[gborrego1991]

Professor Herbener,

I am wondering what your opinion is on the usefulness of GDP as a metric? Doesn’t an increase in GDP just mean that more money was created?

[joconnor]

GDP includes government spending, correct? That means it is measuring economic destruction as if it were consensual production.

GDP = private consumption + gross investment + government spending + (exports − imports)

[gborrego1991]

Yes, but I believe private GDP removes government spending from the equation. However, I’m still skeptical on whether GDP is still a useful measure since it doesn’t distinguish between profitable and non-profitable investments.

[swalsh81]

There may be a type of GDP that removes government spending (I dont know) but the number typically used by politicians and media include some government spending. I dont think (someone correct me) that things like Social Security spending is included in GDP. But there is some government spending included like defense.

What I see as the major problems is that it says nothing about quality. We could pay 10,000 people $100,000 to dig holes and fill them in and raise GDP by $1B. protective tariffs that do, in fact, raise domestic production but drive up prices for the consumer, increase GDP. Here’s one for you, again someone correct me if I am wrong, but domestically produced electronics, a market that has seen huge technological improvement AND price cuts would actually LOWER GDP ceteris paribus. Of course people would buy more but, all in all, a lower price for a more advanced computer means a lowering of GDP even though it is better for the economy and the consumer.

I heard one person say, GDP is about the worst metric we have, but it is the best thing anyone has come up with so we still reference it.

The thing about having a metric about how well the economy is doing is that you would have to somehow measure things like marginal utility which is subjective. you would need to measure malinvestment and overinvestment which, if you could do, then central planning might work but Mises and Hayek pointed the knowledge problem in such economies.

[gborrego1991]

Sterling,

Are you enrolled in LearnLiberty Academy? I asked the same question on there and someone by the name of sterling responded to me.

[swalsh81]

that was me I knew this question sounded familiar. Art Carden gave an answer during the lecture as well.

[gborrego1991]

Yes, I didn’t find his answer satisfying. Figured I would see professor Herbener’s take on it.

It would appear to me that the only way to measure how healthy an economy is would be to study if its capital stock is aligned with consumer preferences. I don’t see how GDP does that.

[swalsh81]

I would like to know what Prof. Herbener says too.

From what I see, no it doesnt look at preferences. I would be very interested to know if you could even test that since preference are not homogeneous. Marginal utility is individual. Its one of the foundations to Austrian Economics.

[gborrego1991]

I think the economic freedom index could be one way – how much the government intervenes in the economy of each country. The more a government intervenes, the more people’s preferences are distorted.

It just seems weird to me using GDP as a way to explain economic growth – when as you pointed out; prices falling as a result of productivity gains would lead to a decrease in GDP.

[jmherbener]

GDP is the monetary value of all final goods produced domestically during a period of time. Final goods are those in the hands of final users. They include goods bought by consumers, governments, businesses, and foreigners (i.e., net exports),

National Income and Product Accounts were invented as guides to government policy. Here are the sordid details:

http://www.bea.gov/national/pdf/nipaguid.pdf

http://www.bea.gov/scb/account_articles/general/0100od/maintext.htm

GDP is worthless as a measure of people’s well-being or even standard of living, i.e., the objective properties of set of goods they have. Obviously, then, it cannot be used to measure economic progress. At best, GDP is merely a measure of economic production.

Attempts have been made to modify GDP to make it more meaningful. Adjustments for changes in the purchasing power of money render Real GDP, which attempts to eliminate the impact of price inflation and price deflation. But, as Mises demonstrated, there is no objectively correct way to calculate a price index and therefore, such calculations will be manipulated for political reasons rendering them suspect for conducting economic analysis.

Austrians have constructed Private Product Remaining, which nets government activity out of GDP.

http://mises.org/daily/2231/

Even as a measure of economic production, GDP is, at best, misleading. by including only final goods, it ignores the vast majority of production in the economy which is the production of intermediate capital goods. Iron is mined and refined into steel which is formed into fenders which are assembled into cars. Only the production of cars is included in GDP. Production across the entire capital structure is left out. This omission leads to the fallacy that consumption is 70% of the economy. No, consumption is 70% of GDP, but a small fraction of the entire economy.

[maester_miller]

Professor Herbner,

Wouldn’t the costs of intermediate goods be included in the costs of final goods though? For example, it is much more expensive to purchase a car than it is to purchase a bunch of iron ore. The costs of the mining and refining are a part of the total purchase price of the car, yes?

[jmherbener]

If all one is interested in determining the the dollar value of all that has been produced in the economy, then, counting the steel, and other parts of the car along with the car would be double counting. But the dollar value of what has been produced in an economy is, perhaps, the least interesting thing we could know about it.

If we really want to understand an economy, we have to know how all the different resources people have get allocated into all the different production processes. The monetary value of all production tells us nothing about this.

When we begin to investigate the working of the economy we see that consumer demands can only explain the production of consumer goods since consumers do not demand producer goods directly. To explain the production of producers goods, we need to understand entrepreneurial demands for them. When we trace back the production of consumer goods to their sources, then, we see that the amount of demand entrepreneurs have for all the producer goods necessary to make some consumer good far outweigh the demand consumers have for it. In other words, the far great portion of production in an economy is of producer goods, which is explained by entrepreneurial demands, which results in investment spending. Consumer demands and consumption spending are a far smaller portion of all demands and total spending and the production of consumer goods is a smaller portion of the production across the entire economy.

Murray Rothbard explained all of this and why it’s important in the production chapters in Man, Economy, and State:

http://library.mises.org/books/Murray%20N%20Rothbard/Man,%20Economy,%20and%20State,%20with%20Power%20and%20Market.pdf

[Author]

Posts