Mises Wire

Finally Kicking the GDP Habit

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As COVID-19 prompts a reevaluation of institutions and standard methods of operating the world over, an opportunity exists to reorient our economic thinking so that it more closely corresponds to the realities of the modern economic landscape. It starts with abandoning GDP.

GDP (gross domestic product, sometimes expressed as gross national product (GNP), a distinction without significance for our purposes) is an anachronism—about as useful for telling us important things about the health of the modern economy as simply looking at the number of calories consumed by a person to determine their health.

GDP is simply the total monetary value of all the goods and services a society produces during a given time.

A product of the mid-twentieth century, GDP is ideally suited for analyzing the capacity and health of an industrialized, undifferentiated economy of few intangible goods and services—it was meant for counting cars, refrigerators, tanks, and bullets, not yoga lessons, cloud storage, Zoom conferences, or Uber drivers. It is telling that GDP’s most recommended attributes are that it is easy to compile and easy to understand: add everything up—more is better. See? Simple!

There are three fundamental problems with using GDP as a measure of the overall health of the economy. The first, its inability to make qualitative distinctions, was illustrated by my earlier comparison between GDP and human caloric intake. The qualitative distinctions that GDP fails to make fall along two lines: qualitative differences between like things and qualitative differences between unlike things.

These are, perhaps, best illustrated by example:

A laptop today that costs $3,000

A laptop fifteen years ago that cost $3,000

According to GDP these are equivalent contributions to the health of the economy—however, no thinking person fails to appreciate the enormous difference in the capacities of the computers in question. This value goes totally unaccounted for using the GDP metric.

So, too, in the following case, which illustrates the second of the two ways in which GDP fails to account for qualitative distinctions:

One thousand dollars’ worth of cigarettes

One thousand dollars’ worth of ventilators

Again, no thinking person is confused about whether these two things make qualitatively different contributions to the economic, and personal, health of the country. But, again, in terms of GDP there is no distinguishing between them.

The second problem with using GDP as a measure of the overall health of the economy is that it does not include any measurement of how much loss the economy experienced over the course of the year.

Were there devastating hurricanes that ripped through the Gulf? All that shows up in the GDP statistic is increased spending in construction.

Did three new smartphones and a faster microchip come out this year? You won’t find the depreciation of the prior year’s models in the GDP metric.

Was energy production increased? The cost of environmental degradation is incomprehensible to GDP.

Finally, the third basic problem with using GDP as a measure of the overall health of the economy is that it does not account for unpaid labor—i.e., time spent doing yard work, taking care of children, or cooking. Pay someone else to do it and that work will be included in the GDP; do it yourself and it won’t. Does that make any sense?

Although GDP is easy to tabulate and make sense of, what it tells us has very little to do with the actual health of a diverse, modern economy that values things like human happiness and environmental health. It is time to try something new—perhaps an app from the US Department of Labor and Statistics that asks individuals at the end of each day to run through what they did that day: they washed their own laundry but had a few things dry cleaned; they bought coffee, but they bought it from a place that uses all recycled materials and verifies that its suppliers all accord with ethical labor practices—et cetera. The data would be available live daily—a much closer picture of the economic health of the nation. And that’s just one of hundreds of possible suggestions.

This is a moment when, I think, many are open to questioning or rethinking some of the core, underlying values and built-in assumptions of the sociopolitical-economic superstructure that failed us in the handling of the COVID-19 outbreak. I just want to close by pointing out that according to the narrow metric of GDP someone walking to work rather than driving each day is “bad” for the economy. This alone, I think, tells us that we need to progress beyond GDP, long one of the most ubiquitous conceptual tools for understanding the world and its great confluence of interdependent relations.

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