The GDP is often used to indicate economic growth. Yet since the GDP also includes government spending, a growth in GDP could indicate public sector growth rather than private sector growth. What statistic is a better indication of sustainable economic growth?
Bill
Just a guess: GDP minus govt spending
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I'd say deflation, but that just shows one side- there can be growth and prices, "as a whole," staying same or rising, to me this ends up being a moot point as it, to me, requires info on every part of an economy, so I think the entire thing is bumpkis
It's even less useful then you think it is. For example, all of the private sector spending that takes place during the readjustment and restructuring phase following the government induced boom is obviously included in GDP. So repairing the "broken window" is considered productive. The point is that it is not as simple as "subtract government spending". The costs of the government portion is much much more then just its numeric value expressed in the GDP.
Along the same lines as DD5's point, given the dislocations in the capital structure caused by monetary policy, I would doubt any such statistic exists. I'm not an economist, however.
I don't have a membership, but you might want to check out ShadowStats.com. If anyone has discovered such a statistic/group of statistics that you seek, it would be someone like this guy.
The most important dimensions of growth are not quantifiable, in my opinion. The Internet was growth. The airplane, the television, the radio and the automobile were growth. Advances in business structures and organizations were growth. Advances in applied materials science have been growth. The biotech sector is growth. These non-quantifiable advances in human productive capacity have no simple metric that can be applied to them. "The economy grew by X%" is meaningless to me. Population increase is the closest thing I can think of that has meaning anywhere close to what people think they mean when they say the economy grew by such-and-such percentage, but then, raw population increase is not necessarily desirable. And the metrics that people regularly point to - stock market, GDP, PPP, etc. - are all monetary, which means, they only really measure inflation over the long-term. Doing the same things cheaper (forgoing less other consumption) or doing better things for the same price is what constitutes actual growth. All other forms of "growth" are monetary status symbols... "My GDP is bigger than your GDP!" How much did the economy grow when the transistor was invented? When the integrated circuit was invented? When mass memory and single-die CPUs were invented? And so on.
Monetary velocity is no help, either. It's just a measure of how fast money moves from hand to hand. I see no reason to believe that a uniform improvement in human well-being across the board has to correlate with money changing hands at ever-faster rates. Perhaps there's a weak connection to division of labor, but even then, labor can be divided too finely.
It seems to me that this is symptomatic of the tendency of non-experts exposed to classical economics (and its descendants) to mistake the use of classical mathematics (calculus) to be an indication that the economy actually behaves like classical mathematical functions. The economy is not like a quadratic curve. It's an evolutionary process* of individuals seeking to satisfy their wants with a minimum of pains (to use Bastiat's terminology). We can find order and structure within the economy but we cannot find simple mathematical equations that explain and predict its behavior anymore than evolutionary biologists can find simple mathematical equations that explain and predict the emergence of novel phenotypical traits. We know that novel phenotypical traits have arisen as a result of variation in populations and those that have survived have done so as a result of their superior adaptability.
Clayton -
*Note that the relatively new field of complexity economics makes this very explicit... the economy is not just like an evolutionary system, it is an evolutionary system. Economists have tried to assert this for some time but have not been able to get past the objection that they are simply advocating Social Darwinism... but with the advent of more powerful abstractions of the Darwinian algorithm, economists can now state very precisely the sense in which they mean that the economy is an instance of the Darwinian algorithm, that is, that it is an evolutionary process. See the book Origin of Wealth by Eric Beinhoffer for more information.
I would say even in a stateless society with no government spending and no dis-coordination induced by monetary policy the merit of such a statistic would be dubious. For example, the same criticism about money spent re-coordinating applies to natural disasters. Is charity included in consumption spending? How would you account for non-monetary exchanges? Wouldn't increases in the purchasing power of the currency actually drive GDP down? Correct me if I'm wrong but it seems to me like national income accounting is another failed attempt to quantify subjective utility.
@Clayton
Nice post.
re: complexity economics
I agree with the conclusion that (free) markets are evolutionary mechanisms, and the (free market) economy an instance of an evolutionary process (in theory, at least, regarding free markets specifically.)
It sounds good on paper, if these guys are referring to free markets specifically. I have a feeling they aren't, however. Regardless, I'd need to read their arguments in full before reaching a conclusion.
But, looking at the references section on the "complexity economics" wiki page, a link to this paper is provided (re: applying complexity analysis to the history of economic thought).
The way the author describes the methodology of complexity sciences vis-a'-vis economics, it appears as though it is merely positivism writ large. Essentially, the author describes running hundreds of economic models through a computer program to test which one fits the data best. The novelty of complex economic analysis vs. standard economic analysis appears to be that it uses non-linear math (I'm not a mathematician, so I could be quite incorrect on this---I got this from my reading of the paper).
Here's an excerpt:
"...complexity advocates find themselves on both sides of the fence in the standard methodological debates; they are agreeing with critics that standard science is lacking, but they favor moving to a new, even more complicated mathematics and statistics than standard economics uses, and are arguing that that ultimately it is mathematics that will provide the formal insights into institutions and history that is needed for economics to be a science. (p. 6)"
Yikes. This is not economic science, imo.
I'm not saying I suddenly know all about the methodology these guys use. And, like I said, the idea of the (free) market economy as an evolutionary process coincides greatly with my own beliefs. So complexity economics looks interesting. I just wanted to post my thoughts on the specific paper refereneced here---for the potential benefit of others viewing this thread.
First define "economic growth".
Good start right there. Even then, who decides what is economic and what is growth.
Concerning the GDP specifically
- what about all the investments, exchanges, and increases in satisfaction that take place beyond what is reported. Is trading eggs for zuchini an economic exchange? How about trading a vehicle for a landscape job, or replacing a roof in exchange for installing a pool?
- what portion of GDP is or ought to be attributed to price inflation due to monetary inflation.....and how can you tell?
Maybe GDP should be dis-regarded as Government Domestic Propaganda
"Oh, I wish I could pray the way this dog looks at the meat" - Martin Luther
Heh. I just had a discussion the other day with a person who argued that World War II brought us out of the depression. "Spending works," he said excitingly.
How do you know we were "out" of the depression, I asked him. Just look at the GDP figures, he said. Ergo, government spending got us out of the depression because the government actually spent!
Ahhh...the mind of a Keynesian.
After having finished Dawkins' "The Ancestors Tale" just right after "Economics in one Lesson" it's hard to argue the market isn't an evolutionary process. I'm interested in the subject and Origin of Wealth is already at the top of my reading list, but I was wondering if you knew of more literature on the subject.
DMI1: Origin of Wealth is thorough and, while accessible, it fully explains the concepts, it's not just a "tour" or "overview" of the field. Beinhoffer also documents his sources, so you can follow up if you have access to the journals, etc.
There's nothing wrong with the national income equation (GDP) in itself; it's merely an identity that does not reveal anything significant about real world economic phenomena (like the equation of exchange). The problem arises only when economists and politicians forget this fact (or are entirely ignorant of it) and use it as if it were an accurate/meaningful measure of economic performance. It's major deficiency is that it does not differentiate between investment and malinvetsment, between consumption and over-consumption, ect (it entirely ignores the structure of production). The Soviet Union, for example, had large GDP figures for decades, but it suffered from extreme structural imbalances, where individuals waited on bread lines for hours, and where scarcities and surpluses were everywhere.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
@bcycl: Actually, I think complexity economics is inherently Austrian in its approach. Simulation can be thought of as choosing a set of axioms and working out their logical consequences... a computation is just one big deduction from initial axioms (the program). Of course, there's a tradeoff. With computation, you can very precisely state your axioms but you can't describe any object of very great complexity (for example, a human brain) because you only have so much time and space in which to construct your starting assumptions (program). On the other hand, with the Austrian deductive approach, you can treat objects of great complexity (brains, business organizations, governments, etc.) but your axioms lack specificity. The axiom "humans act" could not be less specific, yet it is the whole foundation of the entirety of Mises's work.
So long as complexity economics is honest about its limitations - we're really dealing with objects even simpler than insects, simpler even than bacteria - I think its contributions are positive. There's nothing wrong with the empirical approach so long as it is applied in a proper way. Most non-Austrian approaches to economics blithely slap mathematical models onto systems which regularly violate any reasonable error bounds for a model, meaning, the models are crap, useless.
Evolutionary biology is a great role-model for economics, in my view. It is a hard science, it deals with empirical data and seeks to find explanations for why the state of affairs is this way rather than that way. But evolutionary biology is a hell of a lot squishier than physics or mathematics*, contrary to the impression its evangelists often give off. A lot of the argument for evolution is based on the same kind of reasoning that Austrians employ.
The one gripe I have with Austrian economics is with the methodology folks. There seems to be this unwritten code that some (most?) Austrians hold to that there is One Right Way to do economics and those who don't conform to this One Right Way will get the wrong answers and deserve to get the wrong answers for their insolent refusal to submit to the One Right Way. However, we have learned that there is no One Right Way to find the truth. If you don't already know the answer, then there is no best method to find the answer. Some people get confused and think that because there's no right way to find the answer, there are no right answers, but that's not true. There are right and wrong answers, there's just no general method for finding them, not even the scientific method.
*And even mathematics is a lot squishier than people generally believe.