Submitted by Charles Hugh-Smith of OfTwoMinds blog,
Any system that has no way to measure, much less prioritize, opportunity costs and maximization of utility is not just flawed--it is terribly misguided and structurally destructive.
We're told the gross domestic product (GDP) measures growth, but what it really measures is waste: capital, labor and resources squandered in quixotic pursuit of waste masquerading as "growth."
50 million autos and trucks stuck in traffic, burning millions of gallons of fuel while going nowhere? Growth! All that wasted fuel adds to GDP. Everyone who works from home detracts from "growth" since they didn't waste fuel sitting in traffic jams.
Repaving a little-used road: growth! Never mind the money could have been invested in repairing a heavily traveled road, or adding safe bikeways, etc.--in the current neo-Keynesian system, building bridges to nowhere is "growth."
GDP has no mechanism to measure mal-investment or the opportunity costs of squandering capital, labor and resources on investments with marginal or even negative returns.
Buying a new refrigerator that could have been fixed by replacing a $10 sensor: growth! GDP has no mechanism for calculating the utility still remaining in roads, vehicles, buildings, etc. that are replaced--throwing away all the fixed-investment's remaining utility to buy a new replacement is strongly encouraged because it adds to "growth."
Building and maintaining extraordinarily costly weapons systems that are already obsolete: growth! The gargantuan future costs of interest paid by taxpayers on the debt borrowed to pay for the obsolete weapons is not calculated by GDP. The staggering costs of indebting future taxpayers is ignored by GDP--the only thing that counts in GDP is "growth."
Tearing out a functioning kitchen to install granite countertops and new appliances: growth! GDP has no mechanism to measure the decline of quality in new appliances, or the marginal utility of granite countertops over the existing surfaces.
Writing complex derivatives designed to defraud the buyers: growth! The immense profits booked by investment banks and the bloated salaries of the financiers who wrote and sold the guaranteed-to-default derivatives add greatly to GDP.
Creating another huge bureaucracy to oversee the financiers: growth! Squandering taxpayers' money on more layers of bureaucracy adds to "growth" and GDP--never mind that the labor is all wasted, since a 12-page law could have achieved the same results at near-zero cost.
GDP has no mechanism to measure the value of alternatives that use less capital, labor and resources to get the same results.
Tossing out an item of clothing that was worn once or twice in favor of the latest fashion: growth! GDP has no mechanism to measure what else could have been done with the oil burned to ship the new item of clothing across the Pacific and truck it to the retailer; if a consumer spends money on the new clothing, GDP registers that as "growth" (the only economic metric we measure and value) without calculating what else could have been done with the non-renewable resources squandered on frippery.
GDP is another outmoded part of the Keynesian Cargo Cult that worships "growth" and spending (a.k.a. aggregate demand) as the only goal. The Keynesian Cargo Cultists believe that paying people to dig holes and refill them is an excellent strategy for "growth:" ordering bureaucrats to bury wads of cash in abandoned mines and then turning the unemployed hordes loose to find the cash is Keynes' own example of worthy ways to generate "growth."
This narrow way of understanding the world completely ignores the non-renewable nature of fossil fuels and the critical concept of maximizing the utility of capital, labor and resources.
Any system that has no way to measure, much less prioritize opportunity costs (i.e. what else could have been done the capital, labor and resources) and maximization of utility is not just flawed--it is terribly misguided and structurally destructive.
You didn't build that GDP
Y = C + I - G + NX. All fixed Charles.
If everyone came down with a fatal disease that required an expensive cure, the GDP would grow greatly as at the same time the citizens would suffer greatly. Thus proving that an economy based on GDP, is a seriously flawed one.
Million dollar laser guided bomb dropped from $100 million plane to destroy $80000 (captured) Humvee. BIG growth.
Consequences will have their day.
I'm doing my part to boost GDP - I'm smoking 2 packs per day so I get lung cancer.
Scumbama care and Social Security thank you very much.
Try to work up to 4 packs a day so you can grow the GDP. Then you'll get lung cancer and help the GDP even more by needing millions of dollars worth of healthcare. Go Spungo, you overachiever!
Glock 17 and ammo from local FFL -- $600
Monthly PM purchase from LCS -- $750
Seeds, gardening & canning supplies, etc -- $200
House and cars paid off -- $0
Trading soon-to-worthless FRNs for something of real value -- priceless
Nice rant, but it goes nowhere.
GDP minus all government and adjusted for real inflation, would be a damn fine place to start measuring the real economy.
Gross National Income, long disused, adjusted as above, would be even better.
Yep, subtract government spending and subtract indirect government spending like the trillions of government debt to support healthcare. I think if all government spending were excluded from GDP there would be no GDP -- our entire economy is supporting government spending.
The thing of it is, when the government and CB's technocratically manage the economy we have no way of knowing how much of anything is needed that they say is needed by decree.
The problem isn't so much the GDP calculation being flawed, it's that the dollar it's measured in is meaningless.
yeah try comparing with USD two cases:
$100000 spent to buy one car which costs $100000
$100000 spent to buy 100000 cars each costing $1
GDP is the same the only difference is how many people have to drive new cars - 100000 or just 1
This.
I love Charles, but he misses the boat here. The basic concepts of national income accounting, developed in the 1930s by the great Simon Kuznets, were pretty good and pretty useful IF used properly and their limits understood and respected.
This is a big "if" I admit and Charles is right that the GDP concepts get misused by Keynesian "GDP fetishists". But Charles should know that you cannot sum utility functions. Moreover, Simon Kuznets did his early GDP work before Keynes published the General Theory.
So while his heart is in the right place, he needs to think more about this critique.
Growth, growth and more growth! To infinity and beyond!
stats are utilized to lie far more than any other purpose.
A timely reminder of the stupidity of modern economics. GDP does not measure product. It measures churn and turnover. Hence when treading water and going nowhere you turnover your hands and feet alot, and produce alot of GDP, but go nowhere. A well grooved crawl stroke has a low GDP but gets you somewhere. GDP is a fiction for fools. all it measures is friction.
Yes, precisely, only "churn and turnover," i.e. spending totals, which are a function, not of production, but of money supply.
GDP is a fraudulent name; it should be GDEP or "gross domestic expenditure on product" but, put this way, it obviously just tracks (not "measures") only money/credit expansion. Politicians and central bankers bragging about how they increased "money and credit" wouldn't have the same ring to it as "production."
GDP records the whirl of spending. That's it. It doesn't "measure" ANY kind of production, rational or irrational.
"We're told the gross domestic product (GDP) measures growth, but what it really measures is waste: capital, labor and resources squandered in quixotic pursuit of waste masquerading as "growth." "
I will definitely buy that description.
If you ever wanted to create two economic measurements that were intended to deceive the people into a false belief that the economy was running along just fine, GDP and CPI would be the answer.
GDP is basically an income statement, not a balance sheet. Anybody can fudge an income statement. If we judged our economy on a balance sheet, we'd be fucked.
u know the world is fucked when prostitues and drug transactions are considered GDP.
Soon, they will also estimate the church or temple donations and collections as part of GDP also. Any religious contribution will be accounted for growth. Also terrorists activities will also be included soon.
We should understand that demand drives investment, confidence is not the real driver. Lack of real growth is about lack of real demand. Much of the demand we see today is driven by artificially low interest rates and QE that distorts the markets.
We must differentiate the kinds of economic growth and understand that all growth is not created equal. If you spend money but afterwards have little to show for it you have wasted it. Sadly, much of the money America "invests in itself" each year through government spending and programs falls into this category. More on the kind of growth we need in the article below.
http://brucewilds.blogspot.com/2014/01/false-demand-fuels-wrong-kind-of-...
Great stuff Charles. Now, just add the understanding of path dependency and it will further crystallize how much damage these financialization games are doing to our children's future.
Great title and now CHS talks the language of Piketty.
What is wealth creation about, who does it enrich and what time frame does it address?
Capitalism is a means to an end; a tool.
Until society defines its key values and what "common good" means, aka whom or what VALUES (Aims) society as a WHOLE serves, talking about the MEANS is meaningless.
politicians like to use GDP because it correlates with tax collection
50 million autos and trucks stuck in traffic, burning millions of gallons of fuel while going nowhere? Growth! All that wasted fuel adds to GDP. Everyone who works from home detracts from "growth" since they didn't waste fuel sitting in traffic jams.
That is only half the story. In NJ, it that wasted burned fuel each day is great for the environment! The alternative, roads that can handle the traffic is called "sprawl" and is bad bad bad. Want to improve the environment, you don't create lanes, you close those them.