Does GDP Really Measure Economic Growth?

Gross Domestic Product, or GDP, is the commonly accepted measuring stick for economic growth. This is not a great argument in favor of its use, merely an acknowledgement that most people are satisfied with it. Given that bleeding a patient was once the commonly accepted remedy for all sorts of illnesses, we must conclude that the standard way of doing things is not necessarily the correct way of doing them; we must judge things on their merits, not on their popularity. Despite its universal appeal, due to its simplicity no doubt, your humble blogger would like to argue that GDP is a poor measurement for the strength of an economy.

Before we can choose the right measuring stick, we must understand what economic activity is and what is its purpose. The answer is very simple: economic activity is the actions humans take to achieve their goals. Its purpose is nothing less than happiness. An economist might say that human beings labor to produce so that they may consume and increase their utility, but that is just a fancy way of saying that people try to be happy. Even the heroine addict who knows that another injection will only further his problems down the road is still choosing happiness when he sticks the needle in whatever arteries are still soft enough to penetrate. He is simply giving more importance to current utility than future utility. Humans act, we may conclude with the force of unassailable logic, to increase their own happiness, even if they occasionally misjudge, or even if that happiness comes from an action that might be called altruistic. The very act of choosing something is, ipso facto, proof that, at the time of the decision, they preferred the consequences they believed would result from that action than of any other action that they could think to take.

When we examine GDP, we see very quickly how poor a judge of economic soundness it is. GDP is the total of all purchasing, which for the United States right now is about $12 trillion. Unfortunately, there are a lot of purchases which do not represent the freely chosen actions of individuals whose money is used for the purchasing. For instance, it is unlikely that an individual would spend his money on, say, a missile that can be launched to kill people who otherwise are potential customers for whatever work he does, and yet military purchases constitute a large chunk of GDP in many countries, and nowhere a larger chunk than in the United States. This would seem to be an economic loss for a number of reasons, and yet it is recorded as an economic gain by GDP. Similarly, it is certain that few individuals would, of their own accord, spend their money to sustain an agency which would then tell them what they could do with their property, prohibiting some actions and compelling others, and yet when the EPA spends money on its operations, it is included in the GDP.

But it is not a simple matter of eliminating all government operations and expenditures from GDP to arrive at an accurate rating for the economy. For one thing, government performs services that some people wish to have, even if it does it poorly and inefficiently. Let us say that a government spends $100,000 on a police force, something whose services we can assume most people would purchase on their own if not forced to by the governmental system. Should this $100,000 count fully towards the GDP? What if the police force is not managed in the way that best suits people’s needs (for instance, the police spend most of their time writing tickets for silly traffic offenses rather than patrolling neighborhoods to prevent muggings)? What portion of that $100,000 should count towards the GDP? Even if the government is doing the job partially right, should the lost opportunity to have a more customer oriented police force count against the GDP? If so, by how much? What if the people would freely purchase only $50,000 of police services? What if free individual purchases of police protection would result in a $200,000 police industry? In any of these cases, how can one decide by what amount the GDP should be adjusted?

Another problem with discounting all government purchases is that, though it may go too far in some areas like police protection, this discount may not go far enough in others. There are many private activities which have been spurred on by government regulations, even if the government is not directly generating inefficient economic activity. Microsoft, having learned its lesson after the recent anti-trust debacle, now employs full time lawyers and lobbyists in Washington D.C., whereas before they restricted their activity to business and some charitable contributions. The salaries of these lobbyists count towards GDP, and yet these salaries represent lost opportunities to invest in something more productive to human happiness, rather than as a defensive measure against their competitors efforts to initiate another anti-trust lawsuit. The construction of roads is another example, for the highways of the United States are almost certainly more extensive than they would be if people had to pay every time they used a highway. As it stands now, drivers are subsidized by non-drivers because everyone pays for the roads through taxes. Construction companies lobby hard for new road projects, whether they are needed or not. If, in a given year, a government spends $1 billion on road construction and maintenance, should it all count towards GDP, even if some of the roads are unnecessary and that labor could have gone to something else? How do we account for the potential park land that has been turned into a highway? How do we account for all the public transportation which is now not viable because of greater flight to the suburbs subsidized by taxes? Given $1 billion of road construction in a year, what number do we add to GDP? Certainly some of the roads are necessary, but how many?

Yet another problem comes from the fact that the purchase amount of a good or service does not reflect the happiness it gives to varying individuals. If two men purchase a CD for $12.99, the GDP figure grows by $25.98. But let us suppose that one man was willing to spend as much as $145.00 dollars on the purchase, and then, upon listening to it, discovers that he likes the CD even more than he expected to. The other man was never going to spend more than $13.50 on the same CD, and then discovers that he likes it less than he thought he would. Economic activity is about happiness, both purchases contribute the same amount to GDP, and yet the amount of happiness produced by each purchase is very different.

Further confounding attempts at accurate measurement is the fact that some activities which produce happiness do not involve any exchange of money and therefore go unrecorded by GDP. Leisure time, for instance, is a consumer good that is so ignored, and yet it brings much happiness. What adjustment should be made to GDP for leisure time? Even if such an adjustment were not arbitrary, how would we handle a situation where leisure time goes down because people voluntarily work more? The economy would take a hit, on paper, because of the decreased leisure time, and yet people are happier, having voluntarily chosen to work more, either because they are making more money or because they suddenly enjoy their jobs. One man is happiest working twenty hours a week and living poorly but with ample leisure time, while another is happiest working eighty hours a week with little leisure time but a large salary. If we incorporate leisure time into our measurement, it must necessarily split the difference between the two extremes, and yet both men have found the arrangement that suits them the most. By what figure do we adjust GDP?

Criminal actions are also problematic and come in two varieties. There are private criminals whose actions increase their own happiness but violate someone else’s property rights, and there are organized institutions of criminals, called governments, whose members violate people’s property rights and, in doing so, increase their own happiness. There are also private citizens who, though not exactly criminals, benefit from the criminal activity of their government and see their utility increased (there are those who would take the implausible position that governments are not criminal, but such an argument cannot be logically sustained. A government is an institution which compels its citizens to turn over a portion of their money/ property to it upon penalty of imprisonment, and then, after having compelled the purchase of its services, does not allow any competitors, upon the same penalty, to provide the same services. Regardless of whether the government’s goals are parasitic in nature or benevolent, they are plainly criminal in execution). An example of the third kind would be the drivers mentioned earlier who can enjoy driving privileges while dumping the cost of these privileges on non-drivers. Even if their happiness increases more than the unhappiness of the non-drivers, and even if we could somehow accurately and meaningfully measure this net increase in happiness, should we really increase the GDP figure for something that is, in essence, criminal? The government extorts money from one group to benefit another; why should this be recorded as a positive gain? An example of the first kind mentioned above would be a rapist. A rapist may enjoy what he does, and we can imagine scenarios where his enjoyment exceeds the pain he causes his victim, but even if we could somehow measure this, why would we want to represent our economy as being stronger because some violator of a woman’s property rights in her own body had occasion to force himself on a victim? Of the second kind, examples are abundant, but they run into the same trouble. Perhaps a Senator’s happiness increases when a new regulation restricts our freedom, or a President and his supporters enjoy the war he is conducting, but this is no reason to claim that the economy is stronger.

GDP measures purchases; the purpose of economic activity is happiness. There is some area of overlap here, but ultimately GDP is a ridiculous measure of economic growth. In fact, economic growth cannot be measured, but there are a few things worth keeping track of. Since it is axiomatic that a person works to increase his happiness, we can assume that the freer he is to work towards this end, the more happiness he is likely to achieve. Therefore, rather than measure GDP growth, we should attempt to track government depredations on our lives. The freer we are, the happier we are likely to be. Criminal activity of any sort should also be noted, as well as activities taken to reduce this activity. A lock for your door does not increase your happiness, it protects the things that make you happy. If the lock were unnecessary, effort into lock-making could be reduced and the excess labor transferred to a more productive endeavor. GDP is nothing more than a curiosity, at least as far as the economy is concerned. The important figures are three: freedom, criminal activity and the resultant anti-criminal activity. We are better off when the first one is higher and the latter two are lower. Whether these three things can be accurately measured is another matter, but they are the only three things that matter with regard to economics.