Critical Take On GDP in the FT

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Critical Take On GDP in the FT

Postby sanha926 » Fri Jul 04, 2014 9:23 am

This lengthy FT article doesn't get to the root of the issue (the problems of 'hedonic accounting' and the measurement of utility). But it does outline in a systematic and clear way some of the standard problems with GDP & growth.
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Re: Critical Take On GDP in the FT

Postby josephbaines1 » Fri Jul 04, 2014 9:50 am

Thanks for the link. Sean Starrs's excellent article in the New Left Review also touches on the problem of national accounts measures, in general, and GDP, in particular. It would have been great if Sean's piece had more historical depth, but in its own terms it's a fantastic and stimulating read: http://newleftreview.org/II/87/sean-sta ... onvergence
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Re: Critical Take On GDP in the FT

Postby DT Cochrane » Thu Jul 10, 2014 12:17 pm

Thanks for sharing, Sandy.

I'm surprised the issue of real v. nominal didn't come up. GDP can only have meaning as a relation, and growth is measured by relating one year to past years. He seems to have completely avoided the question of inflation altogether. I guess it would've added a significant chunk of additional words.

Learning about the shortcomings with GDP was actually what led me to switch to economics. I was a sociology major at the time, but I found the normative prescriptions discussed problematic as they failed to consider the costs of making choices. An article in Adbusters about the ecological economist Herman Daly and a new measure he was suggesting, which would account for the environmental costs of economic activities, spoke to these concerns, as well as my activist ideals.

I remember going to speak to an economics professor at the U of S, who was kind to take time to entertain my concerns, although he clearly just dismissed them as standard 20-something idealism. I believe he shared with me Keynes' quote about capitalism being horrible, but less horrible than every other option and said the same is the case with GDP as a measure.
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Re: Critical Take On GDP in the FT

Postby joefrancis » Sun Jul 13, 2014 4:15 am

It gets even worse when historians start citing GDP statistics. Can any estimate of China's GDP per capita in 980 be at all credible? I would also argue that for some countries (such as Argentina, in this case) GDP statistics even for the twentieth century can be highly misleading, yet economic historians continue to treat them as if they represented something real (again, see the Argentine example).

The interesting question raised in the FT article is what to replace GDP with. Most of the alternatives discussed actually incorporate GDP – a third of the UN's human development index, for instance, is made up the standard GDP statistics. Personally, I found Kuznets' original idea more interesting:

He was inclined to include only activities he believed contributed to society’s wellbeing. Why count things like spending on armaments, he reasoned, when war clearly detracted from human welfare? He also wanted to subtract advertising (useless), financial and speculative activities (dangerous) and government spending (tautological, since it was just recycled taxes).


I think this is what Herman Daly was getting at from the environmental side.

I imagine the main problem is knowing what prices to use, given that markets aren't very good at valuing what contributes to society's wellbeing.
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Re: Critical Take On GDP in the FT

Postby wayburn » Sun Jul 13, 2014 8:30 am

Undoubtedly, the GDP, which, if i am not mistaken, is the sum total of all domestic monetary transactions, does not do a decent job of distinguishing useful from destructive economic activity. Nor does it give a good idea of economic growth. However, it serves a useful function and I would hate to see it abandoned completely. All economic activity has energy ramifications. For an economic activity that includes a distribution of activities similar to the distribution of activities across the entire economy, one can get a rough idea of the energy flow associated with an activity such as the installation of a "renewable" energy technology to determine the reasonableness of the Energy Returned over Energy Invested (ERoEI) figure or payback period reported by the purveyor. This is discussed at length in http://dematerialism.net/Mark-II-Economy.html or on my blog at http://eroei.blogspot.com/ .
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Re: Critical Take On GDP in the FT

Postby joefrancis » Mon Jul 14, 2014 5:20 am

I suppose that replacing GDP with energy accounting would be one option. Possibly it might lead to a better society – at the minimum it should lead to a more rational use of our natural resources.

One problem that comes to mind as an ex-academic is how to incorporate mental energy. I can see how it should be quite easy to account for manual labour, but intellectual labour could be a bit tricky.
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Re: Critical Take On GDP in the FT

Postby wayburn » Mon Jul 14, 2014 8:25 am

I wonder if I should take this discussion in the direction it seems to be headed which may be a little far from the original intent. My earlier reply was merely a hope that, if a better - more useful - measure of monetary flows were devised, the old GDP would be retained, because the ratio of total energy budget (TEB) for a nation to its GDP can be applied to individual monetary investments that are distributed (typically) across the economy to estimate (roughly) the energy flow that should be associated with that investment. Let X be the monetary investment in the construction, maintenance (including pollution prevention and reparation), and mothballing (including environmental restoration) of, for example, a nuclear power plant. Then, EI = (TEB/GDP) X is the energy investment term for the life of the project. It is easy to compute the Energy Recovered term (ER) from its rated capacity, expected lifespan, and other operating factors. This ER/EI might be close enough to the ERoEI one would get by counting the direct and indirect energy investment expenses individually. We usually can get good monetary data but not good energy data. Yet, every component of prices and other monetary expenses must have a corresponding energy component in EI.

Now, that said, suppose we consider replacing monetary values with energy values in accounting for value. One can imagine a number of methods for converting land, water, and human labor to energy equivalents; however, on the face of it, it seems likely that every economic event can most easily be quantified with a four-dimensional vector-valued currency the components of which should be eMergy, land, water, and time. This and what is meant by eMergy (with an M) is explained at http://eroei.net/cc2.htm and/or http://eroei.blogspot.com/2013/07/we-ne ... te_11.html .
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Re: Critical Take On GDP in the FT

Postby Mladen Ostojic » Mon Jul 28, 2014 1:17 am

As an armchair advocate of a technocratic future, I agree that something like energy should ideally replace money as the basis for accounting. But as it stands, GDP remains a measure of monetary activity that tells us relatively little about anything else. And since capitalism is more about business interests than industrial principles, those of us that recognize it as a mode of power are forced to think in monetary terms.

Therefore, as long as the power that drives our society is measured in dollars rather than watts, I don't know what hope there is for attempts to reconcile monetary measures like GDP with more material considerations like energy. At the same time, I'm glad to see that alternatives are being discussed by scientists and engineers.
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Re: Critical Take On GDP in the FT

Postby blairfix » Sat Aug 23, 2014 7:56 pm

One reason why economists are hesitant to abandon real GDP is that they only ever see official estimates. Everyone here is familiar with the subjective elements of real GDP calculation. However, unless given concrete evidence of what real GDP would look like if different subjective decisions were made, some people won't get the scope of the problem.

Shadowstats.com publishes different indexes of inflation, including the CPI and the GDP deflator. The differences between official and and shadowstat estimates of GDP are enormous. Of course neither represent the 'truth'. The discrepancy only proves that real GDP is a garbage indicator.

Shadow_GDP.png
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Re: Critical Take On GDP in the FT

Postby DT Cochrane » Fri Sep 05, 2014 1:28 pm

One of the interesting points of comparison is the recent global financial crisis. According to the official states "real" GDP took a dip along with the financial intermediaries and its recovery was conjoined to them as well. The shadowstats line, however, shows no such anomalous dip, but rather just a continued steepening of the worsening value.
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