Comments (20)

• Bruno Panetta

• I think the problem is not really with GDP per se, but with the way it is interpreted by many economists, and the way in which it is used as a justification for interventionism by politicians.
  However, in my opinion it is wrong to say that GDP or GDP growth are meaningless figures. GDP does measure the amount of economic activity. The main problems with it are

  1) Higher GDP is not necessarily desirable, since it may result from state intervention (e.g. in a war economy). In this case it will bring along inflation, or shortages in case of price controls. In Samuelson's dear USSR queues in front of shops were a regular occurrence even during the GDP 'boom', because of shortages and misallocation of resources. Shortages were also a common problem in nazi Germany, until the spoils of its WWII conquests became available.

  2) GDP cannot be discounted using measures such as the RPX or the GDP deflator. A much better idea would be to use money supply growth, ideally Austrian Money Supply growth.

  3) Only GDP growth can be compared between different countries. PPP figures for GDP are hard to measure and very unreliable.

  Bruno

• Published: August 10, 2005 7:27 AM

• Dave Scotese

• I think Antony has a good point and I agree that the GDP is largely useless. I wanted to explain how I can come to this conclusion despite the fact that I don't think I comprehended the article all that well...

  Suppose that you and I trade a 100 million dollar building back and forth. We have a $100M bond represented by a piece of paper and the operations in the building are the responsibility of the owner, and you and I, in our changing lives with vacations, new projects and whatnot, find a reason to transfer ownership often. I believe that if we make the price of the building high enough, and the government uses GDP to measure economic health, that all the intervention will be to compell us to trade our building back and forth more often during the year.

  Am I wrong to assume that the sale of the building from one of us to the other would be added in to the GDP?

  Dave.

• Published: August 10, 2005 10:02 AM

• Matthew Armstrong

• Dave,

  GDP measures only consider the production of new goods, so used items such as old homes and cars would not count. This is of course another shortcoming of the GDP as an indicator of economic health. When two people create wealth by trading used goods, both are made better off as the result of volutary trade, yet this does not contribute to this measure of economic growth. The trading of an old building as in your example is simply considered a transfer of wealth.

• Published: August 10, 2005 10:57 AM

• Som

• Yeh i see how GDP is useless and can be very misleading, but how would an Austrian economist determine the social welfare of a nation? Sure we can measure government interference with the economy, the respect for private property rights and contract, and amount of taxation and free trade one country has to predict that the country is doing well (and certainly better than non-free countries), but how would an austrian know production is increasing in a given country and the standard of living (for the poorest people, because law of free markets advances their material welfare as well)?

  I mean, say there are 2 Anarcho-capitalist countries, both islands the size of hong kong and generally there is no difference in demogrpahics like pop size, geography, or whatever. We know that both countries are much likely increasing production and social welfare at their own time prefered rates. Now lets a 15 mile tidal wave (yeh yeh i kno i kno!) hits one of the islands one year, wiping out a quarter of the population and nearly 1/2 of the indutrail factories on that island, no gov. aid is given so only free human action can restore the victims back to normal.

  How would an austrian determine the progress rate of the damaged country in this scenario? What would be the best way to see the production of the damaged island grow again, as people want to restore themselves to their pre tidal wave economy? Can an austrian economist measure the progression of the trade deficit of the damaged island compared the other one? Do we go by obsrved standard of living from island victims? the restoration of savings as a sign of recovering from the tradgedy, going back to normal, so people have the ability and desire to save again? I kno individuals can't be lumped together and call it economic growth, but how can a general standard of living be figured out from a scenario like this?

  Any insightful answers? thanx!

• Published: August 10, 2005 3:24 PM

• Stefan Karlsson

• With all due respect to Professor Mueller, I think he is mistaken on a number of points.

  First of all, economic growth is hardly a concept to be rejected since it is a synonym for increased prosperity. And in a market economy everyone's actions generally aim for "economic growth" for their personal finances or for their company.

  Secondly, to say that it is impossible to compare different baskets of heteogenous goods and services ignores the existence of money. Even though Coca Cola and Microsoft produces very different things it is possible to add up the value of their sales because they are both measured in money.

  Third, GDP numbers can be useful for investors and businessman. Part of that need is of course created by the weight that policymakers attach to it, but it can also be useful in estimating how big the potential market for a new product can be and thus how much should be invested.

  Fourth, while one should take GDP numbers with a grain of salt because of the inevitable measurement problems not to mention of course the manipulation of the numbers by governments trying to make the economy look better it is clear that they do at least roughly reflect real differences between countries and between different times in the same country. The 30% decline in GDP during the great depression certainly reflected real developments and it is clear that the higher GDP/capita in the United States compared to Mexico reflects real income differences, as the flow of illegals illustrate.

  Fifth, GDP statistics generally supports the case for the free market, as for example the relatively capitalist countries in East Asia and Eastern Europe greatly outperform welfare statist Western Europe. While it is true that the Soviet Union and Nazi Germany on paper for a time had fast growth this actually did reflect increases in production, although particularly in Nazi Germany mainly things which was not useful as it was not demanded by anyone except the government. This is not comparable to growth in the production of items demanded by the market.

  I was in this context to see the reference to China as being "development dictatorship". While the Chinese government certainly is not consistently laissez-faire, the Chinese economy is predominantly capitalist today.
  

• Published: August 10, 2005 3:37 PM

• misc

• I think you could argue that measuring the economy as a whole serves no useful purpose. If laissez-faire is the optimal policy (in all cases), then you would never change policy based on a macro-measurement (like GDP), rendering the measurement useless (since it's purpose was to evaluate policy).

  However any particular individual or group could conceivable construct a (or use any pre-existing) subjective measure for their own purposes (whether humanitarian charity or business investment or cheap labor, etc..).

  (note: I may or may not know what I'm talking about)

• Published: August 10, 2005 3:51 PM

• Mark Sunderland

• In using prices to weigh different goods, only the value of the marginal unit of each good is revealed. The relative value of all other units traded is unknown and therefor the value of the economy as a whole is unknown.

• Published: August 10, 2005 5:24 PM

• Som

• Oh duhhh! I just found out the answer to my previous question. Whats wrong with economic growth figures is that we dont need an economic "growth" chart for any country at all, the free market has long provided us with all the information we need to watch the "general" progress and social welfare of a country...

  The Stock Market

  and about inflation. Just watch the gold stock. (otherwise it would not make much sense to say that the gold standard is a stable commodity. )

• Published: August 10, 2005 5:36 PM

• Paul Edwards

• What a great article. Thank-you.

  I've always had something in the back of my mind that bothered me about GDP, but i never took the time to think it through. My original concerns circled around the problem of inflation and how to accurately reflect or measure productivity or prosperity in terms of an ever inflated dollar. But this article makes it plain that beyond that, even with a gold coin standard, this aggregate in terms of gold ounces would remain meaningless. Measurement is not possible against any money because the subjective value of money would not be fixed. There would be no fixed measurement with which to measure against. So in the case of an honest commodity money economy, with no inflation, and a free market, prices would surely plummet over the years as productivity would increase at a high speed. What sold for a gold ounce ten years ago, might sell for a tenth of an ounce today and it might be better as well. Production might explode with a concurrent massive reduction in living expenses. How could an aggregate of money prices measure in a useful way such increases in productivity and prosperity? I agree. It couldn't.

• Published: August 10, 2005 5:43 PM

• averros

• The fundamental problem with all macroeconomical measures is that they are, essentially, no different from computing average temperature of all patients in a hospital.

  The real question would be - are people *feeling* better off or worse off? But, wait, someone measured that and found that the happiest people live not in US or Luxembourg or China - but in the kingdom of Bhutan.

  Makes one think if we really need the misguided rat race usually called "progress".

• Published: August 10, 2005 7:08 PM

• Georgist

• Ground rent of land should be deducted from GDP calculations since it is a deadweight loss. (That means the rent of all land, whether or not someone's paying rent on it.) As should government expenditures. Such a methodology paints a strikingly different picture of the 20th century...

• Published: August 10, 2005 9:52 PM

• misc

• A voluntary-exchange GDP might be interesting (if it's possible to calculate).
  

• Published: August 10, 2005 10:41 PM

• KY Leong

• This article quickly reminds of Hazlitt's "Fetish for Full Employment" (1946). Both are succinct & insightful exposition of modern-day government economic follies. Aggregating national "product" unwittingly from IUOs (consumer debt & government deficits) and calling it "Growth" seems to me just as misguided, fallacious & hazardous to our economic health as socialistic make-work programs and printing fiat money. Wasn't it Lord Keynes himself who declared "..in the long run, we are all dead"? You bet, in more ways than one, we may now add.

• Published: August 11, 2005 12:20 AM

• Stefan Karlsson

• Paul, I must say I cannot understand your reasoning. If production increases fivefold and prices falls 80% thus making nominal GDP unchanged then this mean that real production (i.e. GDP) have increased....fivefold. It is merely to adjust for price changes. And whatever misgivings we may have about the current inflation statistics that is certainly possible.

• Published: August 11, 2005 3:05 AM

• Maikel Van Zaanen

• I last heard about a table in Tom Dilorenzo’s book “How capitalism saved Americaâ€? that showed how long someone had to work to get a certain product(say a bicycle) in 1900 and in 2000(I’m not sure about the exact years). The table listed a whole range of products. It’s a simple way to see how living standards can improve over the years, far from goverment "calculation".

• Published: August 11, 2005 4:17 AM

• Luis

• Great Article.

  Natura science influenced all so much. All must be able to be measured or does not exist.

  This is one of the greatest damages ever to human intelligence.

  Some bits of post-material valuations are necessary and assuming that no individual nor organization can ever reduce such complexity as economy to a figure is really a must.

  This reduction makes much more damage than benefit.

  That's my view.

  Take care,

  Luis

• Published: August 11, 2005 6:05 AM

• Paul Edwards

• Hi Stefan:

  I could be wrong because i haven't worked on this one as thoroughly in my mind as i like to. But the article really struck me as intuitively true. And the direction it took my reasoning is as follows: when i measure something, my scale or yard-stick must be fixed and known and must not change as a function of the thing i am measuring. In the case of a monetary measurement of productivity and wealth, money sits directly on each individual's same value scale as all the other goods and services he is also subjectively valuing. These valuations are all relative and they keep changing. None are absolute. Therefore, I question that one can usefully translate a nominal (and not directly useful) GDP into a real (and useful) GDP, independent of the production we are attempting to measure. I guess it's the premise of an objective and useful "adjustment" factor that i question.

  I have no idea if the above paragraph has come out coherently.

  On the other hand, if i knew of a nation living in relative mansions, driving relatively nice new cars with air conditioning and taking nice long vacations, while my nation lived in discomfort and squalor, i'd have just taken the kind of GDP reading that really hits home with me.

• Published: August 11, 2005 4:18 PM

• Stefan Karlsson

• Paul->"when i measure something, my scale or yard-stick must be fixed and known and must not change as a function of the thing i am measuring."

  I don't see why that must be the case as long as the yardstick can be measured independently. Surely you can say something about a corporations return on capital by comparing its profits with the amount of invested capital even though this return has been affected by that investment.

  "In the case of a monetary measurement of productivity and wealth, money sits directly on each individual's same value scale as all the other goods and services he is also subjectively valuing."

  But price index adjustments aren't supposed to measure subjective value of money, but its purchasing power relative to goods and services. And that is what is relevant when determining how much the real volume of goods and services have developed.

  "On the other hand, if i knew of a nation living in relative mansions, driving relatively nice new cars with air conditioning and taking nice long vacations, while my nation lived in discomfort and squalor, i'd have just taken the kind of GDP reading that really hits home with me."

  I'm not entirely sure what you mean by this paragraph, but if you mean that if GDP figures correlate with obvious wealth differences then they would be meaningful. And I think it is quite clear that they do, at least in rough terms. I previously used the example of the US and Mexico where the US in 2003 had a GDP per capita of $37600 compared to just $6200 at current exchange rates (and $9600 PPP-adjusted) in Mexico. Although there are of course a lot of rich people in Mexico (mostly belonging to the ruling white elite) and many relatively poor people in the US, it is very obvious that the GDP per capita difference reflects real dramatic differences in wealth which is why there is such a hugh flow of illegal Mexican immigrants to the US.

• Published: August 12, 2005 11:59 AM

• Paul Edwards

• Hi Stefan:

  In addressing your point regarding money and calculation, i agree money is critical. But then we are taking differences; that is, income minus costs to show profit. This doesn't require an absolute result, just one that can be fit ordinally on the entrepreneur's value scale. The Mises quote from the article seems useful here:

  "Prices are always money prices, and costs cannot be taken into account in economic calculation if not expressed in terms of money. If one does not resort to terms of money, costs are expressed in complex quantities of diverse goods and services to be expended for the procurement of a product." And Mueller points out that values, being ordinal, not absolute cannot be added. To make that point, he again quotes Mises: "One can add up prices expressed in terms of money, but not scales of preference."

  And it strikes me GDP is meant to measure total absolute value in terms of money. However, as the above paragraph suggests, values on any individual’s value scales are ordinal and cannot be known absolutely, much less added to form a useful aggregate. So while we can add up the money prices of things sold, we cannot add up the actual values of these things sold.

  I admit i'm still grappling with it, but it may come down to this: A concept that can not be known and hence has no meaning on an individual level: the absolute value of any good to an individual (since values can only be known ordinally), can have only less meaning when aggregated across a complex economy of an entire nation.

• Published: August 15, 2005 12:57 AM

• Stefan Karlsson

• Paul, I think you're missing the point. The point is that GDP just like any money price or monetary aggregate isn't supposed to measure ordinal value scale of any particular individual and its meaningfullness does not depend on that.

  What GDP is supposed to show is how much goods and services people in a country has the ability to exchange for their money income. Money can in turn be exchanged for whatever item they have high upon their value scale (except to some extent in many cases complex items like love). That means that a higher GDP can be translated into people getting the possibility of fulfilling more and more of the items on their value scales.

• Published: August 15, 2005 4:40 PM