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Yep. GDP is not even "...the value of all goods and services produced in a country in a given year." It excludes (most) non-market production of goods and services. But even here it's inconsistent. It imputes a value to the services of owner-occupied housing, which is non-market production. (But doesn't do the same for the services of other consumer durables.)

One of the things they are trying to do is to take account depreciation of natural resources. You can see the logic. But:
1. This ignores the fact that GDP also ignores depreciation of produced capital goods (the "G" in GDP stands for "Gross", rather than the Net National Product that is GDP minus depreciation of capital).
2. Once they start down this fascinating road, it's hard to know where to stop. OK, subtract oil reserves used up. But what about adding new oil reserves discovered? Or do you ignore them, on the grounds that they really existed all along? But if we didn't know they existed? And what about new technology that lets us access previously inaccessible reserves? Or, what about new technology that finds a use for natural resources that were previously useless? Like oil itself, which used to just bubble up out of the ground and mess up the horses' hooves.

I look on the bright side. Forget the fact that they will not reach a meaningful destination. The journey down this road will be very instructive. It will force them to think about hard economic questions.

My own preferred measure of welfare for cross-country comparisons is immigration. Where do people want to live? Voting with their feet (or attempts to vote with their feet) seem to me to reveal people's real views about which country offers the best quality of life. But I recognise that this doesn't work properly either. Some people prefer country X to Y, and others Y to X.

What is amazing is that even though GDP was never intended to be any sort of measure of total well-being, it works as well as it does. List the countries where you would want to live from top to bottom. Compare that ranking to GDP per capita. My guess is you will find a strong (not perfect) correlation.

Mankiw argues that countries which have their act together in GDP usually (not always) tend to have their act together in other areas as well.

Nick,
immigration is a lousy measure because:
1. People often go back, information is imperfect;
2. It doesn't matter if the quality of life is better, if it is possible to save in terms of the source countries currency and send the money back (i.e. inappropriate use of methodical individualism);
3. There are barriers to entry of different sorts that distort the pattern.

Arrow's Theorem concerns only attempt to aggregate individual preference relations only, within the context of 5 assumptions/restrictions. One can always 1) give up on one or more of those restrictions (IIR?); and 2) use non-preference data (stuff you think is important from a moral-political philosophical point of view).

If one is to do normative economics then one has to have some criterion in mind and efficiency just doesn't cut it because it's only a partial ordering of possible outcomes.

I'd rather we not do normative stuff and get out act together re: positive stuff (understanding and forecasting), but that's just my preference.

"But just who are these people who are using GDP as a "surrogate for wellbeing"?

That's a joke, right? It got bright way too early this morning for it to be April 1...

"What is amazing is that even though GDP was never intended to be any sort of measure of total well-being, it works as well as it does. List the countries where you would want to live from top to bottom. Compare that ranking to GDP per capita. My guess is you will find a strong (not perfect) correlation."

The flaws in GDP are similar in every country so it has less effect on relative measures of success.

I'm not sure I follow the argument that we shouldn't try to construct a better measure because once we start trying we won't know where to stop.

"But attempts to put together a single index of well-being - that is, a Social Welfare Function - are doomed by Arrow's Impossibility Theorem to be an exercise in futility. How would we trade off an increase in (say) a given measure of income inequality against an increase in another indicator of public health or a decrease in air quality? And why would that tradeoff be constant? There simply aren't coherent answers to these questions - unless the index amounts to quantifying the subjective preferences of a single person."

You are exaggerating the difficulties just a little here! - I get the impression you are more interested in defensively making the case that it is too hard to even try rather than looking for practical, reasonable ways to move forward.

"But trying to come up with a single index for economic welfare is not a high-priority claim on our time."

Because in economics, all that matters is how fast we are running, whether or not we are headed in the right direction or not is beside the point.

Nick,

"Where do people want to live?"

I'd like to live in Victoria, B.C. Nothing against the US, but it's my favorite place. I don't think that I can. How would I fit into your scheme?

Don: that's one vote for Victoria BC having the highest standard of living in the world!

Of course, everwhere in Canada has exactly the same standard of living, as voted on by Canadians. How do I know? Because otherwise people wouldn't be living where they are.

You are exaggerating the difficulties just a little here! - I get the impression you are more interested in defensively making the case that it is too hard to even try rather than looking for practical, reasonable ways to move forward.

No, I'm saying that it's the public economics equivalent of trying to design a perpetual motion machine: it cannot be done. That's what the Arrow theorem is all about.

Sure, you can design an index that puts together things in a way that pleases you. But there's no earthly reason to think that anyone else will or should accept your index.

The point is that while the Arrow theorem suggests it is impossible in most cases to design a perfect measure of overall ranking, it says nothing about the possibility of constructing a measure which is better than no measure at all.

Jurisdictions all over the world hold elections and respect the results despite the impossibility of a perfect election that precisely reflects everyone's preferences. Corporations all over the world measure their progress using balanced scorecards, despite the impossibility of perfectly reflecting the strategic utility of various areas of focus, organizations of all kinds maintain and use composite indices of all kinds from the UN Development Index, to Macleans School Rankings to a million more.

Stepping back, it's worth noting that there are two distinct lines of criticism of GDP. One is what we might call 'accounting' problems, where, speaking loosely, you might consider the GDP as equivalent to our collective revenue, but with no measurement of our expenses, there is no way to know if we are profitable or not. This is what Nick was getting at in his comment and his points about the difficulties measuring one particular expense (depreciation). The best expression of this concern that I've seen came in Kenneth Boulding's 'Spaceship Earth' essay:
http://dieoff.org/page160.htm

The solutions here generally are measures to refine the calculation of GDP to include more of the expenses in order to get a final number that better reflects our profit rather than our revenue, with Herman Daly's work being a good example of this approach.

The second line of attack is what we might call the 'political' approach, and it is on this ground that Romanow and Stephen are fighting. It is a truism that 'what gets measured gets done' so if GDP is the only measure of welfare we have, it will have a strong influence on our politics and our goal-setting, even though everyone knows it is flawed. In particular, those areas of potential gain which do not help, or hurt GDP (e.g. more leisure time), are unlikely to be pursued at an optimal or efficient level.

Here the solution tends to be along Romanow and co. lines, which is to propose a sort of 'balanced scorecard' in which GDP (economic growth) is only one component and other goals widely accepted as being worth pursuing (such as greater life expectancy) are also included. The UN Human Development Index is another example of this approach.

Naturally, there is much overlap between the two approaches, the primary difference being that the first one is working on a proper accounting of the economy, whereas the second is less interested in the accuracy of the actual numbers, and is instead working on reducing the overwhelming emphasis on the economy in measures of welfare and to encourage more efficient/optimal public policy that is not biased by one goal (economic growth) having a widely disseminated and discussed measurement while other goals do not (of course some other goals, most notably employment, also have widely disseminated and discussed measurements, but not all do).

the possibility of constructing a measure which is better than no measure at all.

Better in what sense? If you're Roy Romanow (or whoever), then it's better because it conforms to your ideas of what determines social welfare. What if you're not Roy Romanow (or whoever)?

This is a vanity project, and can only be justified using subjective criteria. If you agree with Roy Romanow (or whoever), then you get a number that may mean something. If you don't, you get a meaningless number. Calling it the 'Canadian' index is more than a little bit presumptuous.

I find that any economic concept falls apart if you examine it too closely. That's why economics should never be taken too literally.

"Better in what sense?"

Better in the sense that it correlates better, on average, to what people see as 'welfare' than GDP alone would do.


Which people?

In principle, I can construct an index that increases when the economy evolves in a way of which I approve. So can you, and so can Roy Romanow. But none of them can claim to be 'better' than another.

"Which people?"

All the people. Of course some indices are better than others, to the extent that they correlate better with the views of people in the country. For example, if I happen to be a nihilist, who sees shorter lifespans as a good thing and I construct an index on this basis, it will be inferior to indices which see longer lifespan as a good thing because that is a much more widely held viewpoint, so the index where longer life is good correlates better with, on average, what [all the] people see as welfare.

Imagine if The Globe and Mail decided to do a University Ranking to compete with Macleans and the categories they rated schools on were: # of birds on campus, height of tallest building on campus and number of letters in the name of the university. Would people use this index? No. Would it be inferior to the index created by Macleans? Yes. Why? Because it wouldn't correlate very well with what the target audience viewed as measures of university quality.

Of course the Globe could construct a very reasonable sounding index and they could have long disputes with Macleans over which one is better, but I don't see any big downside to this scenario. Imagine if the dominant, heavily used measure of university quality was number of students graduated per year and all universities carefully tracked the growth rate of this metric and didn't worry much about any others. In this case, I would see it as an improvement to have someone develop a more balanced metric which didn't see growth of student graduating as the primary measure of university quality and led to a more balanced pursuit of various objectives for universities.

You seem to have this idea that everyone will share the same objective standard.

It's not all or nothing! Everyone will not share the same objective standard. Neither will everybody's standards be completely independent. They will be *correlated*.

Any proxy target becomes less valuable the longer it remains the target (because distorting ways of meeting the target are usually cheaper). The problem with GDP is that is used as a target, not that it measures something that is different from what we would like measure.

The: economics as a means to an end argument. Division of Labour means all professions contribute to brainstorming the ends. It would be complicated to slice off the inter-disciplinary contributors and recreate the 21st century version of historical philosophers.
For example, China killed environmental accounting around 2005 when they realized it cut GDP growth rate (and thus future foreign investment) in 1/2. Infinite # of examples of surrogate behaviour.

USA put out a Battle of Falulljah video game, glorifying the killing of an entire city of males. Short the fuck out of USD and leave Obama's legacy as the Banker Prez.

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