The problem of GDP

Diane Coyle has written an excellent summary of the problems of measuring economic activity in the Information-Innovation-Intangible (I-Cubed) Economy. Her piece in Foreign Affairs, “Beyond GDP”, is an excerpt from her new book GDP: A Brief but Affectionate History. Below are some excerpts from the excerpt that talk specifically about issues related to intangibles. For those interested in the other GDP related issues, I recommend the full article and book.
On the problem of getting the measures right:

In particular, economists will have to grapple with three issues. The first is economic complexity, driven by innovation, the constant introduction of new products and services, and the increasing globalization of production chains. The second is the increasing share in advanced economies of services and intangibles, including online activities with no price. The third is the urgent question of sustainability — whether the depletion of resources and assets now will undermine potential future GDP growth.
. . .
In 1998, the United States offered 185 television channels, 141 over-the-counter painkillers, and 87 brands of soft drink. In 1970, there were five TV channels, five painkillers, and 20 types of soft drink. Even more striking, whereas there were 400 types of computers and nearly five million websites in 1998, there were zero just decades earlier. All this is a great thing: variety through constant innovation could be considered one of the key indicators of economic development. It is surprisingly hard, though, to find economic statistics that take into account the number of different products available.
. . .
This points to a second serious issue for GDP as a measure of the economy. Each year, the economy consists of more that is immaterial, which makes measuring productivity hard. It is relatively straightforward to keep tabs on economic output per worker when you can count the number of cars or refrigerators or nails or microwave meals being shipped from factories. But how do you measure the output of nurses, accountants, garden designers, musicians, software developers, health care assistants, and the like? The only way is to count how many of them there are and how many customers they provide with a service. But that entirely overlooks the quality of the service they provide, which, in their industries, is more important than quantity.
. . .
A related issue is how to count the value of an intangible product or service, the purely digital items such as search engines, apps, crowd-sourced encyclopedias, and so on. These often have a price of zero and, with no market price, are not captured in GDP statistics.

On the problem of depreciation of intangibles:

GDP statistics do include a measure of the depreciation of physical assets (“capital consumption”). The physical stock of capital (machines, transportation equipment, buildings) must grow by more than what is needed to make up for depreciation, for a growing economy. Producers also need to make additional investments to keep pace with growth in the population if consumption per person is to remain stable, which is what matters more than the total size of GDP. In addition, if innovation — technical progress — is taken into account, it is surely important to include some indicator of the research effort required to innovate.
The latest international national accounting standard, SNA2008, has tried to address the problem. The United States is the first country seriously to put into practice its suggested improvements, which include counting spending on research and development — and an estimate of the investment in “artistic originals” such as Hollywood movies and music — as investment rather than a business cost. The United States’ GDP saw a one-time jump of more than two percent in 2007 thanks to the new methodology. An even bigger increase of 3.4 percent was announced in mid-2013 partly due to this change.
. . .
If policymakers are to take seriously the environmental impact of growth — and the extent to which current growth comes at the expense of future growth — natural depreciation needs to be included in GDP alongside the depreciation of machines and roads.
. . .
As if depreciation of natural assets weren’t complicated enough, there is yet another kind of asset to consider: human capital, or how able people are to make use of the other assets they have at their disposal. Human capital depends on education and practical training and ability to create and innovate. Related to human capital is social capital, a hard-to-define concept that tries to capture how well people are able to organize collectively through political and other institutions. It is hard to measure, but it clearly affects economic growth. To give just one example out of many, former colonies that inherited the English legal framework have grown faster and have higher incomes per capita now than those that inherited the French legal framework. Legal traditions would appear to be one factor contributing to social capital.
Investment in human and social capital is not really measured in conventional statistics, although spending on some inputs, such as education expenditure, is. This is understandable, given that the concepts are hard to pin down in the first place, but they do matter. A country should not regret forgoing some increase in GDP this year for the sake of investments that will contribute to its population’s ability to work, build, and invent later.

On the issue of technology displacement:

Productivity, in turn, might not be as important a measure as it once seemed. As the tech guru Kevin Kelly has written, “Generally any task that can be measured by the metrics of productivity — output per hour — is a task we want automation to do. In short, productivity is for robots. Humans excel at wasting time, experimenting, playing, creating, and exploring.” Kelly is comfortable with the idea of robots doing more work for us. Some are not. In response to Race Against the Machine by Erik Brynjolfsson, an MIT economics professor, and Andrew McAfee, principal research scientist at MIT’s Center for Digital Business, Paul Krugman took to his New York Times column to write, “What’s striking about their examples is that many of the jobs being displaced are high-skill and high-wage; the downside of technology isn’t limited to menial workers. Still, can innovation and progress really hurt large numbers of workers, maybe even workers in general? I often encounter assertions that this can’t happen. But the truth is that it can, and serious economists have been aware of this possibility for almost two centuries.” Krugman is right. During the Industrial Revolution, new looms and mills disadvantaged skilled craft workers.
When it comes to automation and job displacement, we tend to dislike productivity increases. Yet the bots of today will eventually have the same effects on the economy as steam-powered mills in the nineteenth century. Robots are a new kind of capital equipment, and their value will initially go to the owners of that capital. Over time, however, each working person will benefit from more capital with which to do his or her job, just as a weaver could produce more with a mechanical loom than with a handloom in his cottage. And that will translate directly into higher labor productivity and — if workers acquire the necessary skills and society can manage income inequality — higher wages for all. For now, increased income inequality has accompanied productivity increases linked to digital technologies, indicating that the gains have not been widely shared, but there is no reason to think that they necessarily couldn’t.

She does end with a somewhat optimistic note:

At present, we are in a statistical fog, without the information needed about either the negative aspects of growth when it is unsustainable and when it depletes the natural and other assets available for the future, or the positive aspects, when it delivers innovations and creativity. GDP, for all its flaws, is still a bright light shining through the mist.

And that is why I strongly support all the efforts at better measurement.

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