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Why the New "GDP-B" Measure Doesn't Solve the Failures of GDP

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Gross Domestic Product-B attempts to capture the added value of things we don’t pay for, such as Facebook, WhatsApp, Google and other digital services free to the user. B stands for benefits; the benefits consumers receive from free and subsidized services. It was devised by Erik Brynjolfsson, a professor at MIT, and is a work-in-progress. He points out that according to the US Bureau of Economic Affairs, the information sector in GDP statistics has been stuck at between four and five per cent of GDP for the last twenty-five years. Yet, the importance of this mainly digital sector now dominates both work and leisure activities, benefits not recorded in GDP.

His solution is to quantify it by attempting to establish how much an average user of a free service would pay if it wasn’t free. The thinking goes that this approach allows the statistician to estimate a “consumer surplus,” defined as the difference between the consumers’ willingness to pay and the amount they actually pay. This approach obviously throws up substantial surpluses, which added to GDP would boost it significantly. 

It is one thing to say how much a service is worth and another to actually pay for it. Those surveyed are told that one in two hundred will be paid the cash-value for abstaining from the digital service for a month. But surely, a reasonable person surveyed would say he is prepared to pay an artificially higher value for the service to maximize the potential payment for abstention. This potential for gaming the survey appears to be ignored.

Professor Brynjolfsson also points out that free stuff online probably reduces GDP, because we give up buying physical copy when we can obtain it for free online. There are many examples where this is undoubtedly true. Conceptually, he has a point; but it exposes confusion over the difference between a GDP money-total commonly believed to reflect an improving economy and the actual improvement to the human condition from economic progress. The latter is not measured by a money-total, but by the market’s unquantifiable but proven ability to satisfy consumers’ demands. While the impact of not buying physical newspapers and instead reading them online reduces GDP, there is no doubt that consumers prefer it. Discarding previous methods of delivering consumer satisfaction is, in fact, economic progress. Here we see evidence of economic progress while Professor Brynjolfsson regrets that GDP falls.

The Consumer Surplus Error

Econometricians have been thinking for some time about something they call “consumer surplus,” so the concept is not new. Simply put, if a consumer is willing to pay $10 for something that costs $7, there is deemed to be a consumer surplus of $3. According to Professor Brynjolfsson, this is also the basis between a free Google service and what an average user would be prepared to pay for it.

This immediately flags up a problem with the concept. The precondition for an exchange of goods or services for money is that a buyer perceives the good or service to be worth more to him than the payment for it. Otherwise, the transaction does not take place. The supposed consumer surplus is not an additional factor to the transaction; it is the reason for it. It certainly should not be added to GDP in an apparent attempt to boost the statistic.

But is this the case with free digital services? We have established it is not an additional factor to a transaction, so logically it cannot be an additional factor in free digital services. Indeed, Professor Brynjolfsson misses the wider reasons for an internet transaction. Google acts as a marketing intermediary. In return for a user’s data, Google’s real customers in the advertising industry pay Google fees for highly targeted and accountable marketing. In effect, a barter takes place, where consumers swap their data for access to Google’s services. Access to this data allows Google to sell its marketing services to advertisers with additional analytical benefits not available using conventional media. It has nothing to do with generating a supposed consumer surplus.

In some instances, users of data services have passed on their data without it being used commercially. Facebook, for example, achieved a circulation of hundreds of millions before the company earned any income. It had the data and needed to find a way to exploit it. But in these cases, it is a mistake to think users get the service for free in the economic sense. While swapping their data for a service, they are consuming the company’s capital, which is spent on employing computer specialists and the hardware, together with all the other business expenses involved. Proponents of consumer surplus seem blind to these offsets, many of which are already included in GDP calculations.

The Broader GDP Fallacy

Econometricians have long been on a mission to measure things, and one way that always finds favor with the government is to unearth a method of enhancing GDP. But other than for currying official favor these attempts are useless and misleading, being frustrated by a simple fact: the economic calculations of a population over a period of time cannot be measured, let alone be turned into a statistic masquerading as a measure of an economy’s condition.

Far from being a measure of economic progress, GDP is simply a money total which has no further meaning. If it increases all it tells us is that the total money and credit spent in the part of the economy included in GDP has risen. Because it means nothing more, no further adjustment to GDP is appropriate. Moreover, the inflation of a GDP number lies in the quantity of money introduced into the GDP statistics, not in the price effects. 

If GDP was not just a money-total, adjusting prices by an honest estimate of monetary inflation might have some rationale. Instead, it has become the basis for inflation-adjusted payments, principally by governments. As a result, statistical methods have developed to reduce measures of inflation and therefore the cost to the state of inflation adjustments, and to suppress evidence of price inflation. So, not only is the application of inflation-adjusting to GDP not theoretically justifiable, but in the hands of government statisticians it has becomes doubly meaningless.

Conclusion

GDP is of little use to practical economists. The only justification for it perhaps is so that the proportion of total transactions allocated to the private sector can be compared with those for which a government is directly responsible. If we know, for example, that a government is responsible for 40% of GDP, we will know the extent of the burden it imposes on the productive private sector. The French government imposes upon its productive sector to the tune of 56% of total GDP. Take the government out, and you get a truer figure of GDP at only $1.22 trillion equivalent. Government debt stands at $2.71 trillion, so the implied government debt burden on the productive private sector is 220% of its GDP.

Looked at this way, a country like France is in deep debt trouble. Instead, econometricians, thee devisers and champions of GDP, would rather we take France’s debt to total GDP ratio to be 97%. This is inconsistent with a proper estimation of loan risk.

It is hardly surprising that GDP is not used truthfully, but instead as a massive obfuscating cover-up of the role played by the state. This is why the state looks favorably at attempts to rig GDP by academics at institutions such as MIT.

We must therefore dismiss Professor Brynjolfsson’s GDP-B as nonsense and disregard both it and GDP entirely.

Alasdair Macleod is the Head of Research at GoldMoney.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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