Why do we typically measure economic well-being with GDP, rather than national wealth?
It seems like GDP has a number of crucial problems which cause it to measure something other than what we intuitively care about.
It seems like GDP has a number of crucial problems which cause it to measure something other than what we intuitively care about.
1. GDP measures how much money changes hands, instead of how much value is created.
If a supply shock reduces the supply of a good by half, but drives up the price of the good by more than 2x, this is counted as a higher GDP than baseline, even though _less_ wealth was created.
If a supply shock reduces the supply of a good by half, but drives up the price of the good by more than 2x, this is counted as a higher GDP than baseline, even though _less_ wealth was created.
Similarly, if a natural disaster destroys an area, and money is spent rebuilding, that is counted toward GDP.
Which is straightforward application of the broken window fallacy?!
Which is straightforward application of the broken window fallacy?!
2. GDP measures a flow, rather than a stock, which means it entirely neglects the robustness of capital goods.
If I buy a car for $10,000 and it lasts for 10 years, I (and my society) am wealthier by one car over those 10 years.
If I buy a car for $10,000 and it lasts for 10 years, I (and my society) am wealthier by one car over those 10 years.
If I buy a car and it only lasts for 2 years, and then need to buy another one, I'm worse off.
But because the value of the car is only counted in the GDP in the year that I bought it, needing to buy another after two years contributes to GDP of that year.
But because the value of the car is only counted in the GDP in the year that I bought it, needing to buy another after two years contributes to GDP of that year.
And in general GPD is higher the more frequently I need to buy replacements for capital goods (while my wealth is greater the less frequently I need to buy capital goods).
As a consequence of not accounting for the broken window fallacy, GDP as a metric incentivizes making shittier stuff that doesn't last very long.
3. GDP fails to account for value that isn't bought with money: labor internal to a household, public goods, un-priced positive externalities, etc.
This category almost certainly comprises the majority of human well-being.
This category almost certainly comprises the majority of human well-being.
And on top of that, GDP includes transactions that don't obviously create value, and seem like they probably destroy it.
Like, the whole advertising sector, which at least doesn't contribute straightforwardly to production.
Like, the whole advertising sector, which at least doesn't contribute straightforwardly to production.
So what's up with this? It seems like it is more straightforward to just measure National Wealth, or the total capital assets of an economy.
And further, @HiFromMichaelV claims, here, that National Wealth is the measure that we used to use, before World War II?
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