09 March 2010

Beyond GDP

The standard mindset of economics is to see the point of everything to be maximizing productivity (as measured by the inputs to Gross Domestic Product), and the maximize GDP itself.

As a first order goal, it isn't a bad approach.

But, productivity fails to capture important measures relevant to quality of life (e.g. the benefits of having diverse products produced on a small scale rather than homogeneous mass produced products) and economic resilience (e.g. the benefits to technology growth and economic ability to deal with hard times that comes from having lots of businesses capable of making sophisticated things).

GDP also has its faults beyond those associated with problems with productivity itself as a measure of quality of life. A good example of that is the role that inventory plays in the measure.

The U.S. had GDP growth at a 5.9% annual rate in the fourth quarter of 2009, which was better than the 5% annual rate of growth experienced by the Candians in the fourth quarter of 2009. This sounds great until you learn that most of the American GDP growth came from building up inventories that weren't sold in the quarter. In contrast, the Canadians actually reduced their inventory levels.

Without considering changes in inventories, U.S. GDP growth in the 4th quarter of 2009 had a much more modest 2.0% annual growth rate, while the Canadian's GDP annual growth rate was more than 5.0% and included health growth in all other sectors of GDP.

In this context, GDP inclines one to the same mistake about economics that the Soviets made in their regime. Productivity is good, but it is actually only good when you are making something that people want to buy.

No comments: