In Bob Murphy's post on the broken window fallacy, Robert Fellner asks why we even care about GDP. He writes:
"So why are we so obsessed with GDP?! And I think the above definition of “economic growth” is more than just unfortunate, its entirely inaccurate.
I really don’t get this. I thought economics was about the study of people making decisions and dealing with scarcity via division of labor etc. Instead it seems like well sure that world is made poorer, but in our fictionalized “economy” increasing spending is a sign of growth. We even have a statistic called GDP that goes up when spending does, so all we need to focus on is increasing GDP because that represents “economic growth”. But that doesn’t mean anyone is actually better off! So why is this our goal?!"
He also writes a blog post about it here, where he spends a lot of time presenting what is essentially Higgs's critique of government spending in GDP.
I basically agree with his analysis in the comment (not his analysis on his own blog), but disagree with the conclusions he's drawing from it. No, of course GDP isn't a measure of "wealth" - that can be dismissed entirely. It's not a measure of the health of the economy either. I don't know what a "healthy economy" means or should mean, but if it means anything I'd imagine economic health would have to do with total welfare, and as anyone who's identified the producer and consumer surplus in a supply and demand graph knows, PQ does not equal total welfare.
So what is GDP? PQ, basically. Why do we care about it? Because we highly evolved apes spend a lot of effort producing and exchanging things, and the behavior of production and exchange seems amenable to scientific study. That's why we care about it scientifically. I think what Fellner is getting at is why we care about it socio-politically?
I don't think this is all that hard. Is it a measure of total economic health? No. But it is a measure of how much people earn or how much people spend in a given time period. If your earnings dropped 6% next year would you care? Yes. If you spent 6% more next year would you care? Yes. I think we have our answer. No, GDP is not a measure of health or wealth. Of course not. It's a measure of gross domestic product. Must we only care about ultimate ends? Can't we care about our income level? After all, while income is not health/happiness/welfare, these things are certainly a function of income.
The other important thing that's relevant now, of course, is that in a market economy we make our way in the world through wage labor. Not only is that how we support ourselves, but it's become a major facet of our identity (what jobs we hold). For good or bad, it's a big deal. Demand for goods is not demand for labor, but that doesn't mean it's irrelevant. Employment tracks output quite closely, for obvious reasons. If you care about working people you're going to care about economic output.
When economists talk about "growth" it's usually a reference to GDP growth. If we had a metric for welfare or if wealth statistics were more readily available, we'd probably have to be more explicit when we use the word "growth". But we don't, so it is what it is. GDP definitely seems like something worth studying, and it also seems like something worth caring about too.
A lot of this broken window fallacy talk has revolved around the obvious point that disasters make us less wealthy. So you might say "well shouldn't we be worrying about wealth"? Yes. Of course. If you think somebody hasn't been worrying about wealth, you're misreading the situation. This is why Krugman has not proposed going around breaking windows. It's quite possible to care about both GDP and wealth. But wealth is hard to track because your wealth is largely dependent on the market value of your stock of stuff. And of course, the market value of that stuff is largely dependent on movements of the market - i.e. - GDP. So even if we'd like to track wealth, that's hard (it's done, to be sure, but it's hard). If you want to track econoimc welfare or well-being, forget about it. When neuroeconomics really gets off the ground maybe we'll have something on that, but not right now.
On Flat Taxes, Tax Relief, and Evidence
2 hours ago