Thursday, June 14, 2007


One of the proximate instigators of this blog was the off-handed credit offered by an economist to feminists for continuing to remind people that non-traded goods and services — in their favorite example, unpaid housework — isn't included in the GDP. In principle, if my neighbor and I each mow our own lawns, that isn't in GDP, but if we each pay each other to mow our lawns, it is, even though, in practice, it's likely to be missed. There are related nonpecuniary (or partially nonpecuniary) transactions that will similarly be excluded; if I choose a low-paying job over a high-paying one, it seems that my share of GDP should be higher than if I were forced to take the high-paying job that I would like less. And that gets closer to the main problems I wanted to highlight.

The first point is that economic concepts of value are essentially relative; the value of a thing only makes sense in comparison to not having the thing. In particular, trying to assign a value to "everything in the world" requires comparing it to a world with nothing in it; in mathematical terms, value forms an affine space. (This is also one of the problems with occasional valuations of the environment.) If we want to value the goods and services we produce in a year, we're comparing it to a world in which we aren't producing any goods and services.

The next point, though, is that the extent to which some good enters into GDP is its quantity times its price; for example, apples contribute to GDP in an amount equal to the sum of the prices of each apple. The price of an apple, though, is the amount of benefit it provides in the current world, where there are lots of apples. If there were a single apple, someone somewhere would be willing to pay a lot of money for it, and that would set its price; the loss if there were no apples would be considerably greater than simply their price times their quantity. (It would be even greater if there were no oranges, either.) A similar problem is with the measure we use for GDP; we measure it in dollars. Economists, of course, try to factor out inflation, to produce a "constant-dollar" measure; this doesn't solve the problem when we're trying to trade all goods and services. The value of a dollar is calibrated against what it can buy; a real value is a price in terms of real goods, and it's hard to make sense of figuring out what we would be willing to trade for everything if nothing existed. To some degree of approximation, we can imagine trading a multiple of one year's product against a multiple of another year's product, but the two multiples aren't likely to scale perfectly linearly against each other. It's specious to think of GDP as the value of all the goods and services; it's more nearly a thousand times the value of one one thousandth of all goods and services.

Finally, there are attempts by some people to correct the broken window fallacy; when a window is broken, we have to replace it, and the cost of the replacement is counted in GDP, even though it simply gets us back to where we started. There is probably some value to this point, but many goods and services are intended to be nondurable, and are valued in their continued consumption for keeping our equilibrium against the forces of entropy at a more favorable level than they would be otherwise; indeed, virtually all goods are, at best, finitely durable, and the value of a durable good lies in its expected ability to provide some nondurable value on an ongoing basis, subject to whatever maintenance it's subject to, until it inevitably wears out — or is broken. If we're going about smashing windows to improve the economy, we've made a logical error, but so long as the rate of window-smashing is more or less in line with the reasonable expectations people had when they decided to buy the windows, I'm inclined to say that that was included in the value of the windows as it's recorded in the GDP when the window was purchased.

It's kind of nice to think of GDP as the value of all the goods and services we produce; modulo some concerns about how we count our leisure, our social interactions, and other nonpecuniary pleasures of life, per capita GDP is more nearly what it purports to be, even if it can't be measured perfectly. Ultimately, the hope is that any errors we make are systematic, and that GDP, as measured, performs well at whatever we try to use it for; from that standpoint, it really does seem to do a reasonable job at measuring economic growth, and, ultimately, that's probably good enough.