Timmy elsewhereJanuary 27, 2014 Tim WorstallTimmy Elsewhere7 CommentsAt the ASI. Technological advance means that our GDP figures aren’t quite right. previousHas the TUC gone nuts?nextChris Huhne and his mistakes on fracking 7 thoughts on “Timmy elsewhere” Ian B January 27, 2014 at 9:55 am I’ve been saying this here for ages. The GDP figure is virtually useless; it acts as a very crude proxy for productivity when comparing different economies and time periods, but at any level of detail it falls apart; it’s the equivalent of using a very approximate proxy for climate, and then looking at it at the “just weather” level of detail. Simple thought experiment; in a non-inflationary money system, GDP would be constant regardless of production levels- MV=PQ. Assuming (as Friedman rightly did) that V is constant over the long term, and there is no P, then M=Q. Production (Q) measured in money units is just the money supply. If everyone doubles their output of corn, or other commodities, prices fall to compensate and Q does not change. So, the Keynesian-barmcakes think, well if we measure the price of eggs over time, we can measure the falling prices, and then if we inflate the money supply to compensate, the increase in the money supply will reflect in GDP, and we can call that productivity growth. Which as Tim points out, kind of works when eggs is eggs. When eggs is replaced by some entirely different product, you lose your metric, and the whole thing falls apart. The more that eggs dwindle as a part of consumer spending and the more products we do spend money on are changing at astonishing speed before our very eyes in qualitative and quantitive ways, the more useless it gets. What’s the growth measure from a ZX Spectrum to an iPad? No fucking idea. bloke in france January 27, 2014 at 10:49 am In a naive economic model, if the price of technology goes down, the savings rate goes up. That this hasn’t happened should tell us something. Maybe that I’ve stumbled on the cause of the obesity epidemic or something. Ian B January 27, 2014 at 11:00 am It’s caused by people drinking sugary pop. As to the cause of the obesity epidemic on the other hand, I have no idea. Andrew M January 27, 2014 at 3:04 pm The contrary view is that you shouldn’t adjust too much for technological improvements. Not so many years ago, the ONS’s inflation figures were accused of under-estimating inflation because while the price of MP3 players was falling, the price of gas was going through the roof. Most people would prefer to be warm in silence than listen to music in the cold: Maslow’s hierarchy of needs and all that. Kevin B January 27, 2014 at 5:50 pm So does GDP measure the effect of technology on people sitting in the office tweeting their angry birds? bloke in spain January 27, 2014 at 9:23 pm Re Ian’s first comment (OK. And his second) It does confirm a suspicion i have that economics is wonderful at explaining in general terms what happened & why & thus giving a useful hint what may or not work in future. It gets less & less wonderful the more it tries to be precise & positively disastrous when it involves algebra or, worse still, actual numbers. I was thinking about that smart phone bought for a £100. So one could allocate that £100 to GDP. Except, in the UK, most smart phones come free with the phone contracts. So do you allocate 0. Or a minus to take into consideration the loss to the phoneco of the buy in cost. But you can allocate a positive number for the phone contract itself. The value of the several thousand call minutes. Except that only works if the contract holder uses all the minutes. If they only use half the minutes is that all the minutes contributing to GDP or half contributing & half being subtracted because they were a loss to the contract holder? And why am i doing this as it doesn’t seem to produce any useful information? Ian B January 28, 2014 at 8:46 am It does confirm a suspicion i have that economics is wonderful at explaining in general terms what happened & why & thus giving a useful hint what may or not work in future. It gets less & less wonderful the more it tries to be precise & positively disastrous when it involves algebra or, worse still, actual numbers. This is basically the whole Austrian School argument against arithmetical macroeconomics and econometrics. Leave a Reply Cancel replyYour email address will not be published. Required fields are marked *Comment Name * Email * Website Save my name, email, and website in this browser for the next time I comment.