Gross Domestic Product – Simplistic, Centralising and (Virtually) Useless

With another quarter of data on the United Kingdom’s gross domestic product (GDP) came yet another day of wall-to-wall coverage on the BBC and another media news outlets reporting on the “health” or otherwise of the British economy. The coverage I saw on the BBC never seemed to scratch beneath the surface, other than to imply that a significant increase in GDP is good and a fall (or a lower-than-expected increase) is “bad”. Politicians, of course, were perfectly happy to perpetuate this fallacy, with the Leader of Her Majesty’s Opposition, Ed Balls, saying “These figures show that last year’s recovery has been recklessly choked off by George Osborne’s VAT rise and spending review”, whilst the Chancellor of the Exchequer claimed “It is positive news too that at a time of real international instability we are a safe haven in the storm.”

The problem with gross domestic product as a measure of economic prosperity is that it considers all spending equally valuable. Whether ten pounds is spent on a nurse, a teacher, food, or digging a hole in the middle of a field and then for it to be filled up again moments later, the “gross domestic product” of an economy will increase by ten pounds. In this way, a country’s GDP doesn’t represent how well off a people are – that is, how far the desires of the people are satisfied by other market participants. Austrian economists from Karl Menger onwards form part of a long tradition of explaining how values are entirely subjective and hence why it is false to say that money spent in one way produces results of equal “goodness” to spending it another way. On this view, then, it is clear to see why gross domestic product is largely useless – the state could increase the money price of all goods produced in the economy by employing half the population to build walls and the other half to knock them down again; this would increase GDP, but as a country we would hardly be better off.

 

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