Disentangling GDP

January 3, 2013 § Leave a comment

Captain Capitalism is a good site that you should read.

He had an interesting post today trying to discern the “black magic” behind Keynesian economics, and I left a comment there that I want to flesh out further here.

The flaws of the Keynesian stimulus approach to reviving our moribund economy come from pursuing a flawed metric through a flawed method.

The Flawed Metric

GDP is, quite simply, the wrong metric to prioritize.  While the values it aggregates are all denominated in dollars, they all have different future meanings and implications.  Losing the distinctions between the three major component categories causes much muddled thinking, and allows someone trying to optimize GDP to cheat through unsustainable means.

Let’s break it down, remembering that what matters is productivity; productivity is the only sustainable method of growth that does not rely on theft from future generations:


Current Impact: purchasing the necessary assets to increase productivity

Future Impact: More stuff is produced for consumption by future people.

Note: the existence and magnitude of investment is heavily reliant on projections of ROI, meaning the likelihood and magnitude of profit are the key levers affecting investment.


Current Impact

Future Impact: Keynes treated consumption as roughly equivalent to investment because consumption worked its way down the value chain to pay for the materials at each step of the path.

Note: The method by which Keynes’ equivalence is drawn is the retention and reinvestment of profits beyond what gets passed down the value chain.  As a result, profitability impacts the extent to which consumption can cause sustainable, real growth of an economy.  This, in turn, means that driving C without also allowing profitability and reinvestment is pissing in the wind.


Current Impact: Stuff that people are willing to vote for, but not willing to pay for directly; green energy companies, tax collectors, military adventurism, EPA investigations,

Future Impact: Death and Taxes and Litigation

So, putting that all together, G, C, and I all count the same in an instant measurement of GDP – but each component has significant differences in what it means for current happiness and especially future productivity.  These differences are obliterated when we focus on an aggregate measure instead of looking at the underlying components.  When you throw in the borrowing power of the government, GDP is too susceptible to manipulation to be a metric with either predictive power or value as a goal to be pursued.

The Flawed Method

Academic economists view Keynes as reduced to formulas by Samuelson not as a rough model of reality that needs to be refined and infused with real-world meaning, but instead as a simple optimization game based on those established  formulas.

Combine that with their stated desire to be the sci-fi heroes of their youth, Asimov’s “psychohistorians.”  That adolescent wish causes academics to most embrace the school of thought that would allow them to carefully curate economic outcomes, and leads to the forumulas-as-optimization-game approach.

As discussed above, GDP has a gaping flaw in that it treats three unlike items as like.  This flaw creates a loophole in the rules of the GDP optimization game, where using deficit spending and transfer programs to juice C and G offers the appearance of growth but without sustainable gains in productivity that would produce long-term prosperity.


Where Am I?

You are currently browsing entries tagged with Econ at Regarding Guns and Butter.