Friday, June 13, 2014

The Fuzzy Math of GDP

By John Tammy at Forbes

It’s not a widely known, but in gross domestic product (GDP) terms, President Jimmy Carter presided over one of the longest and most expansive periods of economic growth in postwar history. Most readers would say the latter can’t be, that the ‘malaise’ president delivered only contraction and misery, but GDP said otherwise.

Of course, the fact that GDP registered growth is the first clue that it’s a more-than-worthless number. Diane Coyle, author of a new book GDP: A Brief But Affectionate History, wouldn’t agree that the number is worthless, but she does acknowledge that it does not measure human wellbeing or welfare. No it doesn’t, and while Coyle doesn’t hide her bias in favor of the hubristic conceit that says economists can credibly measure country economic activity, her book is still an important read for, if nothing else, revealing to readers just how unwittingly fraudulent the practice of economics is.

For those who don’t already know, gross domestic product (GDP) is the standard measure of the size of a country’s economy, and depending on whom you speak to, it carries with it great importance. When a growth deficit called into question the ability of Greece’s government to pay its debts, the country’s GDP loomed large according to Coyle; the irony there that Greece’s borrowing capacity was allegedly decided by a “handful of people” in a “dusty room” in the suburbs of Athens attempting to divine its output. You can’t make this up.

Yes, it’s true, the economics profession believes that country economies comprised of millions, and sometimes billions of individuals, can be measured. No doubt GDP in the U.S. is calculated with quite a bit more sophistication than in Greece, but the naive arrogance underlying the statistic remains for all to see. A profession that was largely blind to the economic crack-up taking place inside Iron Curtain countries back in the ‘70s (GDP signaled actual growth) still thinks unimaginative office drones in Washington, D.C. can divine the dynamism – or lack thereof – taking place in the real world.

While Coyle concludes early on that GDP “is a measure designed for the twentieth-century economy of physical mass production,” and “not for the modern economy of rapid innovation,” her book, as the title indicates, is a somewhat fawning history of the number. It says here that Coyle’s love has blinded her. GDP has never made sense as its makeup makes plain. More on its makeup in a bit.

Concluded after the jump

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