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I think it is worthwhile to spell out explicitly that attacking GDPism is a much more limited goal than attacking productivism. A productivist can easily share many or most of our criticisms of GDP as The One True Proxy without sharing our view that GrowthTM is not unequivocally good.

GDP is a useful indicator - it would be difficult to do economic planning without that indicator. As the diary points out, there are several caveats in interpreting it: Rebuilding a house knocked down by a storm increases GDP, because the house didn't count when it was standing up; raw materials are presumed to be worthless; and those informal favours and pleasures of other people's company which are judged to be too trivial to count as income for tax purposes are discounted.

The two former could actually be resolved by using the net domestic product instead of the gross. The net domestic product includes amortisation of assets, which includes depletion of non-renewable raw materials. However, amortisation of assets is for the overwhelming part a purely internal process on the balance sheet of an economic actor, so getting reality-based data for it is a real PITA.

But the fundamental problem with GDP is not that it's a bad indicator. The fundamental problem with GDP is actually not a problem with GDP at all. It is the universal problem inherent in elevating any single indicator to The One True Proxy. There is no law in econometrics more ironclad than the observation that the value of an indicator as a proxy is inversely proportional to the amount of political attention being paid to it.

Not because politicians are stupid and pick the wrong indicators, but because once you become fixated on The One True Proxy, you are liable to use it as a proxy for variables that it really cannot reliably reproduce - such as using GDP as a proxy for overall societal achievement. If you become fixated on The One True Proxy, you are also much more likely to enact policies that target the proxy, rather than the causal mechanism that made the proxy useful in the first place. Lowering the fever is much easier than curing the patient - and breaking the thermometer is even easier.

A second technical point is that many common uses of GDP implicitly assume that price can be used as a proxy for value. The theoretical justification for this only really makes sense under conditions that do not obtain in any modern economy - namely, if consumer wants are independently established and well-behaved, and producers maximise discounted profits (and there is a well-behaved financial sector which arrives at a uniform discount rate). In a planned economy GDP is a different sort of beast (still useful, just for different things). And all modern economies are substantially planned economies, although the sovereign may not be the entity doing the planning.

Moving beyond the technical problems with GDP, there is another technical problem with national accounts, in that financial assets are counted as capital. That capital and financial assets are not equivalent is actually another point that might confuse new readers: Capital is the physical means of production - financial asssets are promises of command over the physical means of production, or their products, at some future date. The two are only interchangeable if the financial sector is well-behaved. Which it stops being almost immediately when policymakers start assuming that it is, because keeping the financial sector well-behaved requires constant political vigilance.

Further, and staying in the national accounts, production of goods and services that are free at the point of delivery is, by definition, assumed to make no profit. There is a technical reason for this: Goods and services that are provided free of charge are assigned a virtual price, which is then booked as production income for the producer of the free good or service, as a subsidy (expense) for the producer and as a gift (income) for the consumer of the service. This virtual price is, by definition, equal to the cost of production.

While this does sort of make sense, it means that there is a bias against free stuff in the GDP calculation. Imagine that, instead of having a public hospital system to treat patients, we outsource hospital services to a wholly owned subsidiary of the national retirement fund, pay them out of income taxes (which are secondary allocation, and thus do not enter into the computation of GDP), and use the profits to defray the outlays on retirement benefits that would ordinarily accrue from general revenue. The hospitals are the same. The staff is the same. The patients are the same. The cash that actually changes hands is the same, except for some accounting technicalities purely within the consolidated sovereign balance sheet and cash flow. But this game of three-card monte has magically increased GDP by the full profits that the national retirement fund accrues from owning hospitals...

All of the above exposition is a purely technical one that any student of economics, regardless of ideology, should be able to follow. So, as should be obvious, GDPism has far more problems than productivism: GDPism is a subset of productivism, which means that all the diary's excellent criticisms against productivism apply with full force to GDPism, on top of the technical problems outlined above.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Oct 2nd, 2010 at 06:33:33 AM EST
The above exposition points to two further issues that may confuse newcomers:

  1. A substantial fraction of ET regulars are persuaded that WesternTM economies - indeed all modern economies - are best described as planned economies rather than market economies (and that the dichotomy between market and planned economies is a somewhat artificial one).

  2. Financial assets are not capital. Money in the bank is not wealth. Shares in the stock market are not wealth. Those things are command over wealth, but only if that wealth actually exists in the first place. This is taken to be obvious by most ET discussion, but it is not a part of the Conventional Wisdom of the larger society.

- Jake

Friends come and go. Enemies accumulate.
by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Oct 2nd, 2010 at 06:40:44 AM EST
[ Parent ]
"I think it is worthwhile to spell out explicitly that attacking GDPism is a much more limited goal than attacking productivism."

I fully agree -but well, it's the flagship and this was intended for a new reader. I wanted to quickly show how some things that are taken for granted in the mainstream media are actually very artificial.

You are quite right that a detailed position on productivism is a more complex issue, one that I didn't think I could entirely address. If my entry were to spark such a discussion, though, I would be very glad.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Sat Oct 2nd, 2010 at 06:48:44 AM EST
[ Parent ]
You are quite right that a detailed position on productivism is a more complex issue, one that I didn't think I could entirely address.

I think you actually do it very well, which is why I didn't comment on that part ;-P

I particularly liked this bit (my emphasis):

Chasing a higher production level is pushing through some very unpleasant choices. The environment is badly stretched. Workers are put through enormous pressure. We are taught to behave as individualists. Whole cities are turned into artificial attraction parks. Workdays are long, and often involve very long commute, because jobs don't last as long these days so it's difficult to make sure you live close to work.

And for what? Well, I'm not too sure. More toys, probably. [...] Most of us at ET feel that "more toys" is not such a great prospect as to be willing to sacrifice everything for it.

The only thing I'd change would be to make a clearer distinction between the first three paragraphs in the middle section, which are technical problems with GDPism, and the last three paragraphs of the same section, which are ideological charges against productivism.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Oct 2nd, 2010 at 07:05:56 AM EST
[ Parent ]

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