Economists Don't Understand The Information Age, So Their Claims About Today's Economy Are A Joke
from the if-you're-using-gdp,-you're-missing-the-point dept
For years we’ve pointed out how GDP (Gross Domestic Product) isn’t a great way to measure the economy, especially in the digital age. Even if we assume that GDP can be calculated accurately (and, really, it can’t), it’s an aggregate piece of information, hiding lots of important things underneath. In the extreme, you could have one massively wealthy person who collects all the money, while everyone else has no money, and you could still see a “healthy” economy in GDP terms. Even worse, when it comes to the information age, GDP calculations get… both terrible and terribly misleading. Part of the problem is assuming that value only comes from things that are paid for. There’s always been some element of this problem in traditional GDP calculations when dealing with more informal economies (how do you calculate the GDP of a stay-at-home parent who cares for a kid and cooks the meals?). But, when it comes to the information age, this issue has grown exponentially — especially since so much online is “free to the user.”
On top of that, the ongoing march of technology continues to make things cheaper and better (yay, Moore’s Law), but getting a computer that’s twice as powerful for half the price shows up in GDP calculations as half the economic output, rather than 4x the value. That’s why it’s great to see economic historian Joel Mokyr take this issue on in a great Wall Street Journal piece pointing out that too many economists focus on GDP and don’t understand the information age.
Many new goods and services are expensive to design, but once they work, they can be copied at very low or zero cost. That means they tend to contribute little to measured output even if their impact on consumer welfare is very large. Economic assessment based on aggregates such as gross domestic product will become increasingly misleading, as innovation accelerates. Dealing with altogether new goods and services was not what these numbers were designed for, despite heroic efforts by Bureau of Labor Statistics statisticians.
The aggregate statistics miss most of what is interesting. Here is one example: If telecommuting or driverless cars were to cut the average time Americans spend commuting in half, it would not show up in the national income accounts?but it would make millions of Americans substantially better off. Technology is not our enemy. It is our best hope.
Mokyr is one of the best of the best, and I’ve often found myself recommending his books (The Lever of Riches: Technological Creativity and Economic Progress is a personal favorite), and this is another great example of his work.
And, yes, economists will argue that they understand the problems of GDP, and yet they still rely on it, because there isn’t something better. As we’ve noted, however, when you have a bad metric, even if you know it’s a bad metric, you still tend to optimize for that metric. Because that’s what you have. Yet optimizing for GDP could actually limit and hinder innovation, creating results that are actually negative for the well being of the public, just because of the impact on GDP.
And that leads to bad policies, misdirected concerns and dangerous views on innovation itself.