Sunday, December 23, 2012

You really (really, really) can't talk about technological or economic progress without invoking consumer surplus

And David Henderson makes the point beautifully with respect to the microwave and several other 19th and 20th century innovations.

One of the things that bugs me most about how Terrence Kealey talks about the economics of science (cited favorably by Peter Boettke here) is that he spends a lot of time on the impact of research and development on GDP. That's not how we expect science to make its impact. We expect technological development to do (at least) two things:

1. Improve the quality of our lives - consumer surplus, and
2. Improve production processes, thus reducing production costs

Neither of these are necessarily going to improve GDP statistics, and they may even lead to a reduction in GDP.

Other points made by Kealey - particularly around the marginal costs associated with adopting other firms' technology - are much stronger than this.

If we are concerned about things like income and employment (which are worthy concerns!) we need to look to macro aggregates like output.

If we are concerned about things like human welfare, GDP is not a great guide. Think in terms of consumer surplus.


  1. Thanks, Daniel. And Happy Holidays (or Merry Christmas and Happy New Year--whichever of these you prefer) to you. Thanks for raising the average level of civility in the blogosphere also.

    1. I will gladly take your Happy Holidays, Merry Christmas, Happy New Year, and any additional well wishes anyone wants to offer me :) The same to you!

  2. Perhaps, David, the time has come to move beyond consumption as indicator of progress, and try to find a more rational indicator.

    Not to say that there aren't starving people in the cold, but there are, right now, way too many people whose efforts are solely to amass more. We've built, in this First World, a psychological Frankenstein that won't let us distribute.

    Status should follow service to others, not power trips like SUVs and McMansions.

  3. Amen! You get what you aim for. Let's stop aiming for Gross Domestic Pollution. Muhammad Yunus in Banker to the Poor suggests measuring average per-capita income of the poorest 35% of the population. Your consumer surplus is a brilliant metric, if a little hard to measure.


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