GDP Isn’t Flawed, It’s Just Not That Important

The woods are lovely, dark, and deep. But cutting them down would increase GDP.

Photo by Marcel Mochet/AFP/Getty Images

I sometimes read assertions that the statistical methods used by the Commerce Department to calculate GDP no longer properly capture economic output because they don’t, for example, properly account for all the free stuff people enjoy on the Internet.

This is a huge mistake. There really are problems with the statistical methods used by the Commerce Department to calculate GDP (for example, the number it gets using the income method isn’t equal to the number it gets using the expenditures method even though the two methods are efforts to measure the same thing), but they’re small and have nothing to do with technology. The issue isn’t that there’s something wrong with GDP. The issue is that GDP is something rather specific—the total monetary value of market production—and not an overall summary measure of human well-being.

Consider the two richest metropolitan areas in the United States by per capita GDP—the greater Washington area on the East Coast and greater San Francisco on the West Coast. These two cities have very similar output per capita. But the weather is much more temperate in the Bay Area than here in the mid-Atlantic. Consequently, a much larger fraction of DC-area output goes to heating buildings in the winter and cooling them in the summer than you see in the San Francisco area. Yet despite our much greater investment in climate control, since we still have to go outside, we experience on average worse temperature conditions and have less money left over for everything that isn’t heat and air conditioning.

Sucks to be us!

And so it goes. Keeping a house tolerably warm in a cold winter constitutes economic activity. Enjoying a pleasant breeze on a nice day does not. Cutting down a forest and selling the wood is economic activity. Kids having fun climbing trees is not economic activity. Installing an iron gate outside your front door because you think burglars will try to break into your house is economic activity. Having a nice conversation with your neighbor outside the front door because it’s a friendly block full of nice people is not. Prostitution is economic activity. Recreational sex is not. Buying an apple at the store that you forget to eat before it rots is economic activity. Picking an apple from a tree in your yard and eating it is not.

There are Internet-specific versions of these stories, but their existence has nothing in particular to do with the Internet. It’s just that in life a lot of economic activity is trivial or tawdry or even harmful, while lots of great stuff that makes people happy isn’t economic activity. As it happens, international comparisons show that happiness is correlated with GDP per capita in a major way. But that’s an interesting empirical discovery precisely because it doesn’t have to be true. When you look at specific cases lots of things that are pleasant don’t add to market output and lots of things that do add to market output aren’t especially important or meritorious. This isn’t a “flaw” in GDP, it’s a sign that total market economic output isn’t all there is to life.