There is a lot of focus in Economic theory on the importance of GDP. GDP is short for "Gross Domestic Product", gross meaning total before any deductions (like tax), domestic meaning that we are just looking at the country in question, and product meaning how much was produced. So in a nutshell it means how much stuff was made and sold and how many services were provided by a country in a given time period. There's a pretty big problem with this which I think is being overlooked. Let's take a very simple example to make my point. Imagine a desert island, something like this:
that can make exactly 3 products. One is coconuts, the other is fish, and the third is a hallucinogenic cactus. Let's say in 2013 the output per year was as follows:
The basic idea with GDP is that bigger is better, which makes sense on first glance. With more coconuts available, they become cheaper so people can either buy more, or have some extra money left over to get an extra fish. But with fish production up as well, they are fortunate enough to have more left over cash for the cactus. By having more goods and services produced, people are able to consume more and so they live better lives. It's a pretty decent approximation and if you have nothing else to go by, and it's not too unreasonable to just aim for "more" production. But I call into question the validity of this assumption because it ignores one important aspect, and that is the quality of the goods being produced. And by quality I don't mean how round the coconuts are, or how fishy the fish taste, I'm talking about what that product actually does for the person consuming it, and how it impacts their life and their abilities. Eating a few extra coconuts isn't going to cause any harm, in fact it might be beneficial to be eating a bit more food so you have enough energy to do all the things that living requires. There is a problem though with the wild excesses of 2014, let's look at the production figures for 2015:
It seems that the population of the desert island has become addicted to the psychedelic cactus. They have diverted all their resources into producing more cactus, and since they are whacked out of their minds half the day are barely finding the time to fish and tend to the coconut plantations. Production has clearly suffered. In fact the bumper produce of 2014 has been a direct cause of the catastrophic drop in GDP in 2015. So is it really true that just more production is better for the economy? And higher GDP with no regard to the real value of the goods being produced means increased growth and prosperity? Clearly there are many goods that benefit us, make us more able and lead to increased productivity and welfare for the citizens who consume those products. I'm able to run my tutoring business much more effectively and easily with a laptop than I would be able to without one. My car is also enormously beneficial compared to riding a horse to lessons as I probably would do without a car.
However, could there be products that are actually harming the economy in the long run? Things that through decades of consumption are producing less able and less productive workers? Then the extra GDP we are celebrating now is going to lead to reduced or stagnant GDP in the future? I'm not going to start pointing fingers here, I'm more brainstorming than anything. But what about Netflix? I mean, doesn't that make people do less stuff? They sit around more watching highly entertaining videos, rather than say learning a new language, or an instrument, or whatever people did before we had 24/7 on-demand media. It takes a lot more self-control and discipline to learn an instrument than it does to watch Breaking Bad, aren't those skills useful in the workplace as well? When I was younger, sometimes I'd just sit in my room and open my science textbook and look at all the cool pictures. Then I'd find myself even reading it sometimes!! Then in class I sometimes had a good idea of what the teacher was talking about cos I'd already read about it!!!
It's almost like me spending that spare time I had on learning improved my education and prospects in life. I'm pretty much 100% sure if I had had an Xbox with on-line gaming and Netflix when I was a boy I'd have been cramming in as much gaming and TV shows as I could, I mean I was already pretty bad as it was. I would eventually get bored of playing video games because there's only so many times you can do the same thing, and the Simpson's was only on once a day and I didn't like Hollyoaks so that meant I had time in between those things to do other things. Also doesn't really unhealthy addictive food create people that are more prone to disease and will miss work more often? All the economists are fist-pumping the air when GDP is through the roof, but if that's being driven by alcohol manufacturers and fast-food joints, there'll be articles in 15 years time trying to analyse why productivity is down and the governments tax breaks don't seem to be stimulating the economy. Sick people can't work and contribute to the economy, so how is it a good thing for these types of companies to be making large profits now and "growing" the economy when they in reality are shrinking it in the long run?
(Published on 1 Feb 2016)