Economic Critique of GDP

When an economist starts out “But extrapolating from the current situation to say that long run sustained growth is over is taking it too far” and “Because the ultimate source of economic growth over history has been technological innovation, and there is still an essentially infinite scope for this to continue” they start losing me quickly.

But Dietz Vollrath goes on to make a point that makes the above much more simpatico for me.

Things like refrigerators, Diet Coke, and cars contribute to GDP every period because we have to make new versions of them over and over again. But in one sense that is a bug, not a feature. Imagine if, having invented Diet Coke, you could make copies for free. That would lower GDP, as Coca-Cola would drop to essentially zero revenue from here forward. But it’s demonstrably better, right? Free Diet Coke? Where do I put in the IV line?

Diet Coke is a good example here. Let’s say that you could replicate the physical inputs of Diet Coke for free, but that Coca-Cola still owned the recipe, and you had to pay them to use it. This would still lower GDP, as Coca-Cola would no longer be earning anything from the physical production of Diet Coke, only from renting out the recipe each time you wanted a Diet Coke. This is still a win, even though GDP goes down. Lots of current innovations are like making Diet Coke for free, but owning the recipe. They are worthwhile despite the fact that they do not necessarily contribute much to GDP, and might even detract from it.

EBay is a good example. Or AirBNB, or Lyft. If products are used more intensively, we need less of them. GDP goes down. Utility goes up.

But if we lack the means to allocate the utility we have “unemployment”. That’s where things go south. I wish Vollrath would discuss how we function in an economy where labor is superfluous. How do we move to a slack economy?


  1. "How do we move to a slack economy?"

    There is a nearly (?) infinite demand for such things as Barbara Cartland novels, Pokemon cards and other "things" that can exist and be sold, used and destroyed for the cost of a relatively few coulombs each, plus some glucose for powering mental invention.

    Virtualized crap is the way to a rosy, abundant future. Hopefully the future will not all exist within an Amazon walled garden.

  2. Do we actually want to avoid the economy of digital trifles? Because all the alternatives are pretty disturbing.

    The scariest thing is not how obnoxious and demeaning DRM and IP are. The scariest thing is that without them we don't have an economy at all anymore.

  3. "The scariest thing is not how obnoxious and demeaning DRM and IP are. The scariest thing is that without them we don't have an economy at all anymore."

    May have mentioned before, I've just been reading Diane Coyle's book on the history of GDP. I'd recommend it. There's a lot to chew on about how notions of wealth and output have needed to change as society has changed. She's also very good at framing the deep limitations involved.

    My point being, I guess, we don't end up in situations where output drops when the nature of production changes because the nature of measuring it tries to keep up. She mentions hedonic models as vital for accounting for quality differences that had been over-estimating inflation (you're paying twice as much for a better computer processor; previous methods didn't know what `better' meant, so it would just appear to be inflation).

    Seems that the more you move towards complex regression/econometric methods of bringing in economic complexities, precisely in order to keep important activity visible, the more opaque and unrepeatable the methods become. (I've been working with national accounts data a bit - I have to trust the UK statistics bods working in specific sector teams are doing a good job.)

    Questions that arise: what kind of measurement do we need? GDP (as Coyle points out) was a wartime innovation. It's evolved over time, but what data do we need for the anthropocene? Or is the issue more that measurement itself has to be re-assessed? We do need to steer ourselves to a carbon-free future. To do that we need to see which way we're going. What should we be using to help us see?

  4. Yes, these are the core questions and deep and complex ones, so interesting to me that I hope to add my own book to the pile someday, but to your final question the answer seems simple.

    We should measure carbon.

  5. The downside of digital trifles is the way they scale and the implications that has for inequality. You don't need to do 1,000 times as much work to sell a million copies as you do to sell a thousand. But you do need 1,000 times as many people to be aware of your product. And the problem is that everybody will know about the same ones. You see in markets like this (music, acting, etc.) a fame economy develops, where a handful you know about (and everyone knows about...) do very well, while a far larger number toil in obscurity for not much money. And I'm not even sure what the digital trifle equivalent of playing weddings and bar mitzvahs is.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.