Captain Capitalism takes on GDP

Posted by Jason | Posted in Economics | Posted on 13-01-2010

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Captain Capitalism has a great post today on the merits of GDP. GDP is just a formula of economic output, but it does not take into account actual prosperity. If a city is destroyed by a tornado and we rebuild the city, GDP will increase. The problem is you are no better off than you were before the tornado even though GDP tells you there has been economic growth. Actually, you are worse off because the resources that went into getting you back to square one would have been used otherwise to increase your standard of living.  If you’ve studied economics, this is known as the broken window fallacy. Stimulus and government programs are nothing but the broken window fallacy on steroids.

Here’s part of the Captains post. I highly recommend reading the entire article. Even the commentors have great comments. Read those too.

In the video I posted below about China essentially building a city that nobody is living in, the reporter kept emphasizing the importance of GDP. That the government wanted to boost “GDP.” However, given this “stimulus” plan of Ordos as well as the “stimulus plan” here in the US to boost GDP, I think it's high time we have a simple economics lesson in GDP.

Understand the goal of economics is NOT to increase GDP, but rather to increase standards of living. We simply USE GDP as a measure of all the goods and services produced within an economy, ASSUMING those goods and services when consumed help increase our standard of living. That by eating the grapes we produce and watching the movies we produce, we get utility from that, enjoyment from it, and therefore we enjoy our lives more, thus increased standards of living.

This is a logical assumption in that typically, TYPICALLY, we produce what we want to consume. We produce things that are only going to benefit us. Nobody produces ebola for consumption on account that why would we? Nobody produces styrafoam dogs. Nor do we make our roads out of cake. It not only would not benefit us, it just plain doesn't make sense.

However, this assumes an INCREDIBLY important assumption about how we go and produce things. We ASSUME that the free market is going to be in charge of what is produced. We assume that a free people, in control of their own money, is going to decide how many Big Macs we should make, how many I-Pods we should produce and how much sushi we should make. But what if this assumption is faulty?

The reason why it is faulty is the progressively less and less money is being spent by the people. A higher and higher percentage of our economy is being spent by the government. Going from essentially 3% of GDP in 1900 to 46% today.

Read the full article at  Captain Capitalism: There is No Merit to GDP Unto Itself.

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Comments (5)

It’s a good article, however GDP was never meant to be a measure of standard of living (commentors saying as much), it was simply to be a measure of economic output. We assumed that economic output was linked to standard of living.

That assumption was valid as long as this country maintained a free-market economy and government spending was at the levels experienced early last century. Once that started to change, GDP turned into a political tool. GDP should be eliminated if we’re going to be a socialist economy.

His best point is the same one that was argued when they were talking about spending $1T on some BS stimulus – let the people decide how to spend it. Cut everyone a check and let them stimulate the economy.

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//If you’ve studied economics, this is known as the broken window fallacy.//

What if you havn’t studied economics? Is it still called the broken window fallacy.

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Chad, good call. Re-reading that statement, I realize how stupid it sounds.

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I’m just messing around, dude, you know, being a smart-ass. Good article, though.

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I’m bookmarking this blog. It’s pretty good. Keep up the good work.

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