Monday, September 13, 2010

GDP and social policy - Improper politicization of statistics

The most common mistake in social sciences is measuring what is easy to measure, and then inferring that the result is relevant to performance.

When we smash an anthill, we guarantee full employment and frantic activity for the ants.  Similarly, destructive hurricanes in Florida significantly increases GDP and employment in Florida.  The activity of replacing destroyed homes and infrastructure is indistinguishable to economic GDP than the activity building new homes and infrastructure.  Yet the latter increases the nation's wealth, while the former merely restores it.

Distinguishing spending between durable, maintenance, and waste spending can hope to measure productive economic spending even if it focuses on the conceivably measurable economic value rather than all imaginable human wealth increases.  Measuring transactions measures to a large extent wealth transfer rather than value creation.  Making a new car creates value if someone needs the new car.  Buying a new car confirms that value creation and transfers wealth, and also increases capital for the car maker to make more cars.  Its an exchange of value rather than a transfer of value. Transacting on a used car is also an exchange  of value, but neither creates nor confirms value creation in the process.  The depreciation in price (from new) is not a waste but rather a natural maintenance expense given current technology levels.  The eventual need to replace doesn't negate a car's useful service life' value. Education also involves value creation whether paid or not.  Any payment for the conversation or diploma grant can be viewed as a separate side-transfer of wealth.  Legal and financial engineering where it permits the creation and consumption of value through contracts, charters and financing creates value by facilitating the creation of value.  Food, shelter, and healthcare are at their core human maintenance expenses.  The first two can all be viewed as value creating in that people would voluntarily purchase higher value options even if gruel and hovels were free, whereas healthcare can have a substantial extortion component in corrupted markets.

Gifts (negating satisfaction of benefactor) merely transfers value.  Theft destroys value.  The benefactor suffers stress and violation, and both the benefactor and beneficiary waste resources and anxiety over security (thief must avoid getting caught).  Security in general must be viewed as a waste.  Hiring a militia to guard your car does nothing to preserve or enhance the car's value, merely its possession.  The security forces further lose the opportunity to engage in value creation activities.  Both risk and corrupt market insurance are waste as well.  Transfering risk to a third party is a mere transfer of risk.  A social guarantee that a car accident has minimal financial impact on its actors has value, but the profit and bureaucracy involved in providing that guarantee is waste.  Barriers to financial, technology and social arrangements that would reduce that waste are waste.  Lies are similar to theft in destroying value.  They require a (legal) security force/effort to guard against.  When investors choose risky stock investment with inherent uncertainty, and vulnerability to management lies and betrayal, and perpetual refusal to issue sufficient dividends, they tend to gamble under delusion of greed.  The appetite for risk is a misguided lack of recognition for the distaste of capital losses.

Enhancing trust creates value (roughly out of thin air).  It lowers militia and legal security requirements, as well as diminishing concerns regarding lies and betrayal.  The Natural Finance Comptroller function is one technology that enhances trust.  Having a 3rd party control all enterprise agreements removes the uncertainty of avoiding obligations, and so makes suppliers, partners and investors more likely to trust deferred compensations, and more agreeable to partnerships with less upfront cash distributions.  Reduction in legal costs, and extra opportunities made possible by enhanced trust from 3rd party control are likely to favourably outweigh the costs of 3rd party control.

Back to GDP calculations, when you eliminate waste you decrease the GDP calculated economic indicator.  Distributing wealth widely accross society is a legitimate goal, and waste spending is one means to do so.  A more useful means are to use government taxation to fund grants and loans to projects that will create value.  In order to help re-employ those displaced by waste reduction.  A similar misinterpretation of economic indicators occurs when imports are viewed negatively.  If importing tube socks for $2, where the alternative is to produce them yourself for $5, then importing them gives you tube socks and $3 extra.  Economic value is the goods and services that satisfy needs and wants, not the little green pieces of paper that make people provide these.

EDIT: the purpose of this post is to outline political corruption of the GDP statistic.  That recessions are simply defined as 2 quarters of GDP decline, makes simple GDP manipulations through increased deficits a political tool to avoid the label recession.  Waste spending can be labeled economic strength or growth.  That national income transactions remain relatively stable can overlook the wealth destruction that has occurred in the same period (A durable wealth statistic is provided in comments), and so policy can misunderstand the health of the economy in its actions, or ignore simple innexpensive processes that can substantially increase wealth and value.


  1. I didn't want to lenghten post by adding this in text but more help in distinguishing value from waste:

    Generally transportation is a waste. The shipping costs of goods don't add any resale value to the goods themselves, so producing locally or star trek transporter technology and the ample renewable energy supply to power it, eliminates waste and thus adds value.

    The simple criteria for value vs waste is: expenses above those necessary to create value, given possible technology.

  2. Look into Genuine Progress Indicators, the Genuine Wealth Model, or Net National Product.

  3. @AWGB

    Genuine Wealth Model, I assume you mean which appears to attempt to measure happiness. That feels good and I don't object, but I am going closer to GPI with this (comment after):

    Durable wealth = Corporate assets + property values (avoid double counting with corporate assets) + consumer depreciated durable goods + new consumer durable goods purchases + personal savings/investment as Private Durable wealth (+ government assets for total Durable wealth)

    This number is a national cash out number.

    Net Durable Wealth would subtract corporate and personal secured debt for Net Durable Private Wealth, and also government debt for Net Durable Wealth

    The GPI attempts to measure sustainability of assets and resources as well, and I don't know its official formula. Sustainability inclusiveness can be obtained by adding to durable wealth value of resource reserves less expected cost of extracting the reserves