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.
Filed Under: economics, efficiency, gdp, innovation, joel mokyr, marginal cost, technology
Comments on “Economists Don't Understand The Information Age, So Their Claims About Today's Economy Are A Joke”
GDP vs LOC
This has an interesting analog in programming: lines of code.
It’s a very old school approach to judge the productivity of a programmer by the lines of code he produces. However, considerable benefit can be gained by reducing this number rather than making it larger. This confuses and confuses large dinosaurian IT operations that can’t grasp the idea of efficiency.
Sounds like it’s the same with GDP
Re: GDP vs LOC
I believe it was Bill Gates who said measuring a program by lines of code is like measuring a battleship by weight.
Re: Re: GDP vs LOC
Most navies do measure battleships by their displacement weight
http://en.wikipedia.org/wiki/List_of_battleships_of_the_United_States_Navy#Battleship_classes
http://en.wikipedia.org/wiki/List_of_battleship_classes
Re: Re: Re: GDP vs LOC
True enough. But the navies don’t judge the entirety of the ship by weight. Weight (and LOC) is a metric that tells you important things. The issue is that for a long time, management types in the software industry misused LOC as a proxy for things that aren’t actually related to it very strongly: programmer productivity, software complexity, etc.
To use your analogy, shipbuilders don’t measure their worker’s productivity based on pounds-per-hour. Measuring programmer productivity by lines-per-hour makes exactly as little sense.
Re: Re: I believe it was Bill Gates who said
Exhibit A: Microsoft Windows.
I rest my case.
Re: GDP vs LOC
What if all that code is crap?
Re: Re: GDP vs LOC
“What if all that code is crap?”
It always is. If it weren’t, it would be shorter.
Re: Re: GDP vs LOC
I think that is kind of the point.
Re: Re: GDP vs LOC
What if all that code is crap?
Then it was probably developed by Microsoft.
Well you have to make the distinction between real GDP and nominal GDP
Re: Re:
Please, make the distinction for us!
Re: Re: Re:
Real GDP accounts for inflation and deflation and measures the net value of the economy from a base year. So if the price of a processor goes down and so now there are more of them that would increase real GDP.
Re: Re: Re:
Here is a Wikipedia article that explains it
http://en.wikipedia.org/wiki/Real_gross_domestic_product
This is nothing new and it’s not something Techdirt just figured out. Economists understand this very well, for Techdirt to suggest that Economists don’t understand the information age and they don’t understand things like how the public domain adds to the economy (in terms of real GDP) and Techdirt just figured this out recently is silly. This has been well understand by economists for many many years and Techdirt did not just figure out something so simple that economic theory hasn’t already figured after many many decades (and longer) of study.
Not to say that I disagree with the position taken in the OP. I completely agree that the public domain is a good thing and adds to real GDP and improves the economy and that IP protections have gone way way too far in hindering advancement and harming the economy. But that’s the whole basis of economic theory, that competition increases real GDP by increasing the net value of product available to consumers and that setting monopolies (ie: in the form of IP) restricts the economy and reduces real GDP. This is hardly anything new to economists.
The alleged argument for IP is that, while it temporary hinders the economy by reducing real GDP, it ultimately advances the economy when the product enters the public domain if that product wouldn’t have otherwise been created. Of course there are many assumptions behind this and I think there are many problems with the argument (one problem is that even if you assume IP does create incentive to do something it’s a way of allowing the government to decide which activities to incentivize vs the free market making that decision and the free market is better at deciding what activities to prioritize than the government) and given the fact that copy protection lengths keep getting retroactively extended it seems like that whole point is moot now anyways.
Re: Re: Re: Re:
Now if Mike wants to argue that shills, industry interests, and bought and paid for politicians don’t understand these things the response would be of course. Shills only understand what they are paid to understand. No surprise there.
Re: Re: Re: Re:
This is kind of an extremest example, so don’t take it the wrong way, but… I think saying that this is well understood by economists is kinda like saying there are good cops in the Ferguson, Missouri police department. You may be technically right when you say that, but you’re also not addressing some of the bigger disasters those people in general have had a hand in, so that argument lacks persuasiveness and relevance. Besides, clearly the good people do not outweigh the bad people here otherwise we wouldn’t be seeing such turmoil unfold in the first place.
Re: Re: Re:2 Re:
“Besides, clearly the good people do not outweigh the bad people here otherwise we wouldn’t be seeing such turmoil unfold in the first place.”
I don’t know about that. Would you suggest we just not have cops? I’m not saying the bad people should go unpunished and don’t warrant public criticism just that the fact that there are bad people that deserve criticism and punishment doesn’t mean the bad outweighs the good overall.
Re: Re: Re:3 Re:
Aw c’mon man, no one would suggest going so far as to fire all cops. That’s just silly.
…then again though, such silly things have happened before. Have you heard about how the country (not the state) of Georgia elected President Mikheil Saakashvili in 2004, who pledged to fire every cop that was caught harassing his people? He actually meant it too; the corruption of the Georgia police ran so deep that he ended up firing every single officer and head of law enforcement until there were none left.
Once they were all gone, the country of Georgia became fine and peaceful for a whole three months because the cops had been the ones causing all the trouble in the first place. With the entire police force effectively disbanded, not a hint of disorder remained because the police had been the ones causing the disorder.
I have no idea if such action would work for Ferguson, but sometimes nuking something from orbit and then starting over from scratch is the only way to fix something, and if there really are good cops remaining in the city, I’d appreciate it if they would speak out. Isn’t anyone on the force over there on the side of the protestors?
Re: Re: Re:3 Re:
“Would you suggest we just not have cops?”
Personally, I would suggest that the cops have a wholesale rethink from top to bottom. The current police culture and management pretty much guarantees that the police, on the whole, act like bad guys.
Also personally, the cops may as well not exist for all the good they do. Their worthlessness is such that the last couple of times that I’ve been the victim of a crime I haven’t even bothered to report it to the police.
Re: Re: Re: Re:GDP (of any kind) is a crock measure
Many years ago, it was pointed out that GDP is a crock measure for a simple factor. It includes the destruction of goods and services, which was pointed out at the time was an increasing portion of the GDP calculations. Hence, measure of destruction was incorporated into the measure of production.
Having read the article you pointed to, no mention was made of this factor.
David Oliver Graeme Samuel Offenbach
Re: Re: Re:2 Re:GDP (of any kind) is a crock measure
GDP reached its current prominence when trying to answer the question “how much can be sucked out of the British economy to pay for WWII?”, and for that purpose it worked quite well.
Just like Science...
We all advance one death at a time.
It simply cannot be stated enough… the “system” is designed to entrench special interest, and that special interest likes to play these games every which way they can.
We are at the point that we need to consider anyone with a College Education as near valueless zombies with nothing to regurgitate than their special brand of education. The Education system in the USA has become a tax on society and burdens the ignorant with undue expense and aggression against wisdom.
Re: Just like Science...
“we need to consider anyone with a College Education as near valueless”
– wtf are you talking about? Are you on drugs or something?
“The Education system in the USA has become a tax on society and burdens the ignorant with undue expense and aggression against wisdom”
– This is complete bullshit.
Re: Re: Just like Science...
The point was that a college education has become a mandatory rite of passage into a career path. It’s basically job training, whereas college used to be about learning how to think about an issue critically. The bar has been lowered so much that anybody that gets a degree has a very narrow set of specialized skills rather than leaving them with a tool set that will allow them to adapt to anything. It’s the difference of learning “how” rather than “why”.
Re: Re: Re: Just like Science...
Examples please
Re: Re: Re:2 Just like Science...
A pilot compared to an aeronautical engineer, for an example. A pilot knows how to make the plane fly, but rarely does the pilot know why it works. The engineer knows why the plane flies because his knowledge is not so superficial.
Re: Re: Re:3 Just like Science...
So you’re saying that pilots are now doing aeronautical engineering? or that aeronautical engineer are now just pilots?
or neither pilots or engineers are able to reason well?
Re: Re: Re:4 Just like Science...
Did you hear the rush of air go over your head? That was my point going by. Clearly, you missed it.
Let me dumb it down for you. The pilot knows that when he manipulates the controls, that the plane will do what he expects it to do; he need not know why it works in order to fly the plane. The engineer knows why those things do what the pilot expects them to do because he learned why they work rather than just how to operate them.
That’s the difference between training and education. The engineer can do more than just fly the plane, he can change the way it flies. Training prepares you for doing one thing. Education prepares you for doing many things.
Re: Re: Re:5 Just like Science...
As both a pilot and an engineer, I will say you are overgeneralizing.
Many pilots—myself included—know a great deal about aerodynamics and know exactly how and why their airplane works.
Many engineers—including the very good ones—use rules of thumb and other shortcuts on a daily basis without knowing the underlying reasons why they work.
I appreciate the point you’re trying to make about training versus education, but I think the reality is a spectrum and you’re casting it as a discrete difference. Learning how to learn is one of the most useful skills a person can have, but there is more than one way to acquire it and “education”, in or out of a college environment, is just one of them.
Re: Re: Re: Just like Science...
I understand the concept, however I do not agree that is it prevalent in our universities. Perhaps it is most prevalent in the for profit “colleges”.
Re: Re: Re: Just like Science...
College was never about job training. That’s called vocational training or apprenticeship. As in job training or on-the-job training.
College was always about learning to think in the mindset of the field, and that has never changed.
Re: Re: Just like Science...
The ignorant sure are being oppessed with the high price of technology and aggression to the scientists that deliver everything that isn’t religion.
Re: Critical thinking and dogma
Having an engineering background, we were taught many things. One in particular, in anything we know or learn, we only know or learn approximations. Never think you know it accurately, because changing circumstances can make what you do quite inappropriate and wrong.
Unfortunately, as the years go on, it appears that dogma has got in the way of critical thinking in our educational branches. Dogma reared its ugly head when I went through decades ago in particular areas (even in engineering) in a small number of cases, usually as a result of the differences in specialities of our lecturers. This ended up in “political” conflicts, with the winner basically gaining ascendancy.
It occurs much more frequently today in the sciences and engineering. Alternative ideas are now considered anathema instead of fields for investigation. Mathematics is now considered king instead of a tool. Mathematics is an excellent tool (like fire) but a horrible master (again like fire).
I have seen too many scientists (particularly those of the theoretical kind) that come out with strange ideas because their mathematics has so predicted this and current experimental evidence does not support their position. Ant experiments proposed and done give no evidence for their hypotheses. They have not taken a step back and simply asked if they have exceeded the limits of their ideas and need to look at possible simpler theories.
In occurs in the biomedical and pharmaceutical fields, in astrophysics, nuclear physics, climate science, engineering, etc. Yet there is still hope because we do see a small cadre of researchers who are going outside the strictures of their fields and incorporating multidisciplinary cooperation to find new information about the world around us.
David Oliver Graeme Samuel Offenbach
Re: Re: Critical thinking and dogma
And perpetual motions machines will still never work.
Don’t be so quick to generalise against the whole of science because some of it is a bit airy-fairy. There is a LOT of good science and engineering out there that both a) underpins your quality of life, and b) advances the situation for humanity.
Don’t get so sucked into the myth of the lone wolf battling the establishment – because 9 times out of 10 that lone wolf is trying to argue he can step off a cliff with no help because ‘gravity is a global conspiracy’.
Re: Re: Re: Critical thinking and dogma
I am not talking about perpetual motion machines for starters. But things like dark energy and dark matter where the negative results are starting to get very loud. Climate science where everything is caused by mankind (and I mean everything – irrespective of external influences that occur). Biomedical and pharmaceutical research where profits are the only thing that counts – actual health benefits are a last consideration. Included in that one are all the fringe dwellers who claim results without verification because of the rampant abuses within the system.
Computer science and engineering where history repeats itself with the next best thing which is a rehash of old technology.
The lone wolf misses so much. But there are many areas which if you express an interest in investigating an off-limits area, you’ll get neutered by the various “authorities” for even daring to suggest that an off-limits area is worth investigating. Get out and talk to those who have faced that very situation. Very few are willing to destroy their careers when faced with such opposition.
I agree with you that there are a variety of “researchers” who can’t get the processes right, have no idea of the principles and processes of scientific investigation and are attempting to walk off the edge of the cliff by defying gravity.
But there are a LOT of scientists who are so closed minded that they can’t see the problems with their own theories and will dismiss out of hand any suggestion that they are missing something. This is the common response of people. Just because you are a scientist doesn’t mean you stop being people and doesn’t mean that you are open minded. I’ve had my discussions with many different specialists over the years and you get those who are able to see possibilities in alternative ideas and you get those who are completely blind to any alternative. This is what you get from people.
Of course you get the others who don’t know, don’t want to know and only care where the next silver penny comes from, you know, lawyers, politicians, used car salesmen and saleswomen, corrupt police dudes and dames and (oh) spies.
David Oliver Graeme Samuel Offenbach
Re: Re: Re:2 Critical thinking and dogma
“Climate science where everything is caused by mankind (and I mean everything – irrespective of external influences that occur). “
Where did this come from? Examples would be better than “just take my word for it”. I doubt that any scientists have made this claim.
I keep hearing about the unemployment number as though that were a good indicator of economic health. This number is complete bullshit as it does not account for the salary differential between jobs lost and jobs gained. Like GDP, many numbers tossed about in the media and spouted by pundits have little meaning and are mostly used to influence public opinion. It’s a shame this bullshit is not questioned by so called journalists.
Our economy is predominately driven by consumer spending and the majority of consumers are within the middle class – therefore the economy will continue to struggle as long as there is little to no disposable income in the middle class. In fact, net disposable income within the middle class has been declining for several decades.
You reap what you sow, but some are trying to foist blame where it doesn’t belong.
So what are people’s thoughts on alt. metrics like the genuine progress indicator? I realize it’s slanted towards lib/prog causes but I suppose it could be modified to be somewhat more encompassing http://en.m.wikipedia.org/wiki/Genuine_progress_indicator
Re: Re:
GDP is calculated by taking the difference between “how much it cost to make a thing” and “how much you sold that thing for”. It’s flawed in a lot of ways, but one of the major issues is that it doesn’t account for externalities. The GPI tries to extend the GDP by accounting for an additional set of externalities.
THE GPI is not necessarily slanted towards liberal causes; it can be slanted in either direction, just by changing which additional factors you account for. You want to make it more liberal, start subtracting for environmental damage; you want to make it more conservative, start subtracting for money lost to crime.
IMHO, the GPI is even more flawed than the GDP. My main objection to the GDP is that it assumes that market prices consistently correlate with actual value; the GPI makes this same assumption, then factors in additional biases. It’s trivial to cherry-pick those biases to support whatever conclusion you want — one of the early models included costs associated with the “breakdown” of the “traditional” nuclear family.
Re: Re: Re:
But do you have an opinion on how a better indicator can be constructed? There are a million alternative measures for development, most build upon GDP, but what would be your way of measuring it. I see an alternative in having several separate parameters including GDP as an option, but what other measures would better take efficiency/low cost copying/low cost distribution into account? Internet economy still seems like an underperforming black box in terms of value from normal measures.
It also says nothing for the value of user generated content. Participation in any medium could be considered a value to the economy because the economy applies to more than just money. There’s a wealth of knowledge out there, and it’s more accessible than it was when the primary means of distribution was physical containers such as books.
Hocus Pocus
Economics as a science has always been the equivalent of alchemy in comparison to chemistry.
Take the eye of a newt and the hair of a bat and out comes GDP.
I still remember in an economics class when they told me that GNP/GDP calculations contained an estimate of black market transactions. Put in an unverifiable number that is effectively at or near 100% error and somehow out comes a reliable calculation of the state of the economy?
Basically it is a pile of out of context idealizations backed by some introductory level high school calculus.
Re: Hocus Pocus
Chemistry as a science has also been thought of as hocus pocus when compared to physics.
Do you think black market trans should not be counted? they are real transactions.
What about lawers fees, Should they be counted.
Do you understand cash amplification? I think the GDP is counting the same money several times. Does this affect your opinion.
Black market (wtf?)
Re: Re: Hocus Pocus
Technically chemistry is a subset of physics, and have you studies either?
Real transactions or not, there is no way for the government to reliably measure illegal “black market” transactions because the people engaged in them are fairly reluctant to report them. This leaves government economists to make up a number which actually makes the rest of the calculation, based on measurable inputs, unreliable.
The comment was on reliability of these numbers and not on whether the a particular economic input should be theoretically included.
Re: Re: Re: Hocus Pocus
Technically chemistry is a subset of physics.
Oh I see, you’re a stupid person. I get it now.
Re: Re: Re:2 Hocus Pocus
Uncalled for and your response belies your mental capabilities.
Re: Re: Re:3 Hocus Pocus
Ok, sorry, You win that round
Re: Re: Re:2 Hocus Pocus
For your enlightenment:
http://en.wikipedia.org/wiki/Physical_chemistry
Re: Re: Hocus Pocus
You can’t account for data you don’t have. That’s like baking without all the measurements. You want to make a cake, and you have all the measurements, except for the baking soda. You make a guess, and the cake turns out terrible. In reality, you should have tried to find that information or not bothered with making a cake at all.
Re: Hocus Pocus
“Economics as a science”
When was it ever considered a science? Examples for extra credit.
Re: Re: Hocus Pocus
It is one of those “soft” sciences.
Other examples are Political Science and Psychology which are equally as soft but the practitioners still like to believe it is science.
Re: Re: Re: Hocus Pocus
At least it’s possible to control conditions sufficiently to perform psychological experiments that can falsify hypotheses. Good luck trying that with macroeconomics. Economics is much “softer” than psychology.
As it should. If spending gets cut in half by product efficiency gains and those savings aren’t redirected into new consumption, then an economy is producing below its potential. It’s definitely useful to have that show up in GDP changes.
Re: Re:
As a factor, but not as the be-all and end-all.
If America doesn’t make anything because of outsourcing then GDP wouldn’t mean anything.
Re: Re:
We would still have profits from the operation that was outsourced. (Thats how it works, or WHY it works).
In theory, with lower labor costs, profits would be higher.
Re: Re: Re:
Except that profits are a myth. In order to profit, you need to bring in more money from your products than it took to produce them. In a fixed monetary supply (i.e. there is only $X in the economy and that amount is static), then employers have to continually cut wages of their workers so they spend more in consumption of goods than what they earn making them.
Well, a workforce that sees their paychecks shrink every week wouldn’t stand for it. It would become apparent that someone is getting money for nothing. Instead, the monetary supply is progressively inflated so that your wages today will not buy as many goods tomorrow. If that’s “working” I’d hate to see something utterly broken.
Re: Re: Re: Re:
“a workforce that sees their paychecks shrink every week wouldn’t stand for it”
Sleeper will awake
TL;DR
1.) There’s no such thing as a “healthy economy.”
2.) A pleasant looking economy is created when the ratio of poor to rich is low. If you make more than 200% of what you need to be comfortable, someone else can’t work for your employer to make 100% of what they need. This is why the middle class doesn’t whine about “the economy.” The poor whine because they have nothing and the rich whine because they can’t fathom having only enough.
3.) A progressing society puts less effort into getting more done- almost always resulting in a loss of old jobs and a creation of LESS new ones. It is still good, and it is still progress. This is why the middle class doesn’t whine about “jobs.” The poor can’t find enough work and the rich can’t fathom having to try to.
Re: Re:
“This is why the middle class doesn’t whine about “the economy.” “
They may not be whining, I suppose they are more mature than that … however they are not happy about it, and they are learning. Soon they might even vote about it.
Re: Re:
“A progressing society puts less effort into getting more done- almost always resulting in a loss of old jobs and a creation of LESS new ones.”
This alone does not explain the present economic shithole.
Re: Re: Re:
Economic shithole and “some people are rich and some people aren’t” are not synonymous.
> 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
Well, cutting commute time in half SHOULDN’T show up in economic numbers. What those travelers do with that freed-up time should… or shouldn’t matter if they just sleep half an hour longer every day.
“Better off” in the sense of being less tired, having more family time, or spending more time on Facebook… including that in economic numbers, then we might as well go introduce that “Gross National Happiness” number in the west.
I'll listen to a quant any day
If you have never watched the quants of wall street, do it. It’s the best and there’s one part in there where #1 quant in the world Paul Wilmott goes off on economists…”they don’t have laws, Isaac Newton has laws”…
http://ducknetweb.blogspot.com/