Again on Measuring GDP (a.k.a., “The Economy”)

When most people refer to “the economy”, they are generally referring to either: 1. the job market (this happens usually when someone’s looking for work), or 2. (the more common usage) that bundle of economic activity that we measure using GDP. Unfortunately, our obsession with “the economy” has misled us into thinking that anything that boosts the measure (GDP) is good. It’s not necessarily. GDP is actually are terrible, terrible way of trying to measure standard of living or how-well-off-are-we. Unfortunately, it’s the best quantitative measure we’ve got so far. Maybe some really smart folks in the future will come up with better (I hope), but it’s what we have now.

Over the recent decades, popular discourse, politics, and culture has come to reify the concept “the economy”. Instead of “the economy” being the actual quality of life we live, it has become some objective “thing” to which we must sacrifice. As Yves Smith at Naked Capitalism remarks:

Price is Not Value, and Other Reasons Metrics Mislead

Economists have been rewarded all too well for fetishing numbers and mathematics. The self-conscious effort within the discipline to turn it into a science (a goal most real scientists would deem to be impossible, given the fickle nature of human behavior), which meant making it more mathematical, has resulted in economists being better paid than other social scientists and having a seat at the policy table.

The result is that this methodological bias (which we discuss at some length in ECONNED), has had the unfortunate effect of blinkering the discipline. Economists have exhibited a great disinclination towards considering the idea that markets and economies could be unstable, first, because the mathematics that can characterize instability are fairly daunting and second, economists would have much less to say about them (as in the range of possible outcomes quickly becomes large). And this love of quantification has been taken up with even more enthusiasm by businessmen, with equally questionable outcomes (some of the most important aspects of business performance may note be readily quantified, but the obsession with measurement means those behaviors will be overemphasiszed).

Some within the academy have started to question the biases that result from focusing on what can be easily measured versus richer, more nuanced appraisals. For instance, Joseph Stiglitz and Amartya Sen have argued that GDP is a poor metric of economic progress, and are working to develop better measures.

John Kay at the Financial Times has some musings along these lines. He offers a defense of the value of the arts (in a UK context, where it is often subsidized) which might strike some flat notes with US readers, but his underlying reasoning has merit.

From the Financial Times:

Many people underestimate the contribution disease makes to the economy. In Britain…. [i]llness contributes about 10 per cent of the UK’s economy: the government does not do enough to promote disease.

Such reasoning is identical to that of studies sitting on my desk that purport to measure the economic contribution of sport, tourism and the arts. These studies point to the number of jobs created, and the ancillary activities needed to make the activities possible. They add up the incomes that result….to persuade us….that they contribute to something called “the economy”.

The analogy illustrates the obvious fallacy. What the exercises measure is not the benefits of the activities they applaud, but their cost; and the value of an activity is not what it costs, but the amount by which its benefit exceeds its costs. The economic contribution of sport is in the pleasure participants and spectators derive, and the resulting gains in health and longevity…..Similarly, the economic value of the arts is in the commercial and cultural value of the performance, not the costs of cleaning the theatre… Good economics here, as so often, is a matter of giving precision to our common sense. Bad economics here, as so often, involves inventing bogus numbers to answer badly formulated questions.

But good economics is often harder to do than bad economics. It is difficult to measure the value of a Shakespeare play…..The relevant economic questions are whether the cultural and commercial value of the performance offsets these costs and whether these benefits can be translated into a combination of box office receipts, sponsorship and public subsidy. The appropriate economic criterion, everywhere and always, is the value of the output.

But bad economics has been allowed to drive out good. I am sympathetic to the well-intentioned people who commission studies of economic benefit, though not to those who take money for carrying them out. They are responding to a climate in which philistine businessmen assert that the private sector company that manufactures pills is a wealth creator, but the public sector doctor who prescribes them is not. Extolling the virtues of manufacturing, they value the popcorn sold in the interval, but not the performance of the play, arguing that the vendor of consumer goods creates resources, which the subsidised theatre uses up. People who work in the theatre, hospitals or education are often forced to listen to this nonsense. It should be no surprise that so many of them despise business and the values such business espouses. If these values were truly the values of business they would be right to despise them….

We need to put out of our minds this widely held notion that there is such a thing as “the economy”, a monster outside the door that needs to be fed and propitiated and whose values conflict with things – such as sports, tourism and the arts – that make our lives agreeable and worthwhile. Activities that are good in themselves are good for the economy, and activities that are bad in themselves are bad for the economy. The only intelligible meaning of “benefit to the economy” is the contribution – direct or indirect – the activity makes to the welfare of ordinary citizens.

Yves here. If you don’t like the arts example, consider childrearing. If you were to adopt a purely GDP perspective, unpaid child care (mothers staying at home to raise their kids) has no value (save maybe in a discounted NPV of child’s future earnings, but discounting cash flows that don’t begin for 20 more years produces a surprisingly low number).