GDP: nonsense on stilts

‘Britain is today experiencing the longest period of sustained economic growth since records began in 1701.’

Gordon Brown, Budget Speech, 16th March 2005

Economic growth, or just growth, is today’s holy grail, on every politician’s lips. Any tiny uptick in GDP, even over a single quarter is a new dawn, while a downtick a disaster. Yet there are two glaringly obvious reasons why the whole concept of GDP is pure piffle.

Mathematical accuracy is impossible because it is derived largely from surveys of tens of thousands of firms. Simon Kuznets, the inventor of national statistics (of which GDP is one) argued that an average margin of ten per cent, yes ten per cent, is reasonable. You don’t need to be a statistician to realise what that can do to the difference between two readings to arrive at ‘growth’.

But far more important is the nature of GDP itself. In particular, to what extent does it measure current consumer standards as opposed to prosperity in future? These two are entirely at odds with each other, because future prosperity is governed largely by the role of capital goods. But an increase of capital (i.e. savings and investment) means that current living standards are held back in the short term. So guess what: GDP statistics take little or no account of saving, the sine qua non for long term growth!

It gets worse. We can write off most public expenditure as far as prosperity is concerned. Margaret Hodge (MP for Barking) admitted that the Department of Health ‘is not going to achieve its original aim of a fully integrated care records system across the NHS’. Bang goes at least £5 billion. In addition, half a billion pounds has gone west in a failed attempt to mesh 46 fire control centres into 9 regional centres (Fire Control system). Stories like this are commonplace. Government does not do investment; it is concerned only with its term of office.

We should all understand that taxation of any kind whatsoever necessarily reduces the division of labour leading to a loss of production.

Ludwig von Mises, the great Austrian School economist, said that any macro-economic concept of national income is a mere political slogan devoid of any cognitive value. In fact it is worse than that because the GDP concept totally obliterates what is actually going on in a market economy.

Murray Rothbard, another king of the Austrian School, argued that all government spending should be subtracted from private spending as depredation on private production, and then we should subtract the resources drained from the private sector, to arrive at ‘Private Product Remaining in Private Hands’. Which brave economist will sign up to calculate this? Whatever, we must wean ourselves off GDP and all its works.

IEA Pensions and Financial Regulation Fellow

Terry Arthur is a fellow of Pensions and Financial Regulation at the Institute of Economic Affairs and has written on this subject for a number of publications, working closely with Philip Booth, Editorial and Programme Director at the IEA.

4 thoughts on “GDP: nonsense on stilts”

  1. Posted 02/11/2011 at 17:08 | Permalink

    Although I generally agree that GDP is not the best measurement concept, so far it’s the best we’ve got (it’s like Churchill’s quote on democracy).

    And being on the subject, I can’t agree on the following: “But an increase of capital (i.e. savings and investment) means that current living standards are held back in the short term. So guess what: GDP statistics take little or no account of saving, the sine qua none for long term growth!”

    This isn’t true I’m afraid. Capital spending category includes inventory accumulation, residential and nonresidential construction, equipment expenditure, software etc. This category is essential for starting up economic growth and is very well seen as a driver of GDP upwards or downwards (investment fell 34% in the US during the crisis). The very reason we’re not seeing GDP growth now is due to investments being locked down.

  2. Posted 03/11/2011 at 10:54 | Permalink

    Terry, I think this is a bit exaggerated. The weaknesses of GDP are well known, and far too much is made of small changes in GDP such as the 0.5% growth rate for the last quarter – but nevertheless awareness of the approximate size of a country’s GDP is invaluable in current debates about the size of the deficit for example, and awareness of the very rapid growth in China’s GDP is surely useful. It’s not totally “devoid of cognitive value”.
    If free-market economists refuse even to use the common currency of debate, they are unlikely to have much of an influence.

  3. Posted 23/11/2011 at 18:11 | Permalink

    An excellent observation about the limitations of GDP – or, more specifically, GNP – was made by Robert F. Kennedy in 1968: “Gross National Product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl. It counts napalm and counts nuclear warheads and armored cars for the police to fight the riots in our cities. It counts Whitman’s rifle and Speck’s knife, and the television programs which glorify violence in order to sell toys to our children. Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile.”

  4. Posted 30/11/2011 at 15:17 | Permalink

    It’s “sine qua non”, not “sine qua none”. Please fix this.

    (I like the article, by the way.)

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