I’ve accused economists of, though asserting (with a basis I’m shaking) that they don’t really make that big of a deal out of GDP.
Are you not saying that it is essentially worthless to attempt to study economic growth or business cycles empirically because the data is so poor?
With the currently studied data, yes, though with different measures, better progress could be made. In the past I’ve suggested measuring non-cash and non-market production, subtracting certain “bad” activities from GDP (i.e. things which represent a response to destruction, as it’s indicative of merely replacing some capital with other capital), measuring product degradation in calculating CPI, and using insulin as a better inflation gauge.
if you can be [a sociologist] without having completed your dissertation yet.
Hey, I’m fine with calling you one if you’re fine with calling me an engineer despite just having a bachelors and years of field work but not a P.E. license.
I agree that GDP is imperfect. If it were easy to perfect then it would have been done already. Should more resources be devoted to the issue? Probably. I support the use of multiple measures of wealth and well-being. But I do think that when GDP goes up, that usually indicates good things are happening. Other indicators usually track it.
I’m not trying to deny you’ve noticed a problem, I just think that you’re overstating it because even though GDP is imperfect, there is still a lot to be learned from empirical research that uses it.
If we’re going to do metaphors, then yes, you’re right, but we also have to make sure we’re not drinking the bathwater. The bathwater is for bathing, not for drinking. GDP should be used a very rough cross-country comparison, not as a measure of how well the economy’s general ability to satisfy wants changes over short intervals.
Interestingly enough, I was arguing roughly your position a few years ago. But now, seeing how economist deliberately prioritize GDP over the fundamentals it’s supposed to measure, I can’t even justify defending it for purposes other than, “The US economy is more productive than Uganda’s.”
The essay at the link talks about government waste. Is it meaningful to talk about waste in business, or should it all be considered to be at least educational?
Regarding the end-products, one essential difference is that if a business can find private consumers who will purchase its product with their own money and of their own free will, this constitutes strong evidence that these customers assign some positive value to this product, so it can’t be fairly described as “waste.” In contrast, for many things produced by the government, no such clear evidence exists, and even if one is not of particularly libertarian persuasion, it seems pretty clear that many of them are wasteful in every reasonable sense of the term. Yet all consumer and (non-transfer) government spending is added to the GDP as equivalent.
When it comes to waste generated by inefficiencies, miscalculations, employee misbehavior, and perverse incentives, some amount of wasteful efforts and expenses is obviously inevitable in the internal functioning of any large-scale operation. It does seem pretty clear that in most cases, the incentives to minimize them are much stronger in private businesses than in governments, though unlike the previous point, this one is a matter of degree, not essence. However, when it comes to the GDP accounting, there are important differences here.
The reason is that all non-transfer spending by the government will be added to the GDP, whereas spending by businesses is added only if it constitutes investment (as opposed to mere procuring of the inputs necessary for production). As far as I know, the exact boundary in the latter case is a matter of accounting conventions, though in most cases, it does seem clear which is which (e.g. for a trucking company, buying fuel is not an investment, but buying new trucks is). Therefore, whatever the actual amount of wasteful spending by businesses might be, not all of it will be added to the GDP, unlike the wasteful spending by governments.
Thanks for that link. I hadn’t realized Henderson had written that, let alone just a few months ago! Its recency means he could critique the stimulus arguments of the last two years, making basically the same arguments I do.
My only complaint is that he noted that leaving off non-market exchanges (i.e. maid becoming wife) causes GDP to be understated, when he should have discussed its impact on the rate of change in GDP, which is more important.
What exact metric do you have in mind?
I’d be about equally happy if offered a solution in terms of GDP or some more abstract metric like “sum of happiness”.
Trouble is, all these macroeconomic metrics that can be precisely defined have only a vague and tenuous link to the actual level of prosperity and quality of life, which is impossible to quantify precisely in a satisfactory manner. Moreover, predicting the future consequences of economic events reliably is impossible, despite all the endless reams of macroeconomic literature presenting various models that attempt to do so.
Thus, if you want to ask how your choice will affect the nominal GDP for the current year or some such measure, that’s a well-defined question (though not necessarily easy to answer). However, if you want to interpret the result as “helping” or “hurting” the economy, it requires a much more difficult, controversial, and often inevitably subjective judgment.
Of course, gdp only measures goods and services sold, not “household production.”
That’s only one of the main problems with GDP. Here’s a fairly decent critique of the concept written from a libertarian perspective (but the main points hold regardless of whether you agree with the author’s ideological assumptions):
http://www.econlib.org/library/Columns/y2010/HendersonGDP.html
In addition to these criticisms, I would point out the impossibility of defining meaningful price indexes that would be necessary for sensible comparisons of GDP across countries, and even across different time periods in the same country. The way these numbers are determined now is a mixture of arbitrariness and politicized number-cooking masquerading as science.
It is certainly true that some people make too much of GDP, but those numbers can be pretty helpful for answering certain research questions. Let’s not throw the baby out with the bath water.
To continue on your metaphor, it’s not clear to me if there is a baby worth saving there at all. Even if there is, the baby is submerged in an enormous cesspool of filthy and toxic bathwater that’s been poisoning us in very nasty ways for a long time.
To be clear, you are suggesting we might not lose anything by giving up measuring and using GDP figures? I’ll side with the majority of the economics profession… they aren’t perfect but they mostly use GDP data in a reasonable way.
Just so we’re on the same page, could you explain what it would look like if economists’ collective wisdom were actually so bad that you would agree they use GDP data in an unreasonable way?
Because you can’t just look at the fact the top economists all agree—they’d do that even if the field were collectively garbage. There has to be some real-world entanglement which would reveal the failure of their ideas, and I want to know what you expect such a failure to look like.
I’m a sociologist*, and there is nothing sociologists like to do more than point out where economists go wrong. So if GDP was a worthless figure, I expect the real world entanglement that one of my fellow sociologists would have convinced me of that already.
I’m not saying economists never overinterpret GDP figures, and I’m not saying the consensus of macroeconomists is always correct.
Though I think we might both be better served by quitting conversation and reading actual experts (I don’t claim to be one) I would like to make sure we’re on the same page about the implications of your criticism. Are you not saying that it is essentially worthless to attempt to study economic growth or business cycles empirically because the data is so poor?
*if you can be one without having completed your dissertation yet.
This sounds to me like a case of mistakenly thinking “someone would have noticed!”. What exactly would sociologists have noticed and hasn’t happened? Remember, “my echo chamber in academia agrees with me” doesn’t count as evidence!
And, FWIW, sociologists (and a lot of the left in general) do complain about GDP—they’re the ones spearheading the push to use alternate metrics like “Gross National Happiness” and other things. I think a lot of them are nutty, but at least they’re identifying values that need to be looked at.
But I have read the experts! Top economists like Greg Mankiw, Paul Krugman, and Scott Sumner blog and lay out their arguments in detail, and their (economic basis for making their) arguments are exactly as I have portrayed them! Sumner in particular believes (mistakenly imo) that nominal GDP is a crucial measure.
Krugman certainly relies heavily on measuring real GDP growth and equates it with progress. And James_K, who claims to be an economist, just came out of the woodwork and endorsed exactly what I’ve accused economists of, though asserting (with a basis I’m shaking) that they don’t really make that big of a deal out of GDP.
With the currently studied data, yes, though with different measures, better progress could be made. In the past I’ve suggested measuring non-cash and non-market production, subtracting certain “bad” activities from GDP (i.e. things which represent a response to destruction, as it’s indicative of merely replacing some capital with other capital), measuring product degradation in calculating CPI, and using insulin as a better inflation gauge.
Hey, I’m fine with calling you one if you’re fine with calling me an engineer despite just having a bachelors and years of field work but not a P.E. license.
I agree that GDP is imperfect. If it were easy to perfect then it would have been done already. Should more resources be devoted to the issue? Probably. I support the use of multiple measures of wealth and well-being. But I do think that when GDP goes up, that usually indicates good things are happening. Other indicators usually track it.
I’m not trying to deny you’ve noticed a problem, I just think that you’re overstating it because even though GDP is imperfect, there is still a lot to be learned from empirical research that uses it.
Oh boy, we should bring Taleb in here.
If we’re going to do metaphors, then yes, you’re right, but we also have to make sure we’re not drinking the bathwater. The bathwater is for bathing, not for drinking. GDP should be used a very rough cross-country comparison, not as a measure of how well the economy’s general ability to satisfy wants changes over short intervals.
Interestingly enough, I was arguing roughly your position a few years ago. But now, seeing how economist deliberately prioritize GDP over the fundamentals it’s supposed to measure, I can’t even justify defending it for purposes other than, “The US economy is more productive than Uganda’s.”
The essay at the link talks about government waste. Is it meaningful to talk about waste in business, or should it all be considered to be at least educational?
Regarding the end-products, one essential difference is that if a business can find private consumers who will purchase its product with their own money and of their own free will, this constitutes strong evidence that these customers assign some positive value to this product, so it can’t be fairly described as “waste.” In contrast, for many things produced by the government, no such clear evidence exists, and even if one is not of particularly libertarian persuasion, it seems pretty clear that many of them are wasteful in every reasonable sense of the term. Yet all consumer and (non-transfer) government spending is added to the GDP as equivalent.
When it comes to waste generated by inefficiencies, miscalculations, employee misbehavior, and perverse incentives, some amount of wasteful efforts and expenses is obviously inevitable in the internal functioning of any large-scale operation. It does seem pretty clear that in most cases, the incentives to minimize them are much stronger in private businesses than in governments, though unlike the previous point, this one is a matter of degree, not essence. However, when it comes to the GDP accounting, there are important differences here.
The reason is that all non-transfer spending by the government will be added to the GDP, whereas spending by businesses is added only if it constitutes investment (as opposed to mere procuring of the inputs necessary for production). As far as I know, the exact boundary in the latter case is a matter of accounting conventions, though in most cases, it does seem clear which is which (e.g. for a trucking company, buying fuel is not an investment, but buying new trucks is). Therefore, whatever the actual amount of wasteful spending by businesses might be, not all of it will be added to the GDP, unlike the wasteful spending by governments.
Thanks for that link. I hadn’t realized Henderson had written that, let alone just a few months ago! Its recency means he could critique the stimulus arguments of the last two years, making basically the same arguments I do.
My only complaint is that he noted that leaving off non-market exchanges (i.e. maid becoming wife) causes GDP to be understated, when he should have discussed its impact on the rate of change in GDP, which is more important.