It's become the case quite often in the comments that someone—usually some statist—
will try to defend his bogosity using some comparison involving GDP,
without understanding what it is or what its limitations are.
In previous videos, I've shown what the GDP is, and shown examples of how to use it, but
I think it's high time I made a video showing what the problems with GDP are
and things you should watch out for that let you know that someone is using it as a bogus metric.
First, a bit of history.
In the 1930s, as the Depression went on,
Congress wanted something that they could use as a guide for how effective their policy was.
So they ordered the Department of Commerce to come up with a metric they could use
to gague success and failure of these policies,
and the job fell to Simon Kuznets of the National Bureau of Economic Research.
The first thing that's important to understand is that Kuznets was making a tool for government policy,
not
When Kuznets reported the results of his work to Congress,
he was careful to advise them of the limitations of the metric he had created.
The biggest was the problem inherent in oversimplification.
In his report to the Senate Committee on Finance, he wrote:
"With quantitative measurements especially, the definiteness of the result suggests, often misleadingly,
a precision and simplicity in the outlines of the object measured.
Measurements of national income are subject to this type of illusion and resulting abuse,
especially since they deal with matters that are the center of conflict of opposing social groups
where the effectiveness of an argument is often contingent upon oversimplification."
His fears were well-founded.
How many times these days have we heard apologists for government health care, for example,
mindlessly regurgitating the statistic
that these countries pay less than the US on health care as a percentage of GDP?
But you know who pays even less?
Third-world countries where there is no health care!
It can be easily shown that using GDP in this way is an oversimplification at best,
and yet the problem still persists.
Kuznets took great pains to point out
that that there is a huge dimension to the economy outside the realm of monetary exchange.
As an example, he wrote:
"The volume of services rendered by housewives and other members of the household toward the satisfaction of wants
must be imposing indeed."
So if the family goes to a restaurant for dinner, it shows up in the GDP,
but if mom cooks dinner at home it doesn't, because there's no money exchanged.
Same thing if dad mows the lawn: it doesn't show up in the GDP, but it does if he pays someone else to do it.
Even in monetary exchanges it's problematic.
What if a rich woman spends $500 on a nice pair of shoes?
Does that contribute more to the well-being of Americans than a parent buying a $20 pair of kid's sneakers?
Does spending $50 for a brand-name drug contribute more to the health of the patient than a $10 generic?
These kinds of issues caused Kuznets to conclude,
"[T]he welfare of a nation can, therefore, scarcely be inferred from a measure of national income."
This echoes what Ludwig von Mises said in Human Action:
"It is possible to determine in terms of money prices the sum of the income or the wealth of a number of people.
But it is nonsensical to reckon national income or national wealth...
If a business calculation values a supply of potatoes at $100,
the idea is that it will be possible to sell it or to replace it against this sum...
But what is the meaning of the items in a statement of a nation’s total wealth?
What is the meaning of the computation’s final result?
What must be entered into it and what is to be left outside?
Is it correct or not to enclose the 'value' of the country’s climate
and the people’s innate abilities and acquired skill?
The businessman can convert his property into money, but a nation cannot."
Kuznets and Mises both understood that how important a function is,
or how good a quality it is, is not dependent on the amount of money paid for it.
All of that housework that was done wasn't worthless just because mom didn't get paid for doing it.
Same with dad mowing the lawn.
And what about the quality time they spend with their children?
Surely that's worth a lot to them!
But it can't be expressed in monetary terms, certainly can't show up into GDP.
Yet we see all sorts of people clinging to the GDP
as if it were the be-all and end-all of economic wealth,
as if the only way to gague the importance of an activity is its market price—
in other words, by money alone.
And how ironic it is that these same people falsely accuse us Libertarians of having the same mindset!
Sounds like projection to me.
Another bit of projection is the accusation that we believe that people are inherently rational.
But by clinging to the GDP as a metric of well-being, they're doing exactly that!
All of the people who are swindled by huxters, who bought the Q-Ray bracelet or homeopathic "remedies,"
or who were swindled by Ponzi schemes and reverse mortgage scams,
all of the money put to all of those things has a positive effect on GDP.
If you believe that GDP is an accurate measure of well-being,
then you
And even outside of the realm of fraud, what about addiction?
According to the Centers for Disease Control, Americans spend over $80 billion a year on cigarettes.
How many of those dollars are spent because people want to smoke,
and how many are spent because they're addicted and can't stop?
Do those $80 billion
Or would a great amount of that money have been spent by these people on something more productive
if they didn't have this addiction?
I think we all know the answer to that.
If you understand this, you understand why Kuznets didn't want the metric to be a measure of well-being:
because spending doesn't necessarily equate to it.
And you will then understand why he didn't want government spending to be a part of it:
because it's no metric of what people want or what improves their lives.
More than that, it's circular reasoning, since the entire purpose of this calculation
is to determine what government should be doing!
But if government were to print a trillion dollars and spend it,
GDP will go up by a trillion, but what really would have been gained?
Why should the measure of economic activity go up by that amount?
It doesn't make any sense, and yet, almost as soon as Kuznets's report was finished,
Congress and the President sought to go about doing exactly what he warned them not to.
It's exactly this that allows economists to bogusly conclude that the New Deal improved things.
In fact, you can see the claim in the very comments of my video on the Great Depression:
Look at how much the GDP rose after FDR's New Deal!
Of course, it's easy to grow if you're at the bottom; if all you have in the world is a penny,
and you find a penny on the sidewalk, congratulations—you've just doubled your money!
But it was also the case that FDR's spending itself drove up these figures,
and so all you can really tell here is that money was spent, not what effect it had.
They make the same bogus claim about World War II.
According to the Keynesians, and the statists who mindlessly regurgitate their bogosity,
World War II was what finally got us out of the Depression, causing GDP to soar.
Of course, most of that was government making ships and bombs and planes to send overseas,
so it's hard to see how that improved things at home.
And of course the people who actually lived through it can tell you about the austerity and the rationing.
But who cares about reality when you've got a graph to look at? Just look at all that blue!
Look how it goes up, up, up starting with the war!
Wow, the war really was good for the economy, wasn't it?
But what happened after the war?
Why, these good, rational, scientific Keynesian economists
warned that there would be another depression afterwards
if government didn't keep making those ships and planes, even if it no longer needed them.
Why, otherwise, GDP would go down, and that would be bad for the economy!
But those selfish, greedy, kooky free market economists
said, no, stop the war production and let the price mechanism work.
Unfortunately, Congress decided to go with the free market guys for once and stop all that government spending.
And you can see the result for yourself:
a significant drop in GDP that just
Again, if you ask people who lived through it, they'll tell you a different story:
in 1946 and '47, the economy recovered like gangbusters
and we finally had productive years, with families making money and people uninhibited by rationing.
Why does the GDP tell a different story?
It's very simple: because the government spending component
is masking over the real economic conditions of the private economy.
So let's deaggregate it a bit: let's show what portion of this graph is the private portion of GDP—
that is, Consumption, Investment, and Net Exports—and how much of it is government spending.
And as you can see by the red area denoting private spending, it tells a completely different story!
The blue area, government spending, caused the overall GDP to grow,
but government took labor and resources from the private economy
to make bombs and planes and send them—along with millions of soldiers—overseas to fight the war.
As a result, private GDP went down, meaning increased poverty for the average American.
When the war ended, and the government spending went down and the soldiers came home,
they didn't find it impossible to find work, driving up unemployment as the Keynesians predicted.
All of those resources—both labor and capital—that were now freed up were used productively,
and private sector GDP soared well above its pre-war levels in 1946 and 1947.
In fact, in 1947, the private component of GDP was higher than the total GDP had been back in 1941!
We see the same thing today: stimulus spending and fiat money just give the
It doesn't actually improve the economy; it just hides the economic problems under an inflated GDP.
That's why technically the recession ended in 2009,
but, like Workd War II, the average American will tell you otherwise.
The biggest bogosity in all this
is that the aggregation makes people think of "the economy" as a separate entity in and of itself.
"The economy" produces more; "the economy" suffers.
When talking in those terms, it's vitally important to remember that "the economy"
is just you and me, and all of the other people making decisions about our daily lives.
When a free market advocate says to let "the economy" or "the market" sort it out,
they mean let people like you and me make the decisions that affect our own lives.
But it seems like whenever a statist talks about the economy,
it's something separate from the people that we need government to control.
But the economy isn't some engine chugging away somewhere,
it isn't a
it isn't some big thing with levers and knobs that government can adjust.
I'm convinced this is the reason why the statists accuse us of treating the market like a god:
because they just don't understand that it's
and that to control the market, or make adjustments, or steer it, or whatever,
is to interfere in the free and voluntary exchanges that people make every day.
It's saying that government knows better than you how to run your life.
And it's saying that government—which is also nothing more than a group of people—
can do things that no other group of people can do,
which, in essence, means they consider the government to have supernatural powers.
The government ends up being like a god,
and politicians like shamans with special magical powers and divine knowledge.
This is the meaning of the Cult of the Omnipotent State.
So free market people don't worship the economy as a god; that's just more projection.
The fact of the matter is, economic spending is a means, not an end.
Jobs are a means, not an end.
Investment is a means, not an end.
Consumption is a means, not an end.
The purpose of an economy is to enable us to fulfill as many of our infinite desires as our finite resources will allow.
And even though we may make the wrong choices from time to time,
even though we may not be rational all of the time,
each of us is still in the best position to evaluate our own wants and needs
and find the best way of obtaining them—
far better than any politician who has displayed no skills other than the ability to campaign.
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