Losing Affection for GDP – Econlib

• The more I delve into economic statistics, grappling with the real-world complexities, the less convinced I am that we possess any firm understanding of our current economic landscape.

• –Diane Coyle, The Measure of Progress: Counting What Really Matters, (page 29)

It would be refreshing to have unambiguous metrics for gauging economic progress. We yearn to determine if one nation is advancing more swiftly than another or if particular time frames yield greater progress than others. Furthermore, we seek to understand the impact of varying policies and institutional frameworks on this progress.

For decades, Diane Coyle has been at the forefront of researching the nuances of measuring economic progress. Her insights and analytical prowess render her work, The Measure of Progress: Counting What Really Matters, a critical read in this domain.

The predominant metric for economic performance is Gross Domestic Product (GDP), often presented as either a total figure or on a per capita basis. However, GDP figures are frequently cited in media and by economists with scant regard for the complexities involved in deriving these estimates.

Let’s consider a simplified economy that produces wheat and cars. We can tally the bushels of wheat harvested and the number of cars produced. If we wish to assess total output from last year to the previous year, we assign monetary values to both a bushel of wheat and a car based on market prices. After multiplying the production quantities by their respective values and summing them up, we arrive at GDP. While there are challenges in transitioning from market prices to relative values—especially with variable prices year over year—these are relatively minor hurdles.

A significant complication arises from the fact that crucial sectors of the economy provide goods and services that are not easily quantifiable like wheat or cars. What’s the best way to measure healthcare services, banking services, or educational output from universities? Unlike the 1940s, when GDP metrics were first developed and agriculture and manufacturing dominated, these sectors now contribute far less to economic activity.

• In 1947… about half the economy was measurable; by 1990, less than a third; and by 2019, it dropped to around a fifth….

• The evolution of leading economies over the past ninety years has rendered the [GDP] framework a distorting lens, effectively a set of blinders. A new approach is necessary. (pages 14-15)

Coyle’s chapter titled “Value” reveals that the measurable part of the economy comprises goods and services for which we can observe quantity, quality, and pricing. Yet for many online consumer activities, we lack observable quantity. Rapidly evolving products, such as smartphones, complicate quality assessments, while much of the digital landscape is available for free, obscuring pricing metrics. Additionally, many prices are artificially inflated, as seen in hospital fees, college tuition, and the imputed rent of housing services.

To evaluate quality, one might view a product as a collection of features. For instance, a car’s value encompasses durability, fuel efficiency, design, seating capacity, and amenities. In theory, one could calculate the value of each feature and aggregate them. However, the task of valuing a smartphone—whose bundle includes a camera, telecommunications services, computing capabilities, and a suite of applications—is laden with difficulties. The same goes for service bundles provided by telecommunication companies.

Since the early 1970s, a noticeable slowdown in progress, as measured by GDP, has been observed in the United States and other Western nations. Coyle notes that this slowdown is widely recognized by economists, who offer various explanations, yet it remains an enigma that the data fails to elucidate.

• I now believe that probing productivity at either the firm or sector level will yield limited insights…. The available data is being tasked with an impossible burden….

• Part of the productivity puzzle may stem from overstated deflators, which lead to underestimations of the value of new and improved goods and services. (pages 53-54)

GDP calculations presume that consumption, aside from durable goods like cars that provide services over time, occurs instantaneously. However, the temporal dimension has gained considerable significance.

• For numerous digital goods and services, the monetary price of consumption is often zero, yet it demands time and attention. (page 66)

This complicates traditional methods of measuring consumption costs. There’s no systematic way to collect information on the time expenditures associated with consumer items, and these can vary widely among individuals.

Another aspect of time in progress measurement is the extent to which an average person must work to afford various goods. On page 194, Coyle provides examples from the UK in 2019 compared to 1990. While the hours required to purchase a refrigerator halved, those needed for a movie ticket tripled. This underscores the necessity of understanding how individuals value different goods to assess improvements in living standards.

Coyle also expresses concern regarding the consumption of natural resources and its implications for future living standards.

• Global demand for natural resources is increasing in absolute terms. Ed Conway’s Material World (2023) underscores the expanding human planetary footprint: “In 2019, we extracted more materials from the earth than all that was mined, dug, or blasted from the dawn of humanity until 1950.”…. In stark terms, we are progressively deforesting and urbanizing the planet. (page 205)

It’s worth noting that this alarmist viewpoint is debatable. In a 2015 white paper titled “Nature Rebounds,” Jesse Ausubel pointed to improvements in food production efficiency leading to a return of American farmland to nature. Furthermore, in their book Superabundance, Marion L. Tupy and Gale L. Pooley highlight a decline in raw material prices, suggesting that we are not depleting them at an unsustainable pace.

Coyle advocates for broadening our understanding of capital to encompass six types:

• … physical or produced capital, alongside human, natural, social, institutional, and knowledge/intangible capital. (page 212)

While acknowledging the importance of all these elements for overall prosperity, I remain skeptical of her “comprehensive wealth” concept, as I doubt that simply adding these elements would yield a coherent picture of a nation’s wealth, especially given the nonlinear influence of institutions on the productivity of other capital types.

In her concluding chapter, Coyle proposes that

• … a time-use accounting framework, paired with comprehensive wealth measurement, provides a holistic approach to understanding progress: How efficiently do societies utilize available resources to produce and consume valuable activities and products? How sustainable is this endeavor—are we enhancing our well-being at the expense of resources or capabilities for future generations? (page 258)

However, I found myself unconvinced by this perspective. Rather than seeking a definitive answer to economic progress, it may be more fruitful to refine our questions. Different inquiries may necessitate distinct indicators.

It’s likely that progress will hold different meanings for different individuals. This realization urges caution regarding the pursuit of a singular measure of progress. Instead, we might benefit from attending to a diverse array of anecdotes and indicators, prepared to engage in spirited debates over the implications of these observations.