The Paradoxes of Economic Measures

I am not an economist, and I don’t claim to have anything close to useful knowledge in the area.  However, like many areas in which I have little knowledge, I find that I have lots of question.  Economics is a particularly interesting field in that two “experts” can examine the same problem and come up with solutions that seem diametrically opposed.  I put “experts” in quotes because I sense that the discrepancy of opinions lies more in politics than it does in the discipline itself.  By its very nature, the science of economics intersects the arena of politics, hence the phrase “economic policy.”  The down side of this is that even the “orthodox” positions, those on which nearly all economists agree, can be colored for political purposes.  In general, it seems that any social science has something of this.  For whatever reason, the “hard” sciences produce less public controversy.  Perhaps this has to to with the relative ease of experimentation in the hard sciences when compared with the social sciences.  Perhaps it has to do with the fact that the social science have as their subject the human person, which by nature cannot be reduced to overly rationalistic or mechanistic behavior.  Not being an expert in either hard sciences or social sciences, I can only speculate.

Yet despite my near total lack of experience and absolute total lack of expertise, it strangely enough doesn’t seem to hinder me from thinking about paradoxes in the field, or at the very least “perceived” paradoxes.  One such paradox that has kept me up at night, (well, let’s not go that far), is the obsession that political economics has with using GDP/GNP for measuring the health of the nation’s economy.  Now, let’s not go off the deep end here; I am not saying to toss the measure out the window altogether.  But consider the following relatively useless mental exercise.*

We all have household tasks to perform: mowing the lawn, washing the dishes, cooking meals, even watching our children.  We do perform these tasks willingly, and no one pays us to perform them.  The services themselves don’t contribute to the GDP.  Now, one day, my neighbor and I become concerned about the GDP and decide to do something to help it out.  We agree to take some of these services, say mowing the lawn and washing the dishes, and hire each other to do them.  I pay him $20 to mow my lawn and an additional $30 to wash my dishes every week.  Thus, I am hiring him for $50 a week, or $2600 per year.  Now, let’s be honest, with five kids, I can hardly afford to pay someone to do these menial tasks for me, so I get my neighbor to agree to pay me $50 per week to mow his lawn and do his dishes, coincidentally just enough to cover my new annual $2600 expense.  In total, we have collectively contributed $5200 per year to the GDP.  Yet our lives have not changed in the least, neither in income or standard of living.  Further, our workload has not really changed at all.  Yet we have now contributed to the GDP.

To make the mental exercise even more absurd, after a month of doing this, we decide that it is a real inconvenience.  My neighbor simply doesn’t want to walk across the street to mow my lawn and do my dishes.  However, he doesn’t want to give up his new-found $2600 profit.  He decides to subcontract this work out to a poor soul who will be willing to do the work for half the price, $1300.  That poor soul ends up being me.  In other words, I am paying my neighbor $2600 a year to mow my lawn and do my dishes, and he in turn is paying me $1300 to do this work for him.  I, in turn, play the same game with him.  He pays my $2600 a year to mow his lawn and do his dishes, and I hire him for $1300 a year to do his own work.  The net result of this is as follows.  We have added $5200+$2600 = $7800 a year to the GDP, yet the net change to my fiscal situation is $0 (likewise for my neighbor), and the net change in my workload is 0.  (I am mowing my own lawn and doing my own dishes, just like I was before we had our brilliant idea.)

To exaggerate this even further, because we have now become obsessed with our own brilliance, my neighbor and I decide to up the ante by multiplying all of our payments by 1,000,000.  (Of course, we will have to take out loans for this, but once the banks recognize our raw intelligence and entrepreneurial spirit, they will be fighting to give us loans.)  We have now contributed to the GDP $7,800,000,000, or 7.8 billion dollars, all for mowing our own lawn and doing or own dishes.

While I am admittedly unclear on the exact accounting of such an experiment (for instance should the subcontracting fees be deducted from the profits), something of this already exists when trying to compare the GDP in the United State over long periods of time.  In the last two-hundred years, the GDP in our county has grown enormously, yet the figure overstates the growth in production over the that time period.  Two-hundred years ago, far more people (most people?) produced their own food and many of their own possessions (clothing, etc.).  As self-produced, these activities and products were “off the ledger” of the GDP, so to speak.  Perhaps the biggest change came when many women moved from the home into the workforce.  Activities once done for no monetary exchange were now part of the GDP calculation: housekeeping, child care, cooking, etc.  The affect of this was essentially one of accounting: much of this activity moved from “off the ledger” to “on the ledger.”  The activity itself didn’t necessarily change, nor did the production of goods and services (yes, this oversimplifies the situation), yet the GDP was grossly affected by the accounting move.

The same sort of game can be played with unemployment rates.  The unemployment rate is calculated by dividing the number of unemployed individuals by the size of the labor force.  An “unemployed individual” is defined as someone who is not currently working by is willing to work for pay.  In the midst of our recession/double-dip-recession/ whatever-the-experts-are-calling-the-current-situation, no number has been tossed around the news media more than the unemployment rate.  However, this number is just as easily manipulated.  For instance, let’s take every household in which one of the two parents stays home decides simultaneously, “I want a job.”  All of a sudden, even though the financial situation of the country has not changed, the unemployment rate goes through the roof.

On the other hand, suppose every one of these parents decides to engage in a deal such as between me and my neighbor.  Maybe they decide to pay each other to watch their own children for the day.  Now we have the opposite effect: the unemployment rate goes down.

In the interest of attempting some sort of pseudo-rational analysis, I suppose that these numbers are not entirely absurd if only because people don’t act in ways proposed by my two mental exercises.  Nevertheless, it does make one question how much stake we put into a system that relies almost solely on quantifying economic behavior, which is essentially human behavior.  I want to be careful here to once again separate the discipline of economics from the politics of economics.  I cannot in good conscience speak for a discipline of which I have so little experience, but I can speak to the way in which numbers such as GDP and unemployment rate are used (and abused?) by the news media which makes its way into my living room.

In the interest of giving the discipline itself the benefit of the doubt, I will assume that it has as its goal to both measure and increase the well-being of citizens.  (Actually, does not every discipline have this as a sort of telos, each with its own methodology?)  If so, should not the measure of economic well-being somehow take into account how well the beings actually are?  And surely this is a larger question than one of just exchange of dollars and cents.

Further, even if the discipline limits itself to the question of economic well-being (however that is defined), surely the two mental experiments show that the current methods are not at all adequate, despite their preferential treatment in popular conversation.  I have a sneaky suspicion that respectable economists realize this in their theoretical work, yet because it is theoretical and altruistic (I use that word as a compliment), the message is drowned out in the overly-pragmatic popular press which likes to grab on to easily digestible but often misunderstood or misused measurements such as GDP and unemployment rate.

In the current climate in which we find ourselves, there seems to be an inherent contradiction in terms.  More than any other time in my short history, folks are talking about not spending money, about being responsible with their finances.  In short, people are quite concerned about being economical with their resources, financial or otherwise.  Yet according the measure such as GDP and unemployment rate, acting in a way we deem “economical” is one of the most un-economic things we can do.  I speak here not form the level of an individual consumer, for the act of “not spending” often involves investing, even if it be in something as simply as a savings account, which by any measures grows the economy.  As a good friend wrote to me, “Rather than focusing on wisdom, responsibility, and prudent management of resources, the popular discussion focusses single-mindedly on improving questionable measures of national well-being;  As a result, gimmicks rule the conversation and common-sense gets lost in the commotion.”**

I beg you not to misconstrue my point – I am not suggesting that there is no place for numerical measures in the life of the economy.  I am not even saying that there is no place for the specific measures of GDP and the unemployment rate.  Rather, I am suggesting that such measures not “rule the conversation.”  The conversation should instead be ruled by solid philosophy.  And as a good Aristotelian, I suggest we begin with the highest ideas, such as the “happy life”, or “fulfillment.”  Rather than measuring raw dollars and percent growth in spending/income, perhaps we should be thinking about how fulfilled people are, how much closer (or farther?) are they from being “fully human”, and how economic policy can work to bring about the “happy life”.  Did not the philosophers of old define a good society as one in which the greatest number of individuals are able to achieve their telos as human person?  Surely economic measures and policies should keep the proverbial end in sight if they are to be anything that remotely resembles a success?

 

Soap box abandoned.

 

*  This exercise was not of my own creation.  It is a modified version of a situation describe by Joseph Pearce in Small Is Still Beautiful: Economics as if the Family Matters.

**  I am highly indebted to Bill M. for reviewing this post for me.  Unlike myself, Bill actually does have some background in economics, and my ideas, while more than likely still flawed, are at least clearer because of his input, much of which made its way into the final version.  In some cases, I have used his wording.  Nevertheless, any errors in perception or thinking are still mine and mine alone.

11 Responses to The Paradoxes of Economic Measures

  • Jenny says:

    In the interest of attempting some sort of pseudo-rational analysis, I suppose that these numbers are not entirely absurd if only because people don’t act in ways proposed by my two mental exercises.

    But people do act this way! Perhaps not with a net outcome of zero, but the behavior is very similar. How many mothers have to pay someone to watch her children while she goes to work to watch other mother’s children? There are examples of this exact behavior all over the country. The result is not a real increase in productivity, but an increase in the cost of that productivity. You know, the ole dual income trap.

  • Jake Tawney says:

    Jenny,

    Yes, I agree. Later in the post I wrote, “Perhaps the biggest change came when many women moved from the home into the workforce. Activities once done for no monetary exchange were now part of the GDP calculation: housekeeping, child care, cooking, etc. The affect of this was essentially one of accounting: much of this activity moved from “off the ledger” to “on the ledger.””

    Your point is well taken. Thanks for reading!

  • Darwin says:

    There’s a reason to thinking that the amount of paid commercial work going on (as opposed to people doing work themselves without pay) is some sort of indicator of how much work is getting done in that generally when you hire someone to do work this results in specialization, which in turn creates efficiency, which means that more work is actually getting done in the same number of hours.

    So, for example, if instead of hiring a neighbor to mow your lawn, you hired a professional lawn service, it’s moderately likely that they’d get the law mowing done faster than you would. (Both from experience and from having bigger/faster mowers, etc.)

    The which is to say that while something like GDP can, as you point out, be gamed, it’s going to tend to be the case most of the time that when GDP goes up more stuff is getting done.

    That said, it’s clearly a rough measure and acting as if it’s some sort of measure of “good” is clearly way off.

    There have, incidentally, been a lot of attempts by economists over the last 10-20 years to look at things such a “total happiness” in order to get a more human view of the economy. Of course, the problem is that measuring happiness much, much harder than measuring dollars, so while it may in some sense get more at the heart of the matter it’s so hard to measure that most “happiness research” is a little hard to do much with.

  • Micha Elyi says:

    Perhaps the biggest change came when many women moved from the home into the workforce. Activities once done for no monetary exchange were now part of the GDP calculation: housekeeping, child care, cooking, etc.
    -Jake Tawney

    Then perhaps the second biggest change came when, in the first half of the 20th century, many women moved out of the workforce (as housekeepers, governesses, cooks, etc. in the homes of the professional and upper classes) and mostly back into their own homes.

    Yes, measures such as GDP are only approximations of what most people, including economists, would really like to know. Dr. Anthony Ricci, in his book The Science Before Science, exhorts his reader to remain aware of the limitations of a science’s methods and what is being abstracted away in order to obtain an answer to a question. We’d much rather know if total happiness has gone up or down but the sum of monetary transactions is so much easier to measure. Those monetary transactions do tell us a lot about people’s preferences – their genuine preferences in a world that requires choices and trade-offs as opposed to mere expressions of wishful thinking.

    Still, cultural changes can rock the GDP. Suppose millions of young American adults decided to live in smaller homes, drive fewer and more modest cars, and acquire less ‘stuff’ in order to have more family time and one stay-at-home parent for the benefit of their kids. GDP would fall yet, because people are following their choices, an economist can’t say there’s less happiness. Maybe econometricians would begin to borrow from cosmologists and physicists and talk about invisible “dark value”, yes?

  • Elaine Krewer says:

    I myself am a living economic paradox in that I manage to maintain a household, purchase many goods and services, and provide others with information for free that they then utilize to make far more money than I do, in a job that supposedly produces nothing and creates no wealth. I speak, of course, of government (state) employment.

    Yes, I understand that government cannot create wealth in the same way that the private sector does, and that everything government gives with one hand (including my own paycheck and insurance benefits) is taken away from someone else via taxes with the other — all the more reason why I work hard to insure I am really earning those benefits. And I understand that relying on government to provide everyone with jobs will never work and will cause more harm than good.

    Still, when hardcore economic conservatives/libertarians get really insistent about the notion of government NEVER creating wealth, I can’t help but at least chuckle a bit… if that were absolutely literally true, then D.C., state capitals and public university towns would be some of the poorest places on earth.

  • “if that were absolutely literally true, then D.C., state capitals and public university towns would be some of the poorest places on earth.”

    And so they would be Elaine if they did not grow fat, parasitically, from tax dollars.

    In regard to public universities, I spend some $27,000.00 a year to send my son to my alma mater the U of I, so there is plenty of private money also going to those institutions. If they did not have the privileged position as gate keepers into various professions in our society, I doubt if private money would flow to them in such quanities, since my son, for example, seems to be learning far more from from his private reading than from his classes. I had a similar experience during my college years, although back in those days it was possible to raise the funds for college through part time work, and my parents did not have to contribute to my college expenses. For the value received, higher education has become immensely over-priced. I hope that higher ed scandals, such as the one currently besetting the law school I attended, also at the U of I, will help cause the bursting of the education bubble which has now become expensive beyond belief.

    http://taxprof.typepad.com/taxprof_blog/2011/09/illinois-reported-.html

  • Alex Binder says:

    Very good! I am an economist and have also thought about these things. GDP, income, employment, etc. are not the best measures of well-being but as Darwin pointed out, they are the best we have to work with.

    There are many measures and all need to be looked at and discussed before drawing major conclusions such as…GDP went down, our economy must be failing.

    I put a lot of emphasis on unemployment because I think it is a better indicator of well-being than GDP. If someone is unemployed and looking for work but can’t find it, they are denied the opportunity to provide for themselves and their family, expresses their dignity through self initiative/creativity, contribute to society, etc.

    You point out correctly that this can be gamed and unemployment doesn’t take into account the family’s total income or well-being, but unlike GDP (which is a national aggregate and doesnt indicate the allocation of that income/production), it indicates that there are people who want a job but can’t find one–a sort of direct measure of unhappiness or lack of well-being/development.

    But, I whole-heartedly agree that well-being can hardly be measured by what is essentially money or money-denominated figures.

    How would you propose we measure how well our economy is doing? or how would you measure more well-being more broadly such as fulfillment or achieving telos?

  • Alex Binder says:

    Also, Elaine:

    Gov’t doesn’t spend our tax dollars. Tax dollars are destroyed. Spending creates dollars. Gov’ts tax in order to give their currency value, if they didn’t nobody would accept them or use them. If they tax too little, their value would also go down, but that does not mean that taxes must equal spending, in fact, that will rarely be the case.

    It is good that you wish to be a responsible employee because our gov’t MUST spend its dollars wisely in order to be effective, but you are not earning your income from other people’s taxes. Your income is literally created out of nothing.

    That is unless you are a state or local government employee, in which case you are earning other people’s taxes because state and local governments must use the national gov’ts currency. They do not issue their own.

    Also, the gov’t doesnt create “real” wealth, but it does create financial wealth which directs resources toward the creation of real wealth. It can spend its money to direct labor and capital toward the creation of lets say roads and bridges which are real wealth, but the actual creation of that real wealth is done by people and capital (also created by people) who are paid by the government (directly or indirectly).

    Sorry, I don’t mean to be nit-picky, but understanding it properly does have major implications, such as, the ‘government can’t go bankrupt’.

  • Elaine Krewer says:

    “Your income is literally created out of nothing, that is, unless you are a state or local government employee”

    I am a state government employee. And I agree that tax dollars can be inflated and misused. But destroyed? Sorry, but that money HAS to be going somewhere, it isn’t just being tossed in a giant incinerator. It may not be going where it ought to, of course, but it’s going somewhere (even if simply into the pockets of corrupt contractors, lobbyists, etc).

    This kind of reminds me of the old arguments against spending money on the space program on the grounds that the money needed to “stay on Earth.” Well, the money DID stay on earth — it was spent on contracts to build the various space vehicles, on technology research and development, etc. Money spent on the space program was not literally launched into orbit or dumped on the moon where it could never be used again.

    Also, if “too little” taxation means that the value of dollars goes down, why then do so many fiscal conservatives think tax cuts stimulate the economy?

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