July 26, 2024
Friday Open Comments
This essay by Arnold Kling is the best example of why I’m such a fan.
He starts off by criticizing the economics term “productivity growth”, from which he gives a quick rundown of why the very concept of economic growth is itself virtually meaningless. The economic stats don’t really tell us much of anything, but they certainly give us (or some of us) the illusion of knowing something important about the economy.
From the essay:
The problem in the widely-used indicators of productivity starts with measuring what we are producing. GDP is a good measure of economic activity. It tells us how much we are trading with one another in the market.
But GDP is a flawed measure of the human value of what gets traded, and of how that value changes over time.
For example, suppose that the price of a smart phone produced in 2024 is $1000, and the price of a smart phone produced in 2019 was $800. What can we say about productivity in the smart phone industry?
Not much, of course. And over longer time periods, as he describes, the dollar values used to capture GDP and all else are meaningless. Things we put a high value on today may have no value in a few short decades, whereas other things that had no value decades ago have great value today.
He wrote a whole book about this and so much more that is short, succinct, and free: Specialization and Trade: A Re-Introduction to Economics, in various formats at this link, including free (digital), paid (in print on paper), and free audio.
"GDP is a flawed measure of the human value of what gets traded, and of how that value changes over time."
Of course, that is true. A price encodes the value of a good or service, relative to other available goods and services, for an individual at a specific time. That's it. The item doesn't necessarily retain its priced value to buyer for even 24 hours. That's why product returns, thrift stores, and bad reviews on Google exist.
This being the case, drawing large-scale conclusions based on estimated aggregates of all these subjective and time-constrained transactions is parlous at best. But on the other hand, if there is more stuff out there and more transactions, that means something. We recognize a major decline in economic dynamism - the Great Depression, most obviously - when it happens.
Good morning. It's foggy here. Someone let Jake in the bedroom last night. He's very affectionate when he wants me to get out of bed and feed him.